Whether you're listening to outdated advice or blindly following broad rules of thumb, personal finance myths are rampant. These financial experts weigh in on myths they'd like to see debunked.
Niv Persaud, certified financial planner, managing director, Transition Planning & Guidance, AtlantaMyth:You need at least three to six months of expenses in your emergency reserve. Actually, you need enough money in your emergency reserve to cover expenses over the time period it would take you to find a new job.
Most people dip into their emergency reserve between jobs. In today’s environment, it takes longer to find a job. For single-income households, your emergency reserve should be at least nine months of expenses. For dual-income households, your emergency reserve should be at least six months of expenses. The higher your job ranking and income, the longer it will take you to find a job. The process is just longer for senior positions. Adjust your emergency reserve based on dynamics in your industry and role.
(Getty Images/iStockphoto)
Getty Images/iStockphoto
Harold Evensky,certified financial planner, chairman, Evensky & Katz, MiamiMyth: Plan on spending 4 percent of your nest egg annually in retirement. The good news: It’s not a rule, but a guideline. You may be in a position to spend more. The bad news: In today’s financial world, with historically low interest rates and a very pricey market, 4 percent may be very optimistic, and 3 percent to 3.5 percent may be a better guideline. Finally, the rule doesn’t factor in the likely 20 percent tax bite.
(Getty Images/iStockphoto/freemixer)
Getty Images/iStockphoto/freemixer
Zach Abrams, certified financial planner, manager of wealth management at Capital Advisors, Ltd., Shaker Heights, OhioMyth: There is no cost to saving for retirement. Of course, saving is great. The more you can save, the better. However, there is a cost to saving, and that is the life experiences you miss while you’re plowing money away. For example, if you save $3,000 in your 401(k) instead of going on your dream vacation, that $3,000 will grow, but at the opportunity cost of your dream vacation.
If we assume a 7 percent growth rate and $3,000 at age 25, that has a value in 30 years of $23,000 or so. That same $23,000 is worth about $9,000 today if we assume 3 percent inflation. $9,000 isn’t going to make or break your retirement, though of course this adds up. You can also catch up that $3,000 as your income grows. In general, I am a proponent of mixing savings and consumption, depending on your goals and objectives. Everyone is different, but finding the balance that is right for you is key.
(Getty Images/iStockphoto/Rawpixel Ltd)
Getty Images/iStockphoto/Rawpixel Ltd
Stephanie C. McElheny, certified financial planner, assistant director of financial planning, Hefren-Tillotson, PittsburghMyth: Credit cards are bad. There are people who criticize the use of credit cards and the negative effect they can have. While misuse of credit cards can certainly be financially devastating, that does not mean everyone should avoid them. In fact, when used correctly, credit cards can be an incredible financial tool. A person’s credit score is referenced in a multitude of scenarios as it is an important indicator of financial reliability. Without one, there is no strong metric of a borrower’s ability to pay. Establishing good credit is integral to securing a mortgage, a car loan and other collateralized debt. Additionally, a high credit score often results in lower interest rates and higher borrowing capacity. For many people, assuming they have the necessary resources and can make timely payments, including the ability to pay off each month’s balance in full, credit cards offer many financial opportunities and rewards.
(Thinkstock)
Thinkstock
Trevor K. Harris, certified financial planner, senior financial planner, Sonas Financial Group, Kansas City, MissouriMyth:It’s too late to reach my financial goals. I have clients all the time express this attitude regarding their financial goals. I try to tell them that it is never too late to make an impact on your financial life. Yes, if you don’t start seriously saving for retirement until your mid-50s, you probably can’t retire at 55. However, you can always take steps to positively impact your goals. If you started saving late, start increasing that now. But also look at reducing debts, for example, downsizing your house. Or join a health club now to potentially decrease future medical expenses in retirement. If those steps are still too much, then talk to your children and grandchildren about the benefits of starting early and make an impact for their future.
(Thinkstock)
Thinkstock
Wes Shannon, certified financial planner, owner, SJK Financial Planning, Hurst, TexasMyth: It is better to own a home than to rent. This is a myth. Homeownership can cost more than renting, and individual homes are subject to many specific risks. There is never a guarantee that the home will appreciate in value and it is highly illiquid.
(Thinkstock)
Thinkstock
Joel Cundick, certified financial planner, financial advisor, Savant Capital, McLean, VirginiaMyth: You should have 10 times your income in life insurance. Personal finances are just that: personal. I have seen many personal finance rules of thumb prove to be inappropriate for the majority of the public. The myth about having 10 times your income in life insurance is a particularly widespread myth that often leads to poor decision-making. Your life insurance need is driven by the number of children you have, the ease of long-term employment for your spouse [and the level of income it might involve], the debts you have undertaken as a family and what your long-term goals are.
(Thinkstock)
Thinkstock
Ryan Fuchs, certified financial planner, Ifrah Financial Services, Frisco, TexasMyth: Your asset allocation target should be a set number minus your age. For example, many have said that your asset allocation should be 120 minus your age. That is far too generic and there are too many factors that play into a proper asset allocation to utilize such a simplistic ‘formula.’ There is really no set formula you can use to arrive at a proper asset allocation, as it depends on many factors such as age, portfolio size, time horizon, family situation, risk tolerance, et cetera.
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Whether you’re listening to outdated advice or blindly following broad rules of thumb, personal finance myths are rampant. To debunk common misunderstandings, U.S. News asked financial experts to weigh in on the money misconceptions they’d like to see debunked. Their answers have been edited for length and clarity.
