It’s time to hammer a few money myths

Conventional wisdom, though often possessing a kernel of truth, can be an unreliable guide, rooted in outdated beliefs that don’t necessarily make sense in today’s world. This is as true in personal finance as in any other aspect of our lives.
Perhaps one of the most basic and persistent myths is that high earnings equate to wealth. In fact, the two only weakly correlate, with many top earners not “wealthy” at all and many on modest earnings being very well off. That’s because wealth depends far less on what you make and far more on what you do with what you make.
Decades-long research by the authors of the bestselling books The Millionaire Next Door and The Next Millionaire Next Door, for example, showed that many truly rich people were in that position because they neither lived in expensive neighbourhoods nor drove flashy cars (just because they could), preferring to live simply and invest their cash.
But there are plenty more myths where this one came from. Here are seven — along with some financial advisers’ takes on why we need to shake them off.
Certain types of debt can play a useful role in any financial framework. For example, a mortgage can, says Fonz Scanlan of Money Smart, ingrain a savings habit by forcing borrowers to pay off a certain amount every month. “More importantly, it allows us to use this cheapest form of debt to buy appreciating assets.”
As a general rule, therefore, he advises clients to neither overpay their mortgages nor pay them off early. “Not only are you losing liquidity if you do so, but you are also losing the ability to instead invest in the stock market for the long term.”
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From the perspective of Steven Barrett, managing director of Bluewater Financial Planning, the merits and demerits of debt come down to what form it takes. Taking on debt for big expenses such as buying a house or car makes sense — although, he notes, as your salary increases, you should be able to buy a car outright.
“But if you are getting in debt for day-to-day things, you are living beyond your means. This means there is more money going out than is coming in, and it won’t end well,” he says.
Although auto-enrolment should pull many taxpayers into the pension net next year, there will be an option to leave after six months. For most people on lower salaries, however, experts say that thinking they can’t afford a pension is a fallacy.
“Waiting for the perfect salary to start retirement savings is a common trap that can derail people,” says the money coach Kel Galavan, aka Mrs Smart Money.
“Saving for a pension needs to be a priority, regardless of income level. The sooner you begin, the more time your contributions have to grow, thanks to the magic of compound interest.”
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You can start small and work your way up over time. “It’s not about how much you start with but the habit of saving that matters,” she adds.
“Just don’t let the idea of needing a higher salary stop you from taking advantage of the tax breaks; your money is better off in your pension than in Revenue’s pocket.”
According to Paddy McGettigan, managing director of McGettigan Financial Planning, you might be surprised at how quickly you acclimatise to paying your contributions.
Nikki Digby, director of Impartial Financial Advice, cautions taxpayers not to be tempted to rely on a partner’s pension. “This ignores the tax advantage of having a pension for both of you and can cause difficulties if you end up separated or divorced,” she says.
Although there is of course logic to being frugal, the consensus among those who advise on money matters is not to sweat the small stuff. “I’ve never agreed with the saying ‘look after the pennies and the pounds will look after themselves’,” Scanlan says.
“My advice is to focus on the big decisions. In life we face no more than a handful of really big money decisions, which need care and attention.” These typically include your choice of job, your marriage and children situation, your house and mortgage decision, and your investment approach, he adds.
Some of us might get hung up on saving a few euros here or there, while blissfully spending far more than necessary on big-ticket items. As Barrett says: “Ten euros saved on shopping per week won’t make much difference if you are buying an expensive car. Drive a cheap one instead.” Penny wise, pound foolish is a bigger danger to your wealth.
As McGettigan points out, people need to remember that there are different types of financial risk. One is investment risk; another is inflationary risk.
“Money held on deposit may maintain its cash value but, due to inflation, its purchasing power is reduced. While there is definitely a requirement to keep money on deposit for everyday living and for short-term planning, the cost of this is the inflationary risk. Any cash assets that are not needed in the short term should be invested to avoid this.”
Neglecting to acknowledge this risk is, Scanlan says, possibly the “biggest and most common mistake” people make. “It is a surefire way of decreasing the value of your hard-earned money.”
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Unless you need the cash within a few years, you are better off siphoning all savings — except your emergency fund — into pensions and investments. “Put simply, bank savings effectively see you grow poor slowly, while investing can help you grow wealthy slowly,” Scanlan says.
“While it’s true that those with significant resources can invest more, you don’t need to be rich to start,” Galavan says. In fact, she adds, with access to the markets easier now than ever before, your investment journey can begin with as little as €20.
Gone are the days when you needed to set up a meeting with a stockbroker to invest. “Now anyone can easily open an online account and start trading,” Barrett says. “Most young people have online trading accounts but are at the start of their careers and are not wealthy. But they are creating the correct habits to build wealth by investing.”
Where less well-to-do investors will feel the pinch, however, is when they have to fork out exit tax of 41 per cent on funds and ETFs (exchange-traded funds).
“[These investments] are taxed as if only rich people invest in ETFs, when in fact ordinary earners are using them just as much,” Barrett says.
“The most common question I get asked by clients in well-paying jobs who see people with bigger cars or houses than they have is, ‘How can they afford that?’” Barrett says. “That is because we don’t talk about money. We don’t know if that other person simply earns more, got an inheritance, or is up to their eyeballs in debt.”
One client, for example, was routinely open with her colleagues when it came to salary levels; as a result she was better able to gauge whether they were all getting market rate — and improved their earnings as a result.
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Scanlan, meanwhile, says his No 1 rule for any household is to talk freely and openly about money.
“If you don’t discuss money with your partner, you’re storing up a whole heap of trouble; and if you don’t discuss money with your kids, not only is the taboo being passed on to them, but how will they ever learn good money habits?”
In Scanlan’s opinion this is the most dangerous myth of all because it results in a huge part of society “not partaking in the wealth-accumulation machine that is long-term stock market investing”.
While equity markets are risky in the short term, and putting your money into individual companies is also a risky approach, there are, he says, “cheap and simple” ways of maximising diversified exposure to global equities for all of your life.
Just don’t kid yourself into thinking that you can “time the market”.
“Invest regularly in a well-diversified portfolio and don’t react to market noise,” says McGettigan, who adds that your exit from any investment should be determined by your own financial planning, not by market prices.