Have you always dreamed of being rich, but wondered if money myths and misconceptions are holding you back? If so, you’re not alone. Most people would love to be wealthy enough to never to worry about money again, but this is easier said than done.
Becoming rich doesn’t happen overnight. Unless, of course, you’re hoping to win the lottery. Since you’re unlikely to hit the jackpot playing Powerball, you’re going to have to be more strategic than that.
To start, you’ll need to understand the specific money fallacies that are keeping you from becoming wealthy. Fortunately, you’ve come to the right place for life-changing advice.
11 Money Myths That Broke People Believe
Below I dive into 11 money myths that can be extremely self-destructive. I also explore how to replace them with empowering beliefs that will alter your financial future.
1. All Debt is Bad
When it comes to the pursuit of wealth and maximizing your finances, this is one of the biggest money myths of all.
Because many personal wealth experts believe you can’t responsibly use debt, they will try to dissuade you from using it at all. This advice is harmful, because it doesn’t take into account that there are two types of debt: good debt and bad debt.
Good debt is any debt that is paid for by other people on which you get to “keep the spread.”
Meaning, if you take out a mortgage to buy an investment property and your tenant pays you more each month to live there that your cost of the mortgage (plus maintenance and repairs), then you get to keep the difference as cash flow. This is definitely good debt. You should want lots of it.
In contrast, bad debt is consumer debt that you have to pay off yourself. If this type of debt has a high interest rate, then it’s really bad debt. When it comes to bad debt, then you should stay far away.
2. You Can’t Use Debt Responsibly
As mentioned, most personal finance experts try to teach you to stay away from debt, because they don’t think you can use it responsibly.
Perhaps for some of you, this could be true. But for many of you, this isn’t the full story because you are disciplined and smart.
Let me give you an example. When you were a child, your parents told you not to use your large kitchen knifes because they were dangerous. These knifes are dangerous when someone uses them carelessly or without adequate maturity.
However, by adulthood, every one of us owns sharp kitchen knifes for the simple reason that they’re effective at helping us speed up our food prep.
The same principle applies to debt. Debt is dangerous when it is used carelessly. It is also extremely effective at accelerating wealth creation.
The wealthy nearly always use debt on their path toward wealth creation. They frequently teach their children to use it too. I’ve done this effectively and you can do the same thing too.
For example, you could use debt in the form of a mortgage to acquire your first home or cash-flow producing rental properties that you couldn’t otherwise afford.
At the very least, you deserve to be told the full story about debt, so you can decide for yourself how and when to use it to your advantage.
3. Avoid Credit Credits At All Costs
There’s no denying that credit cards are convenient. They can also become a problem if you aren’t careful. But that doesn’t mean that you should totally avoid using them.
It’s certainly not a bad idea to make purchases with cash. But that doesn’t make it the very best idea.
Why is this? Well, credit cards provide all kinds of protection for your purchases, such as warranties and fraud protection that you typically won’t have with cash. Plus, if your wallet is stolen, you can simply cancel your cards, instead of being out whatever cash you were carrying around.
The key to using credit cards responsibility is to make your monthly payments on time and avoid maintaining a balance.
Many credit cards offer rewards programs that are very useful and often pay cashback for using them on everyday purchases. You can readily find credit cards right now that will pay you 1-2% cash back.
The judicious use of credits cards can also be an effective way to boost your credit score.
Of course, the higher your credit score, the more readily you’re qualify for home mortgages, investment loans, and business loans. You’ll also qualify for better, more competitive terms. With this type of access, wealth can become a virtuous cycle that self-propagates.
4. Hard Work is the Path to Wealth
This money myth propagates from generation to generation.
Your parents and grandparents probably drilled into you the need to have a strong work ethic. There is some truth to this, but it is not the secret to getting rich.
If it was, then hardworking laborers would be rich. They’re not because the wages they command don’t leave enough money remaining after paying living expenses to allow for wealth to be preserved and multiplied.
The moral of this story is to work smarter, not harder, and to find ways to generate passive income so that you’re making money while you rest—that is, on the weekends and while you sleep.
Put simply, technicians (i.e., the people that “do” the job) tend to be paid the least. Even highly paid technicians like doctors, lawyers and engineers eventually max out their earning potential.
In contrast, people with management skills, business building skills, and investment skills can achieve nearly limitless earning potential.
5. You Get What You Pay For
When you make a purchase, you want to know you are getting the best possible product for your money. Because of this, many people live under the assumption that more expensive items are of better quality.
This isn’t always the case.
For evolutionary reasons, humans tend to be “cognitive misers.” As researchers have found, the brain represents approximately 2% of our body weight, but consumes about 20% of our oxygen and fuel (calories). Meaning, the brain is very expensive in terms of energy use.
For this reason, we tend to rely on mental short-cuts, like this one that “price equals value.”
Unfortunately, this is true some of the time. But, some of the time, it’s falsely manipulated by clever sales people or manipulative marketing campaigns.
The key is to be an educated shopper, research the item and the various brands, and then make a decision based on actual quality rather than the price tag. Remember this money myth next time you hit the mall or shop online.
6. Retirement is Far Off
Many people fall into the trap of thinking they have plenty of time to start saving for retirement. Yet in reality, your best time to prepare for retirement is while it’s a long time away.
