One of the most frustrating aspects of running Money360 is reading comments where readers, who are intending to do the right thing, actually spread misconceptions and falsehoods based on some false money myths that are floating around out there. I thought I’d correct six of these misconceptions right here, right now – and I’m sure that some of these will stir up some real discussion.
1. Investing in stocks is expensive, with fees up to and over 2% eating you alive.
This might have been true back in the 1970s, but with online discount brokerages and direct connections to investment houses, you don’t have to drown in brokerage fees. There are a lot of great options out there, but here are the two that I use (the best ones).
For individual stocks, I use Zecco. Zecco offers a handful of trades per month for free – no brokerage fees at all. They are able to afford this by putting advertising for other products on their site. There are also premium features available, but for the individual investor who just wants to buy and sell a few stocks on the side, it’s the best deal out there.
For mutual funds, I use Vanguard. Vanguard allows you to invest directly with them with no fees. They offer a huge number of index funds, most of them charging very low expenses, usually below 0.2%. You can manage everything online, easy as pie, and get started investing very quickly.
The idea that you have to pay huge brokerage fees to invest in the stock market is a myth from the days before the deregulation of the brokerage industry. In today’s world, there are a lot of investment options available and, as you can see, some clearly target the frugal investor.
2. Debit cards are less secure than credit cards.
If you look at the actual federal laws that describe the basic consumer protections for debit cards and for credit cards, then debit cards offer slightly less legal protection than credit cards. They’re actually equal (you’re only liable for $50) within two days of your realization of the fraud, but after that, debit cards offer less protection.
However, virtually all credit and debit cards offer far more protection than this. If you see a Visa or a MasterCard logo on your debit card or on your credit card, it means you have zero liability on fraudulent purchases.
As long as your debit card has a Visa or MasterCard logo on it and you tell any business to use your card as a credit card rather than a debit card if they ask (meaning you don’t enter your PIN), your debit card affords the same protections as a credit card. This is because, even though they’re often criticized for encouraging people to get into credit card debt, Visa and MasterCard both give people quite a bit of consumer protection.
3. Things are set up so that the rich get richer and the poor get poorer.
I used to believe this myth as well, but it simply isn’t true. Things are set up to reward people who work hard and who provide a lot of value to others, and believing in the myth that “the rich get richer and the poor get poorer” simply ignore the people who regularly come from nothing to become a success (often by working incredibly hard and using their talents in an intelligent fashion) as well as the people who have plenty and squander it away.
The truth is that if you work hard, work intelligently, and work to continually build value for yourself, you’ll do just fine in life. If you make the choice to just put in your hours at a 9 to 5 job and then play hard on the weekends, you’re also choosing to stay in the same socioeconomic class. If you make the choice to excel at your job and then spend at least part of your off hours starting a side business and/or improving yourself, you’re putting yourself in place to move up.
It’s not about “the man holding you down,” it’s about the choices you make every single day. The next time you sit around with your pals talking about how the system is set up against you, ask yourself if you couldn’t be doing something right now to improve your situation – or improve yourself.
4. I can save a huge amount of money hitting big sales.
Lots of people get very excited about Black Friday (and other huge sales), and why not? They offer impressively low prices on consumer goods of all varieties – you can save big money, right?
Actually, sales are designed to encourage excessive and premature purchasing. They show off these low prices on certain items to get you into the store and get you into the buying spirit. I’ll see an ad and think, “Wow, that game is on sale for only $40? I’ll pick it up!” Then, I’ll go into the store, spend $40 on that game (that I shouldn’t be spending), and then spy something else I “need,” like a big pack of AA batteries. Before I know it, I’ve spent $100 on stuff I shouldn’t have bought and could very easily live without.
Even better, some retailers actually mark things as being on “sale,” but in fact they’re marked up compared to their basic original price. My uncle personally did this when working at a major retail chain in the 1980s and 1990s – when applying a “sale” sticker to an item, he’d first put a sticker on below it with a hugely inflated price, then affix a “sale” sticker on top of that with a markdown from that inflated price, returning it to a price that’s still higher than what it was to begin with.
Sale prices are fine if they match up with something you’re already planning to buy, but if you see something in an ad and the sale price is convincing you to buy it, then that sale isn’t saving you money – it’s costing you, big time.
5. Refinancing your house when interest rates drop will always save you money.
A couple I know well refinances their home seemingly every time the interest rates drop a bit. They almost got hysterical with me when they found out that I wasn’t refinancing after the recent drops in interest rates. “You’re throwing away money!” they shouted at me.
The truth of the matter is that refinancing isn’t always the best choice – in fact, unless the difference between the rate you have now and the rate you would have is more than 1%, it probably isn’t worth it. There are several reasons why.
First, when you refinance, you have to pay a big fee up front. Do you have $3,000 or so to drop up front on this refinance? Sure, it will lower your monthly payments, but for many families, that’s a lot of money to just drop on a whim.
Second, the average homeowner moves long before their mortgage ends. If you pay for a refinance and then move in three years, you’ll almost always take a nice loss on that refinancing. Refinancing can be great if you plan to stay put for a while, but if you’re even remotely considering a move in the future, it may not be the best choice.
Third, the time investment hunting for the best refinance rate can be quite high, too. In order to find a really good rate, you’ll likely have to beat the pavement quite a bit to find it. What is your time worth to you in this hunt? If you spend forty hours tracking down the best rate, getting all of the paperwork done, and getting everything signed up, that’s a significant cost as well.
If you’re even considering refinancing, use a refinancing calculator and see how long it will take for your refinancing to be worth it. For us in our situation, I think it will be, but I think there will also be another interest rate cut in a month or two, so I’m going to hold off for the moment. Remember, refinancing is never an automatic “yes!”
6. If I have any significant money at all, I’d better get a financial planner.
With the huge amount of information available online and in books, you’re better off investing by yourself for several reasons:
Financial planners often charge substantial fees. Even if an investment advisor were able to find the absolute best investment for you, they still would be charging you some fees on top of that. If you can put in some legwork, do some reading, and find the right investments for yourself, you’ll keep those fees right in your pocket.
Financial planners are sometimes paid to steer you to certain investments, often subpar ones. When you pay someone else to manage your money, you’re expecting that they will steer you towards the best investments for you – and most financial planners will. However, there are some out there (I’ve interacted with one, myself) that will steer you into investments that aren’t necessarily the top of the line. Why? Because they’ll get a kickback by steering you there. This is rare, but it does happen – whenever you entrust someone else with your money, you are taking on some level of additional risk.
So why should a person ever use a financial planner? Financial planners are useful if you lack the confidence (or time) to manage your own money. If the thought of managing a significant amount of money worries you (or the thought of doing research on investments overwhelms you), then hire a planner – the ability to sleep at night is likely worth the fees and the small risk associated with it.
Just remember: you can do it yourself. It’s not that hard, and the relatively small amount of extra time you’ll spend on learning and doing it yourself will be well compensated by not having to pay fees.