Don’t be fooled by these 9 common money myths, finance gurus say

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It can be difficult to separate financial fact from fiction.

CNBC polled eight personal finance experts to answer one question: What are the biggest money myths consumers face?

Here are 9 of the biggest misconceptions the finance gurus have debunked.

Myth #1: Forgoing a daily coffee purchase is a financial game changer

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You’ve probably heard this refrain: Buying that daily cup of coffee kills your chances of budding retirement wealth.

But savers don’t have to be extreme or strict about their money decisions to be financially successful, said Douglas Boneparth, a certified financial planner and a member of CNBC’s Advisory Board.

Sacrificing small expenses that bring us joy isn’t nearly as critical as making big decisions like where we live or what car we drive, said Boneparth, president and founder of Bone Fide Wealth.

“Of course every cent counts,” said Boneparth. “But [housing and transportation] have the ability to change outcomes in much more ways than just skipping a cup of coffee.”

“Going through our entire existence without some measure of joy seems like a bit of a waste,” he added. “At the same time, it takes a certain discipline and consistency to give yourself a chance to achieve your financial goals.”

So, consider your voluntary spending budget and consider which purchases you want to prioritize.

Myth #2: Car dealers will give you the best interest rate on a loan

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Car buyers often believe that by financing a purchase through the dealership, the dealership is getting the best available price for them, said Erin Witte, director of consumer protection at the Consumer Federation of America, an advocacy group. That may sometimes be true, but it is not always.

“What consumers may not know, and what merchants will almost never tell them, is that the merchant is being paid by the lender to give them their business, and it’s often based on what the interest rate is,” Witte said.

Traders may therefore have an incentive to charge a higher rate because they’re also making more money, she said.

“Consumers are much better off going to their own local credit union or bank and looking at what’s on offer to get their own financing,” Witte said. “This can save hundreds or thousands of dollars over the life of the loan.”

Myth #3: Financial “advice” always has your best interest at heart

There’s a misconception that every financial advisor is a “trustee,” said George Kinder, who pioneered the “life planning” field of financial advice.

“That’s just not true,” he said.

A trustee is required by law to put your economic and financial interests ahead of their own. For example, lawyers also have separate fiduciary duties to their clients and physicians to their patients. However, not all financial intermediaries are obliged to act as trustees for their clients.

“There are many financial advisors who are fiduciaries and there are many advisors who are not,” said Kinder, founder of the Kinder Institute of Life Planning.

It is important to consider this point when choosing a financial advisor. You can ask a financial professional if they are a trustee before doing business with them.

Myth #4: You have to pay for frequent access to credit reports

That used to be the case but has changed in the Covid era, said credit expert John Ulzheimer.

“The Fair Credit Reporting Act gives us the right to a free credit report every 12 months. AnnualCreditReport.com was born,” said Ulzheimer, who previously worked at FICO and Equifax, two big players in the credit ecosystem.

“However, since Covid started, the credit bureaus have essentially unlocked this site and now we can get free copies of our credit reports every week for free,” he said. “Sure, there’s no need to buy them anywhere when you can get so many from the credit bureaus for free.”

Myth #5: Hiring a consultant only benefits the wealthy

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Holistic financial advice — advice that focuses on savings, debt, and insurance in addition to investments — can be worth an income increase of more than 7% per year, said Shlomo Benartzi, behavioral economist and professor emeritus at UCLA’s Anderson School of Management.

“Where does this enormous profit come from? It comes from eliminating costly mistakes and reaping sure-fire profits,” said Benartzi, who, along with Nobel laureate Richard Thaler, pioneered the concept of “nudging” investors to increase their savings over time.

For example, Benartzi said: “Many people choose the wrong health insurance and pay inflated premiums for slightly lower deductibles. People often don’t pay off credit cards with the highest interest rates first, wasting money on interest payments. Older workers often fail to maximize their employer match, although they can withdraw these funds at any time after age 59 with no penalty.

“While households and regulators remain concerned about the cost of financial advice, it turns out that the lack of holistic financial advice is so expensive,” he said.

There are many different fee models for financial advice, and the costs do not have to be high: many consultants have hourly or project rates, for example.

Myth #6: Prepaying your mortgage isn’t worth it

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In a way, this is a mathematical problem, said Brian Portnoy, an expert on the psychology of money and author of The Geometry of Wealth.

Conventional thinking applies, where can you get the highest return on your extra money? When your mortgage rate exceeds your expected market rate of return, it usually makes sense to pay off the mortgage more quickly.

“There’s also a legitimate emotional component,” said Portnoy, who is also the founder of Shaping Wealth. “Sometimes people enjoy the feeling of owning their home. This is a valuable psychological asset that should not be sniffed at.”

The conventional wisdom — comparing mortgage rates to investment returns — is also misleading, said Christine Benz, Morningstar’s director of personal finance and retirement planning. Paying off a mortgage faster “almost never looks like a great idea compared to the stock market,” she said.

But a mortgage repayment is like a guaranteed “return,” she said. The only fair comparison is the rate of return on an account that is similarly guaranteed, such as B. FDIC-insured investments, said Benz, author of “30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.”

Myth #7: You don’t need emergency savings

“The most egregious myth out there is that people think they don’t need a standalone emergency savings account when they actually do,” said personal finance expert Suze Orman.

These accounts shouldn’t be viewed as nest egg or billed as part of a long-term savings plan for things like college tuition, a new car or a vacation, said Orman, co-founder of SecureSave, a start-up. Work with employers to provide emergency savings accounts.

Instead, that fund is a safety net that’s only tapped in emergencies — like to keep up with mortgage and car payments, say, if you’re laid off, she said.

Myth #8: You need to watch the stock market daily

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“There is virtually no valuable information in the day-to-day movement of the market,” Portnoy said.

In fact, advisors often warn that focusing on daily market fluctuations can help you regret later how you sold at an inopportune time.

“It can be interesting and even exciting to follow what’s new,” he added. “However, successful investing is really boring. Set your goals, set a plan, build a portfolio and focus on something else.”

Myth #9: Money can make you the happiest

Studies have linked money to happiness. But what people do with that money is ultimately what makes them happiest, Kinder said.

Using money for personal fulfillment is at the core of his life planning philosophy.

Having extra money in the bank “is always going to make you happier,” Kinder said. But it won’t make you the happiest version of yourself, he said.

“The main myth about money is that people think money will make their life the happiest,” Kinder said. “Finding who you really want to be is what will make you happiest. Because then you can raise the money for it.”