"Ten percent of every paycheck should go into your savings!" Raise your hand if you heard some variation of this growing up. But the truth is that stockpiling your money and never doing anything with it is just one of many misconceptions about saving money a lot of us were taught. We desire safety and security, and yes, tucking cash away in the bank is safe and secure. But unless you're making a very generous paycheck, those savings likely won't be nearly enough to retire on.
But it's more than that: We're often actively discouraged from spending, which in and of itself isn't always a bad thing; however, it starts to become a problem when we're discourage from spending even if, in the long run, spending that money actually makes us more money. We're terrified of losing what we have, or parting with it even temporarily. It's a kind of scarcity fallacy where, even if we have enough, we still feel inadequate. In reality, spending less, saving more, and steadily creating a little nest egg for yourself is more involved than collecting money in a savings account that you hardly ever look at, or shopping in the sales bins for what you're convinced are the best deals.
All of this isn't to say that you should have a little "cushion" saved away; that's always a great idea in case you have some kind of an emergency. But according to some estimates, the average American retires with about $57,000 saved — when they'll need over $200,000 for healthcare alone. If you want to avoid this conundrum, here are a few misconceptions to be aware of.
1MYTH: You Should Save Every Penny You Make
This might be the big kahuna of money misconceptions. We like our money where we can see it: In the bank. If we invest it, we may lose control, and people don't like losing control when it comes to their hard-earned cash. But while saving is important, there are a number of reasons you should be investing your money instead.
For starters, investing means you make free money. Free money! Does that not sound like the best thing in the world? For example, if your employer offers a 401(k), they very likely offer some kind of match. That means every time you invest, they invest in you.
Even more promising is that oftentimes, that initial, upfront investment is all you need to get the ball rolling. Let's say you invest $1,000 dollars, which compounds to $1,100 within the next year thanks to a 10 percent interest rate. The following year, you'll earn even more, without having to invest more. Why? Because your overall balance grew, and now you're taking 10 percent of that. It's the magic of compounding interest!
Melissa Leong, a personal finance expert, has some more helpful advice: "You should also invest in you. I'm not talking about investing in new kicks. Rather, invest in learning a new skill. Invest in professional development. In an experience that brings you closer to loved ones. These 'investments' also pay dividends that you'll enjoy for the rest of your life."
The moral of the story: Saving isn't evil, but why not put our money somewhere it'll make you something more?
2MYTH: Head Straight For The Sales
If you're anything like me, you have this sixth sense for sniffing out any sale within a 10-mile radius. But thanks to my fiance, who is quite the savvy shopper, I learned many valuable lessons about getting the best deal — or rather, how you might not actually be.
For instance, you've probably been shopping online and seen something like, "Hurry! Only five left in stock!" Heck, I just saw that the other day when I was booking a flight. It puts you into a panic by creating a sense of urgency. Guess what? Some of these messages may not be the whole truth. I know. It's not nice to lie. But go back to that same website in a week, and they might still be claiming they only have five left. (Hmmmmm.)
There's more trickery at work that we often don't notice, too. For example, we're often quick to compare two like items next to each other on the shelf, and pick the cheaper one; but what we're not always doing is comparing the price per unit or amount. One bottle of shampoo might be a dollar more, but you also get more shampoo out of it — making it a better value than the cheaper option.
Buying in bulk, couponing, and spending more to get free shipping are other common tactics you've likely run into. And don't let sales fool you: "Just because an item is on sale doesn't mean you are getting the best price for it. If you think you've found a great sale price on an item you wanted to buy, make sure you can't find the item somewhere else for cheaper. You can do this using any of the price checking apps you can download on your phone," says Ashley Jacobs, Wise Bread's community manager. She adds, "Sales can entice us to make purchases we may not normally make, so unless you were already planning on buying the item you found on sale, best to leave it on your shelf and save yourself the money."
Adds Leong, "Sales often lead to impulse buying. And impulse buying wastes a lot of your money. Shop with intention. If you're on a budget, stick to your shopping lists. If you're in a store, get in and get out. Don't be tempted by material crap you probably don't need."
3MYTH: Investing Is Always A Gamble
Yes, investing can be risky — but it's not always. 401(k)s and IRAs can be a good place to start; additionally, savings accounts that offer a good interest rate are basically risk-free investing. As Money Crashers writer Amy Livingston points out, Certificates of Deposit (CDs) are yet another good option. Peer-to-peer lending can also be a safer way to start investing; some platforms even let you start with as little as $25 invested. It can be a more stable way to get your feet wet and test the waters.
Other things, you might want to steer clear of. Of course you don't want to start investing in stocks when you don't know anything about it — but you don't need to do that in order to make money off of your money. Livingston points out that the lower the risk, the smaller the return; but if you're investing your money for retirement, you're not in a hurry anyway. A lower return can work just fine.
4MYTH: You Don't Buy Expensive Stuff, So There's No Way For You To Spend Less
If you don't buy an expensive car or big house or go on fancy vacations, it's easy to be misguided into thinking that you live very modestly. Maybe that's the case, for the most part; but a lot of us still spend frivolously on smaller-ticket items that, over the course of a year, really add up.
Here's a classic example: Let's say you love to pick up a cup of coffee on the way to work every morning, costing you $3.00. That's nothing, right? Well, one cup isn't. But doing that five days a week, 52 weeks a year, we're talking about nearly $800 in coffee. That would've paid for the flight I just booked in a complete hurry because they claimed they only had five seats left. See where I'm going with this?
Imagine if you started making coffee at home, which you can do for less than a dollar a cup. Or maybe you buy coffee once or twice a week, instead of five. Think of the money you're saving (and maybe investing!) over the course of the next few years.
5MYTH: Paying With Cash Is Always Best
To put it delicately, a lot of us are raised to think credit cards are the devil. But they're not actually the problem; abusing them is, which is why as of 2016, 38.1 percent of households in America have credit card debt. But credit cards can actually be good for your financial health.
Paying with a credit card can mean racking up rewards points, which can get you discounts on groceries, gas, travel, and more. Some also provide cash-back deals, so when you spend, you get money. The key is to pay off your balance every month. If you do that, credit cards can be your friend.
6MYTH: Buying A Home Is Financially Smarter Than Renting
Depending on where you live and what the housing market is currently like, this may very likely be true. In my home of Las Vegas, for example, the cost of living is very low. You can spend $1,100 a month for a two-bedroom apartment, or have a $1,100-a-month mortgage for a three-bedroom, two-and-a-half bathroom house with a two-car garage and a backyard. In my case, buying was absolutely smarter.
However, real estate isn't always a good deal. While having a house as an asset can be beneficial, your age, income, and generally where you are in life should also be factored into the equation. For instance, TIME Money explains that if your market is a close call, you plan on leaving within seven years, you don't itemize tax deductions, or you need an FHA loan, renting might be smarter.
7MYTH: If I Really Fail At Saving My Money, I Can Always File For Bankruptcy
This hurts my feelings. Filing for bankruptcy is no joke; even if you qualify, you're still looking at around 10 years of cruddy credit. Filing for bankruptcy does not automatically mean that all of your debts will be forgiven; you'll lose your credit cards and some of your possessions; and getting a job, apartment, or car can be next to impossible. Bankruptcy is not the easy way out of having saved and invested your money poorly!