Money sure does make the world go round. Just about everyone has opinion on what you should do with yours. How many times have you been told how to make money, save money, or where to get the best deals here, there and everywhere?
But, while most people dispense their advice with nothing but the best of intentions, many are misinformed.
Here are five big lies which you may have been told before. I’ll explain why you should never pay any attention:
Lie #1. You don’t need a pension
Some of the most vocal members of the lovemoney.com community will always claim pensions are an utter waste of time. I can completely understand why. The pensions industry in this country has a terrible reputation. After all, how could a victim of the Equitable Life debacle, for instance, have even the tiniest amount of faith left in pensions?
But the point is, you do need a pension. Or at least, some form of investment to save for your retirement.
That doesn’t necessarily have to be a traditional pension scheme - an ISA can do more or less the same job. But anyone who tells you not to bother saving at all because the state will look after you is gravely mistaken. Even if you qualify for the full basic state pension, that means surviving on a weekly income of just £97.65 (on current rates).
For some, modest levels of saving may backfire by cancelling out means-tested benefits later on. But, for everyone one else, skip retirement planning at your own peril.
Lie #2. You should never get into debt
Many years back, I distinctly remember my Dad telling me I should never need to get into debt (with the exception of a mortgage). Clearly, vast quantities of personal debt are never a good thing. And our ‘buy now, pay later’ consumer culture is not one we ought to be proud of. But there are times when borrowing money can pay dividends.
For example, if ready cash is in short supply but you need to improve your job prospects, a loan to develop your career, skills or education could easily pay for itself in the long run with the greater earning potential it provides.
And, of course, there aren’t many of us who can fund the purchase of a home without the assistance of a lender. Borrowing money to improve your property, and step up its market value, can also be an acceptable reason for getting into debt. But, that’s only as long as the price increase significantly outweighs the capital you have borrowed plus the interest paid.
Similarly, if you've got the drive and discipline to make money by stoozing, running up some credit card debt for a short period of time could actually make you richer. Just be aware it's easy to get caught out if you're not careful. Read The ultimate guide to stoozing for more information.
Jane Baker explains why life insurance should be your number one financial priority
Lie #3. You don’t need insurance
It’s true some insurance policies are utterly useless. Mobile phone insurance immediately springs to mind. Not only is it vastly overpriced, but cover can usually be included in your home insurance policy at a fraction of the cost.
Another is ID theft protection, which preys on your fears, but provides zero compensation for financial loss suffered as a result of the fraud. (Read Avoid this expensive rip-off! to find out more.)
But some insurances are legally required - third party car insurance and buildings insurance for mortgaged properties are the main ones. Other policies, while not demanded by law, are nonetheless vital. Life insurance is an absolute must for those of you with financial dependants. Imagine how they would survive without your income.
And I shudder to think of the financial consequences of suffering a horrendous accident abroad for someone without travel insurance. Or a fire gutting your home and destroying all your worldly possessions with no home insurance in place.
People will tell you “it’ll never happen”. But it does - and you should always insure against that risk.
Lie #4. Property is always a good investment
Our love affair with property never wanes. There’s no question that buying your own home - as a place to live - is nearly always preferable to lining a landlord’s pockets. But we have let our fascination with property as an investment go to our heads. And it’s destined for renewed vigour as house prices have strengthened over the last 12 months.
It’s all based on the myth that anyone can become an amateur landlord. But the credit crunch has seen many novice property investors get their fingers well and truly burnt. Buy-to-let investors have faced tough challenges since 2007. Some have experienced a nasty cocktail of rental arrears, lower yields and a dearth of affordable buy-to-let mortgages.
Protracted periods of runaway house price growth can make property look like a no brainer. But you know bubbles always burst in the end. Clearly an investment project, which involves this much effort and outlay, is never one to embark on lightly.
Recent question on this topic
- JoeEasedale asks:
I am getting VERY concerned about investment questions we see here.
- MikeGG1 answered "Joe It is even worse than that sometimes. There was one question from a landlord,..."
- manzanilla answered "It is truly alarming to see someone think of putting half their ISA money into an ETF of Columbian..."
- Read more answers
Lie #5. You should invest in the latest boomindustry
Speaking of bubbles, the last myth is all about investment bandwagons. Think back to the massive popularity of dot com shares from the mid nineties onwards.
Investors piled in with hopes of handsome rewards from new and exciting technology companies. Shares prices soared, confidence was riding high and hordes of investors - eager not to miss the investment opportunity of a lifetime - ploughed even more money into internet-based firms. In hindsight, dot com share prices had already become hugely over-valued.
Of course, many different factors led to the boom and eventual bust, but not least the flawed business model adopted by vast numbers of dot coms, all with the same ambitious plans for success by monopolising their sectors. But there could be only one winner, so many were doomed to fail.
There’s an obvious moral in this story: Whenever people try to persuade you to jump on the bandwagon, always proceed with the greatest caution. I firmly believe any investment or asset, which experiences rapid growth way beyond its normal pace, will be forced to correct itself sooner or later. If you're reckless enough to take the plunge, but fail to sell up before that correction occurs, you will lose out.
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