The Five Biggest Money Myths and How to Fix Your Poverty Mindset
There is no shortage of personal finance advice on YouTube, in Podcasts, and especially from your MLM friend; tweeting from Starbucks that he/she is his/her own boss and makes his/her own hours.
If you are reading this, I am sure that I’ve bombarded you with financial facts while you were out clubbing, at brunch, or even on vacation.
Proving yet again, you are not safe from the reality that you have bills to pay.
“The average American is living less paycheck to paycheck nowadays and more like debt to debt.”
Lawrence Gonzalez
Table of Contents
It’s pretty bad out here, especially for millennials
There aren’t enough tiny violins and wine to close the gap. Millennials were dropped into the path of the tornado with no exit. We are married to credit cards, and student loans are our children. So I’m not here to shame anyone; I know the struggle. I write this stuff so that you are aware that you are choices; whatever step(s) you make beyond that, you own it outright.
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This is what PERSONAL Finances is all about. You have to square up with your own life and say, “welp with my odds, I’m either going to work to make it all work or not”.
Unfortunately, with all the good advice available, there are tons of bad advice. And since most people can’t tell the difference between real news and fake news anymore, hopefully, this helps. Time to peel back some deep psychological trauma of asking your dad for money and him saying, “No” repeatedly. Time to face up to fear-inducing behaviors cause by watching your mom work two jobs. Let’s get over the hump, to be better than average.
Myth #1: I DON’T MAKE ENOUGH TO SAVE
The reality:
If you start early enough and save at least 15% of your paycheck—including your employer’s match to your 401(k), you can make it to $1.7 Million dollars (the current amount you need to survive/retire).
Yep, that sounds like a lot, but it’s 100% attainable (see illustration below)
Live differently and save as much as you can early. Your money will start working for you through the power of compounding interest. It would take you $801/month in savings from age 40-67 (retirement) to accumulate $1M. versus about $340/month in your 30s (to retirement), or a whoppingly low amount of $150/month from age 20-67.
It’s better to make the effort ASAP. For more information read The Case for Saving As Early As Possible.
The solutions:
1. Spend a weekend evaluating your core values. What are your goals and plans for your life? If you don’t have any, that’s fine. That’s all part of the process. Spend the time figuring out what you really like to do VS. what you think everyone else wants you to do.
2. Take inventory of your money; what’s coming in and what’s going out. And then make a budget to trim off the fat. I guarantee you that your food allocation is killing you, either physically or deep in your pockets. Staying out late drinking also leads to late eating which is detrimental to your health, less energy for the next day no matter how much energy drinks you chug, and loads of microtransactions such as Uber/Lyft. Something will have to give. Use Mint.com or Personal Capital to track all your net worth.
3. And simply save. Don’t make it more complicated than it is.
Myth #2: CREDIT CARDS ARE EVIL
The Reality:
According to data from Creditdonkey.com, the average individual credit card debt stands at $5,331 in 2019. Additionally, on a monthly basis, most Americans don’t pay their credit card balance in full every month – 55% don’t regularly pay in full. 2 out of 3 US adults are in chronic revolving debt. 70% of people with credit card debt admitted that they can’t pay it off in a year.
We clearly have issues. However, credit cards are not pure evil. Money isn’t either.
Most are merely caught up in what is known as the Diderot Effect. Buying a bigger home leads to more furniture, bigger TV, and more home renovations than HGTV on a Saturday. On top of that, this society is going more digital. I walked into Joe & the Juice with $10 and they said, “your money isn’t good here sir” while pointing at the credit card machine. Society is weeding out unbankable people.
The solutions:
1. Change your lifestyle. If you think that you can’t have fun without money, you are solely disappointing your inner child. Find new ways to enjoy life again without the need to swipe. Remember to play castles and forts. Grab any outside sport and go play. The perk in adulthood is that you can stay out later. You are in charge.
2. Make it harder for you to spend. Add more friction between you and spending. For example, how easy is it to stroll online during your lunch break and click and buy something from Amazon? I suggest cutting off Amazon Prime and removing your credit card from the online registry. And as a final dagger to yourself leave your credit card at home.
3. Meal prep so you aren’t there hungry in the streets. Got a friend that sends herself a reminder at around 5 pm that she has food at home. Hold yourself accountable, by any means.
Myth #3: ALL DEBT IS BAD
The Reality
Experts go back and forth on the value and the determination of debt. In a society that prides itself on schoolyard antics, people often clamor to find out if someone is 100% wrong or 100% right.
Credit cards, auto loans, student loans, and mortgages can all be used as tools to get you to your desired destination. Having too much of all of them is the problem.
It’s rare to even get a quality job or career options without a college degree. Where do you get $200,000 for even a modest 2-bedroom home? While I’m not saying that most costs are unavoidable; we have to be real that some of them par for the course.
The average American now has about $38,000 in personal debt, excluding home mortgages. 25% of that debt falls squarely on credit cards and our bad habits. Older millennials are carrying about $42,000 which makes sense since we were the first generation fully indoctrinated into the credit system. With no warning and inadequate education, we jumped headfirst into Amazon Prime and easy access.
