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October 2008 |
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Many people don't understand how money works. But when lots of people misunderstand money in exactly the same way — that's a money myth. Below, we'll debunk a few of the more common monetary misconceptions that too often prevent families from building wealth. One day, I'll win the lottery. Think of it this way: If the odds were just one in a million — most of the time, the odds are much worse than that! — and you played the lottery once a week, it would take 9,615 years before it would become likely that you win. That's not guaranteed. At that point, it's merely likely. So it very well could take you 15,000 years to pick the right numbers … and most of us want to retire before that. A few dollars doesn't mean much. This one is big because it justifies spending money on silly things like lottery tickets, ATM fees, or lunches that we could make ourselves. Wasting a few dollars is okay. But wasting a few dollars every month is wasting a chance to be wealthy. Starting at age 25, saving just $50 a month in an investment with an average annual return of 8%, will be worth $155,000 at age 65. Buying a car is a good investment. Really? When was the last time you received a dividend check from your car dealer? Buying a car might be a necessity, but it won't do what an investment does: pay you a return on your money. Cars simply get you from place to place. A close cousin of this myth is that spending more on a car will get you more value at trade-in. Technically, that's true, but it doesn't make it smart. Generally speaking, a $20,000 car lasts as long as a $30,000 car. The more expensive car will be worth more at trade-in but probably not $10,000 more. Retirement is something you save for when you're older. You won't hear this from 55-year-olds. In fact most of them have figured out that saving for retirement is a young man's game. The truth is that a 30-year-old who has saved $10,000 will accumulate $1 million at retirement by saving $5,000 a year at 8% interest. If that same 30-year-old did not save the initial $10,000 in his 20s, he would accumulate just $861,000. That first $10,000 ends up being worth $131,000! My neighbors are richer than me. Many people believe this and many are wrong. The average American household has $7,200 in credit card debt. And if you include other consumer debt, such as car loans, lots of us have $20,000-$30,000 in debt. So for many, many people that debt is subsidizing expensive cars, furniture and clothes. Sure, a few of your neighbors are probably well off. But the truth is an expensive lifestyle usually indicates a life riddled with debt. |
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