I have prepared a list of 4 common money and investing myths that if you blindly believe like the masses could harm your financial future. The 4 myths I break down in this post are:
1. “Your home is an investment”
2. “You have time to invest later”
3. “Buying is always better than renting”
4. “I can’t afford to save”
Your home is an investment
This is a very common money and investing myth that most people believe. Whilst historically, house prices rise over the long term, the house you purchase to live in should not be classified as an investment for a number of reasons.
1. Cash-flow – A good investment should put money in your pocket each month, or at last not have any holding costs while facilitating capital appreciation. Your home costs you a lot each month between your mortgage, property taxes, rates and repair costs. Most of which would be tax deductible on an investment property, but for a PPOR (Principal Place of Residence) is not. Well, unless you’re living in a duplex with one half rented for example, but we can’t cover all the edge cases here.
2. Intention – An investment should be purchased as, well, an investment. This means it should be a vehicle used to get you from financial point A to financial point B. This may require flexibility in when you buy or sell to maximise returns or minimise losses. Or compromising on personal tastes or wants – like location, size or style – to get what makes sense financially. When you buy your home to live in, the emotional side is what dictates most of the decisions. You live where you’re happy, not in the best place financially in most cases.
3. Appreciation is a benefit but is not a guarantee – If you know what you are looking for, you can find investments that outperform inflation and market averages and leave you feeling that little bit wealthier every month. With your own home, you don’t normally feel much change in your financial situation until you decide to sell it years later (If you’re lucky). Depending on where you bought, the price will probably have gone up if you held it long enough, but when you factor in inflation it may not have risen in value as much as it has in price. At best, owning your own home is a great forced savings scheme that can usually track with inflation. As an investment though, it isn’t as financially beneficial to own your own home as it is to own someone else’s. Own your own home for you, not for the money.
You have time to invest later
A widely held money and investing myth, especially by young people! By definition, to invest is to sacrifice something in the short-term with the hope of it benefiting you significantly in the long-term. For example, you may invest in your education by giving up your time (and some money) for a number of years at University in the hopes of it paying off later in the form of better career opportunities. Investing with your money is no different, and the sooner you start, the more time you have for the fruits of your investment to be a part of your life.
The other major reason why you should strongly consider investing now rather than later is the power of compound interest. Warren Buffet proclaimed compound interest to be “The 8th wonder of the world”, and there is good reason for that. Compound Interest is a topic I would love to break down in its own blog post, which I will link to from here when I do. But for now, a picture speaks a thousand words. The image below illustrates the impact that allowing compound interest to accrue on your investments over time has.
Notice how in the later years the rise is exponential. It is a hard concept to truly appreciate on the surface, so I encourage you to play around with some savings or investment calculators and see how the numbers can really ramp up.
Buying is always better than renting
This is a money myth that even I have struggled with in the past. Ultimately, it comes down to circumstance. I am a huge fan of real estate ownership and investment, and the long list of benefits that come along with it. I will certainly discuss them in later blog posts. However, I think a common myth is that under no circumstances is it “smart” or “responsible” to rent. Why is that?
A lot of people, especially those who are a little bit into money, will tell you that renting is dead money. “If you put that rent payment into a mortgage instead, you’d end up with a paid-off piece of real estate instead of nothing!” While this is technically true, it really does come down to circumstance, and it is important to understand under which circumstance you’re jumping into the real estate pie for. In basically any case, if you’re looking for property investment, owning is the way. Although when considering where you actually want to live, and this needs to be considered in conjunction with any investment plans you have as well, renting could be a key part of your wealth building strategy. Allow me to explain.
Say where you want to live in is quite a nice area and homes are expensive. Often in areas like these, that have already seen solid capital growth, the rents have lagged behind as properties in the area have likely been strongly held by long-term owners who have kept supply low. This means if you bought there now, your mortgage costs would be higher than the equivalent rent that property would get. Don’t forget also, with owning a property there comes maintenance costs, insurance costs, various rates, taxes and so on. The mortgage payment is only a piece of the puzzle. If you rent, depending on the exact terms with your landlord you generally know exactly what you’re paying regardless of what other expenses may be generated by the property.
This means it can be smarter to rent in the area you want to live in, and use the extra capital and cash-flow you saved to allow you to buy an investment property elsewhere where the numbers are stronger from an investment perspective. There are certainly other reasons renting can be useful, such as experiencing an area you are considering moving to without fully committing to buying property there first. Remember that property should be considered a long-term investment due to the high entry and exit costs as well as the potentially large swings in price in the short-term.
I can’t afford to save
If you give one person 3 apples and then take one away, they’ll tell you how much they needed that third apple. If you give the next person 2 apples, they’ll probably be pretty content if they didn’t know a third was available. The problem with the common “I can’t afford to save” mindset is that it is simply a matter of perspective and priorities.
Like my rudimentary apple analogy. When you receive your pay cheque, you’ll get that hit of reassurance that things are going well. You’ll probably start going about your spending only checking in on how much of your money is left every few days or weeks and conveniently, you probably almost always burn through most or all of it by the time your next pay cheque rolls around. What was that you told yourself about saving what was left at the end of the month? That’s what I thought. One of our great skills as humans is our ability to adapt, often without thinking about it. That includes your spending habits.
So, what can I do to change any of that you may ask? I say outsmart the game you’ve found yourself in! An effective path to success is one that feels easy. You don’t always need to force yourself to drastically change overnight if you can identify your behaviours and build systems around them to allow yourself to reach your goals without feeling like it is too hard or cumbersome. If I told you to start forcing yourself to leave a certain amount of money at the end of each pay cycle to save and invest you’d probably feel unnatural doing it as you are not forced to think as critically when you have a cash buffer there to catch your extra spending.
The trick is, and you’ve probably heard it before, to pay yourself first. As soon as your pay comes in, automatically setup your banking so that a certain portion of that pay is taken out of your usual daily spending account and put into a high interest savings account that you use to save up your money for the purpose of investing. This allows you to carry on with the rest of your pay doing what you’d normally do, while always guaranteeing you have put away some money to assist your financial future.
For more money myths check out this great post by Afford Anything: 8 Money Myths That Might Be Holding You Back