Debt isn’t bad. Your relationship with money and your habits need work.
If you are just going with the flow and rolling with the lifestyle creep with no savings or investments; you are doing it all wrong. Debt isn’t bad nor is it good. It’s just a leveraging item. When you hear Jay-Z has a billion-dollar net worth, do you honestly think he isn’t carrying any liabilities? Or do you think he is literally swimming in cash? Think bigger. Just like a corporation, use your own debt wisely. Don’t just take it on a whim.
The solutions:
1. Forgive your past self (or even your present self) for prior mistakes with debt. It could have been yesterday or last year, you already made the mistake. Stop beating yourself up, you will need all the positive mental fortitude to fix your mistakes.
2. Educate yourself on core concepts such as interest accumulation and Pay-Off methods.
3. Divorce yourself from the idea that Spending all your money = Happiness.
4. Before you pick up your next debt. Know the interest til the payoff amount. Know the date that you intend to pay it off.
Feel free to read my journey with $100k worth of student loans. I still have $90k and $150k+ in savings accumulating from (-$1k) – $5k per month through the market. It can be done. You just need to start mastering your purpose.
Myth #4: HAVING A BUDGET DOESN’T WORK
The Reality:
According to a recent study by U.S. Bank, 38% of Americans say they use a budget basically one in three households. That means a large majority of people are not keeping track of their finances in any fashion. They are rolling with the punches. I was asleep at the wheel as well and it cost me $10,000 for starters and $90,000 more for grad school.
Just 46 percent of Americans have a rainy day fund, according to FINRA’s National Financial Capability Study.
When someone says “budgets don’t work”, ask them if they have one. They are likely to get mad. People often feel that budgeting is a complicated thing. Nope, even poor farmers in 3rd world countries learn to budget or better yet make the necessary adjustment to make even $15,000/annually work for a family of four. Budgeting just means that you are telling your money what to do versus ducking creditors.
The solution:
1. Budget. You literally haven’t tried anything else so, why not?
2. Know your own numbers and your own goals. You are likely seeing a repeating trend today. Grasp where you are financially and make peace with it. You are older now and should be worth a damn.
3. According to Dave Ramsey, there are roughly ten categories for budgeting: housing (25-35%); food (10-15%); transportation (10-15%); insurance (10-25%); utilities (5-10%); health (5-10%); recreational (5-10%); personal (10-15%); giving (10-15%); and saving (10-15%).
Myth #5: THE BIGGER THE RISKS, THE BETTER THE REWARD
The Reality:
Many people (mistakenly) think that making money by investing involves picking a hot stock or the latest bitcoin trend. Investing is not the same as gambling. When you gamble, you are throwing money into a pot and hoping for good luck.
Investing is a whole other animal. Armed with the right information, you can consistently make a profit in the long run, even if you lose money once in a while.
It’s a long game. The bigger the risk doesn’t often mean the bigger the reward. Just like debt, try not to compound your risk. For example, if you are randomly asked to pull out $10,000 for a sure bet, operate like it is a hit on your life. That person is lying to you.
The Basis of the Myth: Over Optimism. “Past Performance Indicates Future Returns.”
It’s often tempting to buy an investment because you heard that it is doing phenomenally. It can be true that the investment can do the same or even better numbers than before but this house of cards can easily fall if you stack it wrong. It is still a risk, not a sure thing. You can’t predict the weather, the market is just as volatile.
The solution:
1. Mitigate your risk. Diversify your portfolio between stocks and bonds. Adjust annually if need be.
2. Understand your risk tolerance and start to shift toward this version of yourself. The version that’s an adult and cares about the value of his/her dollar. #Equalpay
Bonus Myth: CUT OFF ALL UNNECESSARY EXPENSES – CABLE, NETFLIX, STARBUCKS, AND ALL THINGS FUN
The Reality: “In a recent essay for Fast Company, Ellevest CEO and founder Sallie Krawcheck lambasted the patronizing advice of “stop buying lattes.” She pointed out that the math doesn’t add up, “In order for that one latte a day (at $5 per latte) to earn you that $1 million over 40 years, you would need to earn 10% annually, every year, year in and year out.” The stock market, she went on to say, has only gone up 5.6% annually over the last 20 years. Krawcheck also stressed that the condescending tone of the advice overlooks the systemic challenges that women have had to face when it comes to money–including the mindset that they are not good with it.”
We’ve been talking forever about making a budget and saving money, Abella says, yet so many people still struggle with it. At the end of the day, “money is very psychological . . . It comes down to mind-set, conditioning, and emotional stuff.”
There is no amount of cutting that will make up for an increase in income. I know I’ve been there as well. However, I can tell you that if you can’t handle a small amount of money, anything more will end with the same issue. I know many people making over $100,000 annually in DC and are still broke.
Adjust for the life you need but don’t completely forgo your well-being and personal happiness.
Yeah, you can’t take (it) with you but you can leave plenty behind for your family. Legacy Building over Survival Mode. LG
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