0 Spend

Unfortunately, one of the factors that will prevent many people from becoming financially successful is their own false beliefs about money and their personal finances. Take a look at my top 10 money myths, and hopefully you can avoid the consequences of believing in them.

1. If I get a raise that bumps me into a higher tax bracket, Ill actually take home less money.
Buzz – WRONG! Moving into a higher tax bracket only increases the rate of tax paid on the last dollars you earn. For example, lets say youre filing single, your old salary was $40,000 a year and your new salary is $43,000 a year. According to the Canada Revenue Agencys 2010 federal tax rate schedules, when your salary was $40,000, your federal marginal tax rate was 15% and now with a salary of $43,000, your marginal tax rate is now 22%.

The key to unlocking this personal finance myth is the definition of the word “marginal.” In this situation, your first $40,970 of income is still taxed the same way it was before you got your raise. With a $40,000 income, your take-home pay was $34,000 ($40,000 less 15% in federal tax). If you make $43,000, you will take home after federal tax a total of $36,407.90. This is because it is only the extra $2,030 above $40,970 which is taxed at the 22% – not the whole $43,000.

2. Renting is like throwing away money.
Do you consider the money you spend on food to be thrown away Or, how about the money you spend on gas Both of these expenses are for items you purchase regularly that get consumed and on the surface they appear to have no lasting value, but they are ultimately necessary to carry about daily activities (unless you can walk or take the transit everywhere). Rent money falls into the same category.

Even if you own a home, you still have to “throw away” money on expenses like property taxes and mortgage interest (and likely more than you were throwing away in rent). In fact, for the first five years, you are basically paying all interest on your mortgage. For example, on a 25-year, $300,000 mortgage at 5% interest, your first 60 payments would total about $105,000. Of that you “throw away” about $71,000 on interest payments and you only put $34,000 into equity of your home.

3. You always get what you pay for.
Higher-priced items are not always higher quality. While there is sometimes a correlation between price and quality, it is not necessarily a exact correlation. A $2 chocolate bar may be tastier than a $1 bar, but a $10 bar may not taste significantly different from a $2 bar. When determining an items true value, look past its price tag and examine the true indicators of value. Does that generic Tylenol stop your headache Is that home well-maintained and located in a good neighborhood When doing a proper analysis, youll know when paying the higher price is worth it or alternatively, when it isnt (and youll be on your way to understanding the principles of value investing).

4. I dont have enough money to start investing.
Its true that some brokerage firms require you to have a minimum amount of money to invest in certain mutual funds or even to open an account. The truth is, it is easy to start investing with very little money thanks to online savings accounts. While traditional bank savings accounts generally offer interest rates so low that you would barely notice the interest you accrue, an online savings account will offer a more competitive rate based on how the market is currently doing. As of April 2010, it is common to find online banks offering 1-2% interest. With recent news that interest rates in Canada will be going up, we could be in the 3% range within a year or so. A 3% return is a pretty good return on your low-risk savings account investment when you consider that stocks historically return an average of 7-10% annually. Also, some online savings accounts can be opened with as little as $1. Once youre in a position to start investing in stocks and mutual funds, you can transfer cash out of your online savings account and into your new brokerage account.

Alternately, you could open a brokerage account with minimal funds through one of the online trading companies that have cropped up. However, this may not be the best way to start investing because of the fees youll pay each time you purchase or redeem shares (generally $10 – $30 per trade).

5. Carrying a balance on my credit card will improve my credit rating.
Carrying a balance and paying it off slowly does not prove your credit worthiness. All this will do is take money out of your pocket and give it to a credit card company in the form of interest payments.

If you want to use a credit card as a tool to improve your credit score, all you really need to do is pay off your balance in full and on time every month. If you want to take it a step further, do not charge more than a small percentage of your cards limit because the amount of available credit you have used is another factor involved in the calculation of your credit score.

6. Home ownership is always the best way to invest your money.
Just like all other investments, home ownership involves the risk that your investment may decrease in value. While commonly cited stats say that housing appreciates at somewhere between the rate of inflation and 5% per year, if not more, not all housing will appreciate at this rate. Owning a home is a major responsibility and there are easier ways to invest your money, so dont buy a home unless you are attracted to its other benefits.

Another factor is the psychological element – I once heard a partner of a large accounting firm say that he credits much of his wealth to the fact that his mortgage payment is “forced savings.” So, thats true.. if you dont think you have the discipline to invest the money you save from not having a mortgage… youre probably not going to be better off financially.

7. “Ill save more later when I make much more money.”
Thats just another excuse for not saving, in fact, thats a really lame excuse. Claiming that a higher income will be your source to good financial habits, is simply lame. You can need to take control of your own finances, now… not later.

8. The stock market is tanking, so I should sell my investments and get out npw before things get any worse.
When the stock market goes down, you should really keep your money in the market. This way, you can ride out the dip and eventually sell at a profit. In fact, stock market lows are a great time to invest even more. Many seasoned investors consider a decline in the market to be a “sale” and take advantage of the opportunity to pick up some valuable investments that are only experiencing a temporary dip. You might want to do some reading on Benjamin Graham or Warren Buffet – who are both proponents of this method. A common expression out of Buffets mouth is “Be fearful when others are greedy and greedy when others are fearful”.

9. Timing the market is easy
You always hear successful stories of those who have timed the market and have made fortunes. We rarely hear of the thousands who time the market but lose fortunes. Studies and reports show that marketing timing does not work for 95% of us, unless you have money to burn, dont try to time the markets.

10. Im young – I dont need to worry about saving for retirement yet… or, Im old – its too late for me to start saving for retirement.
The younger you are, the more years of compound interest you have ahead of you. Compound interest is like free money, so why not take advantage of it Someone who starts saving and earning interest when they are young wont need to deposit as much money to end up with the same amount as someone who starts saving later in life, all else being equal.

On the flip side, you shouldnt worry if youre older and you havent started saving yet. Of course, your $100,000 nest egg may not grow to as much as a 20-year-olds by the time you need to use it, but just because you may not be able to turn it into $1 million doesnt mean you shouldnt try at all. Every extra dollar you invest will get you closer to your goals. Even if youre near retirement age, you wont need your entire nest egg the moment you hit 65. You can still put money away now and make a considerable sum by the time you need it at 70, 80 or 90.