3 Financial Myths: Totally Squashed
There are a ton of myths out there parading around as truth. But the real truth is that these myths are keeping people, well, broke!
We’ve all messed up when it comes to money, and it’s about time we call out these long-believed “truths” for what they really are: myths. Once you know the real truth, you can continue your journey toward financial peace.
“My vehicle warranty covers all repairs.”
I was getting my oil changed today when I overheard a woman’s struggles with the dealership. It went like this:
Dealership: “Your broken axle needs immediate repair and will cost you $700.”
Woman: “My car only has 30,000 miles on it -- the axle isn’t covered under the original warranty?”
Dealership: “Because you’ve had the car longer than 6 years, no.”
Woman: “I bought an extended warranty through [provider], let me call them because it should be covered. I pay them a good bit of money each month.”
She calls the provider…
Provider: “Well ma’am, I’m looking at a 3-page list of parts not covered by this warranty, and the axle is on it. Unfortunately, we cannot process your claim.”
She was frustrated. I was frustrated for her. She later told me she’d been paying $50/mo for 6 years on various warranties (that’s $3,600!), and never needed to file a claim until now.
Warranties sound attractive because they promise to cover substantial repair expenses in exchange for a small monthly payment. But the fine print paints a less promising picture as to what circumstances and which parts are covered. SmartPath CEO Alok Deshpande’s self-made millionaire mother once said, “don’t buy anything you don’t completely understand.” Car warranties are a great example of a commonly misunderstood service.
Rather than commit your money to a warranty contract, set up a car repair fund instead, and do the saving yourself. A good rule of thumb is:
|If your car has...||then your target saving should be…|
|0 - 30k miles||$50/mo|
|30k - 60k miles||$100/mo|
|60k - 90k miles||$150/mo|
“Social Security is going away.”
As an advisor, I hear this concern a lot. But if Social Security were to just “disappear,” do you know how many families would be impacted? 61 Million. Yes, that’s how many people are currently receiving some form of Social Security benefits, most of which rely a great deal on them for their basic needs. If checks were cut off, rents/mortgages would go unpaid, savings would deplete faster, and retirees would have to go back to work. Future collectors would have to work longer, save more, demand higher salaries (which companies may not be able to afford to do). It would create an economic disaster.
It’s unlikely that Social Security benefits will just “go away” for current and future check collectors. It’s much more likely that benefits will be reduced or accessible at a later age (i.e. 65 rather than 62).
To account for these potential changes when planning for retirement you can:
- Assume your estimated benefit today will be 20% less when you file.
- Assume your benefit will not adjust for inflation each year. That means it won’t increase at all once you start taking it.
Here are some more ideas on how to incorporate Social Security benefits into your retirement planning.
“It’s financially smarter to buy a home vs rent.”
A client of mine, we’ll call her Jasmine, got an itch to buy a home. She was 27-years old and just moved to a new city to start her 4-year medical residency.
Jasmine’s reasons to buy:
- I only need to put $5,000 down.
- The mortgage would be $200 less than current rent.
- I can build equity while I’m living in a new city.
These were OK reasons, but they excluded some deeper financial and lifestyle considerations like:
- Total Cost: She’d deplete her savings account to $500 after making the down payment. The prospective home was 20-years old and needed work. Jasmine had the money for the down payment, but not for anything else.
- Time: Jasmine spent close to 70 hours/week at the hospital for residency training. Did she really want to dedicate her sacred off-days to house upkeep?
- Length in City: Jasmine did not intend to stay in her new city after residency. Acquiring and selling a home is expensive, especially if you’re only planning to stay for 4 years.
Think beyond finances if you're considering buying a home. Do you have the time? Does homeownership fit the current season of your life? If you’re attending school, starting your career, recently divorced or moving to a new city, the ease and lesser responsibilities of renting may better fit your lifestyle.