(This article is a part of the series aimed at dispelling some of the popular financial myths. Please refer to the full index for myths related to other financial topics. Oh, and a quick disclaimer: I am not a financial advisor. I have made every effort to research the facts before presenting them here. But, if you have a reason to believe any of the statements are incorrect, please feel free to correct me.)
- Myth: “Money = Happiness”
- Myth: “I could be hit by a bus and die tomorrow. So why bother to save?”
- Myth: “I bought the plasma TV/designer boots/widgets during a sale, so I saved a lot of money.”
- Myth: “It is OK to loan money to friends/relatives.”
- Myth: “It’s a man’s job to handle the investing and taxes. It’s a women’s job to create a budget and keep the family spending frugal.”
- Myth: “Rich people are greedy/lucky/privileged/scum/crooks. If I make a lot of money that is what people will think of me.”
- Myth: “A person must drive a flashy new car and live in a fancy mansion if he is rich.”
- Myth: “I have to make more money if I want to get rich.”
- Myth: “I don’t make enough money, so I can’t save”
- Myth: “My children will take care of me when I am older.”
While money can certainly make life a lot easier, several surveys have reported that rich people are not necessarily happier than the poor people. According to this article, once the basic needs are met, the relationship between more money and increased happiness tends to become weaker. I can still remember how happy I would get during my undergrad (when I was really quite broke) if I were to chance up on $10. To make me have similar feeling now, it would take a lot more money, and even then, I doubt the feeling would be as exquisite.
Have you heard of the story of the little grass hopper who did not save for the rainy day? He thought he could be easily crushed by a lawn mower, and so what was the point in saving? Well, he wasn’t crushed by the lawn mower and when the rains came he was at the mercy of the ants to avoid starvation. Don’t be the grass hopper and give ridiculous reasons not to save. Yes, you could be hit by a bus and die tomorrow – so make the best of today. But just in case you don’t get hit by that bus, make sure you have some savings to tide you along.
Unless you really needed the plasma TV/designer boots/widgets, you are only fooling yourself by thinking that you saved money by buying these items - be it on sale or not. “Sale” and “Clearance” are words with potent enticing power that captivates many of us and beguiles us into a shopping frenzy. Marketing gurus know this and that’s why we have sales associated with every national holiday you can think of, semi-annual sales, inventory clearance sales, surplus sales, tax-free days etc etc. Heck, I am sure if I sneeze next to a marketing pundit, there will be a “ispf-just-sneezed-sale”! So watch out, don’t fall for the oldest scam in the world! Oh, and even if you needed the item, just buying it during a sale does not mean that you save a lot of money, especially if you have a tendency to “reward” yourself for saving so much by buying more stuff :)
More often than not, loaning money to friends/relatives is a bad idea. Not only do you risk not getting back your money, it could really mess up your relationship with the person as well. If you do have to loan money to friends, ask yourself these five questions first. Also, remember that even the loan between friends and relatives can be made through formal arrangements using services such as those offered by Circle Lending.
Traditionally, since men were the bread winners and women were home makers, men would take on the responsibility of more serious topics such as investing and taxes, while women would focus on more family oriented topics such as budgeting and household expenses. In the unfortunate event of a divorce or death, the surviving member was usually helped by family members and friends to manage the aspects of finances they are not familiar with. But we do not live in the same world anymore. As families get more and more nuclear, we each need to be able to handle the role of the other efficiently. Golbguru has an excellent article on this matter titled Husband, Does Your Wife Know How To Invest? Wife, Does Your Husband Know How To Pay The Bills? that is definitely worth checking out.
There is so much misconception about money and the rich. On the one hand everyone wants to be rich. On the other hand they resent those that are already rich and worry that if they were to become rich someday, then all their friends and family will start resenting them. It is all in your attitude. This article on Facing and Fighting Financial Trolls has some excellent advice on recognizing both external and internal factors that result in self-defeating financial notions and how to deal with them. Another interesting article -- Money Memes and Myths looks at the common saying that can result in warped ideas and personal conflicts. Ultimately, it’s up to you to develop a healthy attitude towards money (and people with money) if you eventually want to reach a state of financial freedom.
Not if you believe the research presented in the book The Millionaire Next Door: The Surprising Secrets of America's Wealthy by Thomas J. Stanley and William D. Danko about the U.S. households with net-worth exceeding one million dollars (USD). According to their findings, the average price of the homes owned by the millionaires is $320,000, and only a minority of them drives a current-model-year automobile. Their median annual taxable income is $131,000 and 80% of them are first-generation affluent (did not receive their wealth in inheritance). Their secret is to live below their means and to avoid buying status objects. If you are interested, you can read the first chapter of the book online on the nytimes site.
Sure, making more money can give you more opportunities for growing your wealth, but only if you make sure that an increase in income does not result in a corresponding increase in lifestyle. Alternately, even when you make less money if you can find ways to keep more of it, you can still get to become rich eventually. It does not entirely matter how much money you make. What matters more is how much money you keep. And where you keep it. For instance, if you stash all your savings under your mattress, then inflation will eat into its buying power and you will end up in a state worse than you started. On the other hand, if you can make smart investments by increasing your returns while keeping the risk low, even with a smaller initial investment, you can find ways to get rich.
Do you know that there are people out there who live on less than $1 a day? My point is, basic needs such as food, shelter and health expenditure do not take up a whole lot of what we make. What eats up the paycheck is usually unfortunate circumstances or excess expenditure on things we do not really “need”. If you are a victim of the circumstances, strive hard to get above them – instead of feeling sad for your situation or blaming someone for your problems, strive to get out by looking for opportunities or creating them for yourself. If you are an excessive spender, try to curb the expenditure a little bit at a time. For instance, can you pack lunch for just two days a week, instead of eating out all the time, and put the lunch money in a savings account? Can you try and reduce the grocery bill by just 10% every week, until you reach a level that meets your basic necessities? Can you go without television? Ultimately, it all boils down to your attitude – if you really want to save, you can always find a way to do so, no matter how much you earn.
This may just be a culture thing, but in many Asian cultures it is common for parents to expect that their children will take care of them when they are older (more about this here, here and here). In my case, while my parents do not quite expect me to take care of them, their financial situation is not great, and I offer to help from time to time. There are several friends of mine that send money to their parents on a regular basis. But, just because we help out our parents, does not mean that we can expect our kids to take care of us when we are older! Yes, it is going to be quite hard to help our parents, provide for our children and save for our own retirement, but it needs to be done. Relying on our children to provide for us in our old age is just not a viable option for retirement planning in this age of changing cultural influences and where old values are replaced with newer ones.
Hmmm.... that is the list of myths I have so far on attitudes towards money and finances. If you know of others that should be on this list, please do leave a comment. Over the next few weeks, I will cover some of the common myths in other finance-related matters as well, so stay tuned. Once the series is complete, you should be able to access the full list of myths via this index.