(More) Financial Myths

There are so many myths in finance, it's hard to know where to begin. How about this: 'Paper' money is a myth.

The surprise in this subject is that there are so many myths, so where does one begin? How about with a simple one; paper money is not paper, it is made of 100% cotton. That’s why it wears so well, can be washed and etc. And some kind of plastic might be the next step, before virtual money eliminates even that.

The next mis-fact is that the value of your money is safest in a bank. Well, even if inflation stays at a measly 2%, your 1% return over time will eventually disabuse you of that idea. Short-term parking ok, but long-term storage is a loser in this interest rate environment.

How about the idea that I pushed in my last column, that more savings is the key to financial success. I was a bit ahead of myself there, because on a wider scale, the most important thing you can do financially is to make more money. Then it is easier to save more. If you are a doc already working at full steam, your options are truncated by your employment contract or the harsh financial realities of current-day private practice. But there are still a variety of options open to you either way, some delineated in previous issues of PMD.

The counter argument, also a myth, by the way, is that “If I earn more, then I will be in a higher tax bracket and may actually take home less.” As I have written previously, one of the best financial insights I have heard is “If you ever owe $1 million in taxes, get down on your knees and be grateful.”

Another old saw, this one only occasionally true by timing and location, is that buying a home is a great investment. To pop this balloon generality, I refer you to 2008. But some folks in San Francisco, New York, and other real estate mania locales have done well. With lucky timing, I might add.

The follow-on myth is that it is always desirable to pay off your mortgage in retirement to live in a paid-up house. It might be true if you have a limited income and live in a modest home in a limited real estate market. But if you have been fortunate enough to build up big equity, and I have seen many in the 7-figure range, and the market seems to be getting frothy again in your neck of the woods, it might be best to sell or otherwise take the equity out to put into a more economically productive venue.

Another myth that took off in the late Great Recession is that we should all cut up our credit cards and stick to (cotton) cash. OK advice if that was a trouble spot for you, but for those able to pay off their cards every month, using cards can be real plus. You carry little cash, have a record of all spending, and automatically get what amounts to a 1-2% discount on everything you buy without trying. You either get cash back, points for merchandise or miles for free travel. By the way, if you spend and/or fly enough to get into an “elite” status with an airline, there are some perks to be had, such as shorter lines at the airport. No small thing, in my book.

The last myth for today is one of my pet peeves; that gold is a “safe haven” and should be a small part of everyone’s diversified portfolio. Investing in gold is a straight speculation play. Being unproductive of anything, its value is 100% dependent upon mass psychology. Another example of “the greater fool” theory, or, more simply, musical chairs. Buy your spouse a shiny bauble, great. Get a new dental inlay, ok. But throwing the dice on a commodity timing speculation such as gold does not qualify as a “safe haven.”