Money Myth #1: “I should focus on saving to avoid getting a loan.”
Being terrified of loans means you neglect other critical financial issues, such as liquidity. For example: You have S$150,000, and you would incur a debt of S$150,000 to further your studies. To avoid getting a loan, you’d pay the whole amount at one go, and have no money left to deal with emergencies. When a crisis does come along, what then? You have no cash to deal with it. You will probably have to borrow (precisely the thing you were trying to avoid), and often at far steeper rates than an education loan would have cost you.
The truth is… Always keep an eye on liquidity. Even if you have to pay a bit of interest, try to pay in manageable sums–avoid wiping out your bank account in one massive repayment.
Money Myth #2: “Risk is always bad and must be avoided at all cost.”
Risk comes from volatility (the tendency of values to fluctuate) without which you can’t make money. For example, imagine if the price of a T-shirt were a fixed S$12 everywhere in the world. Could you make money buying and selling it? Obviously not, because the lack of volatility (price difference) means there’s never profit to be made.
It is the constant fluctuation in value that makes profit possible. The downside is that volatility also creates potential loss. If prices can swing up, they can also swing down. People who get rich are very good at picking assets where the potential upswing is greater than the potential downswing (or at least balanced out).
For example, lending money to a friend has low potential upside, but high potential downside. The best result is that you get your money back. That’s it. The worst result is that he doesn’t pay you back at all. The downside clearly beats the upside here, so that’s a risk you’d avoid.
But there are cases where the upside is bigger than the downside: Say you buy a well situated house. The potential downside is that you could sell it at a loss. However, there is a much higher chance that its value will appreciate (Singapore is land-scarce, the population is growing, and the house has a good location). Also, you can rent the house for income–even in the off chance you were forced to sell at a loss, the accrued rental income over 10 or 15 years might make up for it.
The truth is… That risk is not always bad, provided you are fairly compensated for taking it. And risk can make you a lot of money if you ensure the downside doesn’t outweigh the upside.
Money Myth #3: “I can win just by not losing.”
This is the mentality that makes you stick your money in a fixed deposit, or some other “safe” place, because you want to win by not losing. This works as well as it does in a real race (i.e. you will never win. Not by striving to just stay in the middle). The people who do this severely underestimate the impact of inflation on their savings–every year in Singapore, the rising cost of living actually devalues your savings by at least 3%. At a typical fixed deposit rate of 1% (if you’re lucky), you effectively lose 2% per annum.
The truth is… That basic financial prudence requires that your returns beat the inflation rate by 2% – so if you’re not getting at least a 5% return on investment, you are in serious danger of never retiring.
Money Myth #4: “I’ll just spend the last of my money, my pay is in next Monday anyway.”
Living paycheque to paycheque is extremely dangerous. If even the slightest thing goes wrong, such as a critical illness, redundancy, or burst pipes in your kitchen, you’ll be forced into borrowing. This is somewhat similar to myth #1: never have a completely empty bank account. Always have a little bit extra in there. The cash must flow.
The truth is… If you really want to live paycheque to paycheque, then first set up an emergency fund. Spend some time, maybe two years, to save up six months of your income. Once you have this emergency fund set aside, you can go ahead and spend every last penny of your paycheque.*
(*It would be nice if you invest some of it though.)
Money Myth #5: “I hate hearing banker talk. I’ll just take the first deal and be done with it.”
And yet, people still wonder how some investment bankers and financial advisers manage to rip them off. The dishonest ones count on the fact that you hate talking to them and asking questions. This is how you end up paying high management fees, or buying products at twice the cost of the neighbouring bank’s.
The truth is… There’s really no way around this, short of legwork. You need to call, ask questions, and compare rates. If you get confused, get up and walk – don’t just sign to get it over with. These days there are plenty of free online comparison tools (like ours) where you can find the best deals without a face-to-face meet.
Money Myth #6: “I can save more money by doing everything myself.”
You can also lose more money this way. With regard to equities, bonds, and property, there are a ton of books explaining how easy it all is. In reality, there’s a good reason why the finance sector still exists, and people don’t all balance their own portfolios. Most people who try to DIY everything end up either ignoring their portfolio, revising it maybe once every five or six years, or fiddling with their portfolio too much, and rushing to sell and buy while following the herd. Neither method produces good results.
The truth is… In order to have a balanced portfolio, you will need to subject it to formulaic and calendar based rebalancing. That takes time, and a good knowledge of financial markets. Likewise, many of the best assets come with having the right contacts – the banks may not be inclined to offer you, a total stranger, a better price on a deal. But they might do it if your wealth manager (be it a financial adviser or private banker) intervenes for you.
Consider that in certain situations, such as when you lack the time to deeply understand investing, paying fees to professionals might be worth it. Yes, things like commissions eat into your returns, and the price is high over the years. But if you don’t have the time to track your portfolio and understand what’s going on, a DIY approach might cost even more.
For more money-saving tips and tricks, read, Money Lessons Nobody Tells You About When You Get A Pay Raise, 5 Habits That Will Help You Save Money Better and 8 Money Saving Tips That Will Change The Way You Save.
Text: Ryan Ong / Additional Reporting: Elizabeth Liew
This article first appeared on SingSaver.com.sg, Singapore’s #1 financial comparison platform for credit cards and personal loans.