You need to accept that retirement will be here before you know it, and it’s going to be expensive. Plus, if life extension occurs as expected, you may be living longer than ever before in human history.
It’s critical to start preparing for retirement at an early age, because there is an enormous “time value” of money.
This is due to the power of compounding, which Warren Buffet famously called the “8th wonder of the world.”
Compounding can be thought of us a two-step process. The first step is to get paid interest on your original amount, known as your “principle.” The next step is to continually get paid interest on your interest.
To take advantage of this “miracle” of compounding, you’re going to need time on your side.
7. A Job Creates Wealth
When growing up and coming of age, most of our parents told us to “study hard and get a good job.” The irony is that almost no one gets wealthy from a job.
In contrast, wealth is nearly always created by investing in assets, such as businesses, real estate or stocks, for example. This process involves saving a substantial portion of one’s paycheck (ideally around 40%) and deploying that money into assets so it can multiply itself over time.
This is how $100K can become $200K, which can double to $400K, which can double again to $800K, which can then double into $1.6 million. Using the Rule of 72, you can easily estimate the length of time it will take any amount of money to double.
If you invest your money for a 10% annual rate of return, then your money will double in value in around seven years.
This means you could turn $100K into $1.6 million in only 4 doublings—meaning in 28 years, in this example. If you could get $100K invested by age 40 at a 10% rate of return, you could be sitting on $1.6 million by age 68—without ever investing another penny.
Meaning, investing is a much more powerful force than working a job. Better yet, you can stack investments, but you can’t stack jobs (at least beyond at point) because there’s only one of you.
8. Buying is Always Better than Renting
You’ve probably been told your entire life that buying a home is better than renting. After all, renting is viewed as simply throwing money down the drain.
Yet, owning a home is expensive, because it requires you to pay the mortgage, property taxes, homeowners insurance, maintenance and repairs.
Renting, on the other hand, provides flexibility, which can be very appealing and can allow you to save a lot of cash if you live below your means. Plus, most people don’t consider a third, very powerful alternative, which is to rent where you live and buy what you rent.
In many cases, the best “first home” you could purchase would be a cash-flow producing rental property. That way, you’d get paid every month and would secure major tax advantages.
The truth is, there are many financial benefits associated with owning a home. There are also steep expenses associated with owning a home. When people tell you that you should “always“ buy a home or “never“ buy a home, I’d encourage you to be skeptical.
The truth is, the answer as to whether or not you should buy a home is undoubtedly situational and personal to you.
9. Inflation as the Ultimate Money Myth
Inflation is the increase in prices and the corresponding fall in the purchasing value of your money that occurs over time. Meaning, the amount you pay for gas or milk this year is likely to be less than you’ll have to pay for these items five years from now.
Put simply, inflation makes your money—your savings in the bank—go down in value every single year. To explain this principle, imagine that I visited you each year. Each time I visited, I demanded that you give me 3% of the money held across all of your bank accounts. That’s exactly what inflation does to you by reducing your purchasing power.
On average, our average annual inflation rate has been around 3.22% in the U.S. If you’re holding your wealth in cash, then you’re losing more than 3% of your net worth every single year.
Plus, this rate of inflation causes the prices of everyday objects to double every 20 years. Yikes.
10. You Need to Save, Save, Save
Your whole live you were probably told to save, save, save. Sadly, this was bad advice. The reason? Because being a “saver” will make you a “loser” over long periods of time.
As described above, inflation reduces the purchasing value of your money over time.
However, while inflation decreases the value of your money, it also exerts an equally important effect. It increases the value of your assets.
The way the economy works is that inflation drives down the value of your savings (cash) over time. However, it also drives up the value of assets that you might own, such as real estate or stocks.
Thus, rather that saving for the sake of saving, you need to trade your hard-earned cash for assets that will pay you and outpace inflation.
11. 401K’s Are a Smart Choice
While your employer and maybe even your parents will tell you to contribute to your 401(k), there are many instances in which this is detrimental advice.
There’s more than a few reasons that I think 401(k)s are a questionable idea. These include giving up control of your money, havinglimited investment options, not being able to access your funds until you’re 59.5 or older, not being paid income distributions on your investments, and not benefiting from them during the most expensive period of your life (child-rearing years).
Did I also mention that your 401k account could plummet in value? It happened in 2008.
Plus, you won’t be able to deploy funds into high return investments like real estate. And, you’ll have to pay hefty fees to the folks on Wall Street. Yes, they’ll collect between 1-3% in fees from you every single year.
What’s more, 401k’s are a relatively recent “experiment.” It was not until the early 1980s that the IRS began allowing employees to contribute to their 401(k) plans through salary deductions. Yikes.
What should you do instead? Consider investing into cash-flowing producing investments throughout your lifetime, like rental estate, peer-to-peer lending, tax lien certificates, or dividend paying stocks, for example. This way, you’ll accumulate money to live off during your lifetime.
The upside of 401k’s is that they’re simple, passive and have some tax advantages. However, they’re definitely not the retirement “cure all” that you’ve likely been taught.
Money Myths That’ll Prevent You from Getting Rich
You deserve to be taught accurate messages about money that will empower you and accelerate your returns. Unfortunately, too many people within our society benefit when you stay uneducated.
Thus, you’ll want to shatter these money myths as you strive to become financially literate. As you’ve learned above, it’s can be easier than you think.