Campaign Against Financial Myths: Part 1 – Financial Planning

(This article is a part of the series aimed at dispelling some of the rampant financial myths. Please refer to the full index for myths related to other financial topics. Oh, and a quick disclaimer: I am not a financial advisor. I have made every effort to research the facts before presenting them here. But, if you have a reason to believe any of the statements are incorrect, please feel free to correct me.)

 

  • Myth: “Financial planning is for rich people.”

 

 

      I believed this myth for the longest time. When I did not have enough money and was living paycheck to paycheck, it did not make any sense to “plan”. That line of thinking eventually led me into debt and a lot of heartache. Financial planning is important no matter what rung of the financial ladder you are on. Financial planning could mean something as simple as budgeting for day-to-day expenses, putting away money for future purchases so you don’t get into debt, making sure you pay your bills on time so you can avoid late fees and interest, etc. Without a plan you will soon find yourself in a lot of trouble.

 

  • Myth: “Financial planning = Investing.”

 


Since I believed that planning is for the rich, I automatically assumed that it meant determining how to invest. But the truth is, financial planning can be just about anything. If you are living paycheck to paycheck, then financial planning would involve budgeting to ensure that you live below your means and avoid debt. If you can spare some room in your budget, then planning could involve setting up a retirement account and making regular contributions. As your income increases, you would add investing to the mix. Maybe you will plan a luxury trip. Maybe you choose to buy a fancier car. Financial planning is all this and a lot more. Start out with some basic goals, and determine how you will get there, and voilá, you have a financial plan.

 

  • Myth: “I am very young. I don’t need to start planning for retirement just yet.”

 


If you are very young, then this is the best time to start putting aside some money for retirement since you can have the full power of compounding behind you! My favorite example is the story of John and Jane. John starts working at 20, and for the next 10 years, he puts aside $250 every month towards his retirement. At 30 he gets married and stops contributing for his retirement and does not make a single contribution ever again. On the other hand, Jane gets married at 20 and spends the next 10 years raising a happy family. At 30, she decides it is time to start contributing to retirement and for the next 35 years she contributes $250 per month towards her retirement account. Assuming that they both receive the a conservative (by stock market standards) rate of 8% returns, can you guess who will come out ahead when they retire at the age 65? It is John. Even though he contributed for only 10 years compared to the 35 years that Jane contributed, he still comes out ahead by 20+ %! Here, check it out yourself by playing with this bankrate calculator (opens in a new window).

 

  • Myth: “It’s too late for me to start saving for retirement now.”

 


This is a corollary to the myth above. Like me, if you woke up to the world of financial planning at the same time that you approached 30’s, the example above can be quite disheartening. But it is never too late too start saving for retirement. Hopefully with some extra effort and learning how to manage our finances to earn the best interest rate within our risk tolerance, we can still save a healthy amount towards our retirement. The later you start the larger your contributions should be. So, while yesterday was unarguably a better day to start, today isn’t quite that bad either. Start now, if you have not already done so!

 

  • Myth: “Kids’ education comes first. So I need to put all my savings in college funds.”

 


Kids’ education is definitely a very high priority for most parents. But that should not be the only one. Push comes to shove, your kids can still fund their college education using loans and grants. But there are no loans or grants to provide for retirement. So, make sure you put away enough money to support you through retirement before pumping all the money into a college education fund. Also, when you have kids it is more important than ever that you should be prepared for emergencies. So make sure you put aside money in an emergency fund as well. If you torn between saving for your kid’s college fund or other savings, then Jeremy @ Generation X Finance has an excellent article that you might find interesting.

 

  • Myth: “I have a financial planner to take care of my money. So I don’t need to worry about it.”

 


Well, it’s your money… if that’s how your want to deal with it, Good Luck!!! Seriously though, no matter what the ads on TV say, you financial planner can *never* replace you when it comes to managing your money. Nobody can see your dreams the way you do. Nobody can assess your situation as well as you can. No matter how well you explain, nobody can understand the unique challenges in your life. So, seek the help of a financial planner if you must, but always remain on top of what is being done with your money and always be aware of how it is handled.

 

  • Myth: “I can pick a financial advisor randomly from the Yellow Pages.”

 


No! Unlike stock brokers, financial advisors are not required to be registered or certified. So look around and ask your friends to find someone who has several years of experience and a proven track record before hiring someone to handle your money. Also, not all financial planners are created equal. While a CFP (Certified Financial Planner) may have better knowledge of the current trends and be up-to-date due to the requirements imposed by the certification, for your particular situation a person with no certification but more experience under his belt may be more appropriate. Here is a good article from Investopedia on shopping for a financial advisor.

 

  • Myth: “Financial advisors mostly provide investment/retirement advice.”

 


Since we have already established that financial planning ≠ investing, it follows through that financial advisors don’t just offer advice about investing. Another related myth is that financial advisors mostly help plan your retirement. This is not true either. You can use the services of financial planners to handle your insurance needs, plan your kids’ education fund, handle your debt, taxes, estate planning and any number of finance related matters.

 

  • Myth: “All savings accounts are created equal.”

 


Pretty much everyone knows that this is a myth! Online savings accounts can offer much higher rate of interest than the traditional brick and mortar banks. These days several online banks also offer checking accounts that have higher interest rates than brick and mortar banks. In addition, while planning for retirement, it is better to park the money in tax-deferred accounts such as a 401K or IRA so that more of your money can earn compound interest. Then there is a variety of other options such as Money Market Accounts (MMA), Certificate of Deposits (CD), brokerage accounts etc. So determine what you are saving for and once you have your goal in place choose the appropriate vehicle for the savings/investing.

 

  • Myth: “Two incomes are *always* better than one. So, it is *always* better for both the partners to go to work.”

 


When you speak in absolutes, you are *always* likely to be wrong (couldn’t resist that one) :) While in many cases if both the partners earn, they can provide better quality of life for the family, in some cases this is not true. Especially if you have kids of young age that are still not in school yet. PFAdvice had an excellent article on this matter titled Two-Income Trap: Why Many Couples Shouldn’t Both Be Working For The Money that I would highly recommend that you read if you believe that two incomes are *always* better than one.

That’s about it for today. Over the next few weeks, I will cover some of the common myths in different financial categories. Once the series is complete, you should be able to access the full list of myths via this index. Knowing the difference between a myth and the reality can make a huge difference in the long run – so stay tuned for more.

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Comments

  1. 8% annual interest is not a “conservative estimate” by any means.

  2. Max: Historically, the stock market has returned an average annual return of around 11%. I know past performance is no guarantee of future success – but still 8% is relatively conservative for a long term investment in the stock market.

  3. Very nice. Especially true about the financial advisers. Who knows whether they can handle money and what kind of agenda they’re pushing…

    Max, I think the 8% thing is a long-term (think 30 years) estimation based on the market in general. It’s also more conservative than many I’ve heard.

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