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Six Costly Money Myths
There I was, a CPA highly recruited out of graduate school, and less than 10 years later I had hit rock bottom financially. I wish I could have blamed financial calamities beyond my control. The truth? I had fallen victim to many of the myths that keep most American households from achieving their financial goals. We made bad choices—and it wiped us out.
After I moved my wife and two children in with my parents, I woke to my need to learn the realities of financial life that weren’t taught in business school. With God’s help, I discovered six myths that had deceived me.
Myth #1: To see if you can afford a purchase, you only need to ask one question: Can I handle the monthly payment?
Look at the car ads. The always focus on the monthly payment: “ONLY $159 A MONTH, AND YOU CAN DRIVE THIS CAR!” The have learned that we will buy if we think we can handle the monthly payment.
But look at how much it really costs us to drive that new car. Suppose we financed $14,000 at a 10 percent interest rate to buy a car, and pay it off over 48 months. The monthly payment would be $355.08, including an average interest payment of $63 per month, with total interest of $3,044. On the other hand, if we pay cash for the car and take the $63 average monthly interest saved and invest it at a 10 percent return, we will accumulate more than $47,800 in 20 years, and more than $398,000 in 40 years! This is what the money lenders know and why they are in the lending business. The Bible proves true once again: “The rich rule over the poor, and the borrower is servant to the lender” (Prov. 22:7).
Keep driving your current car until you can save for a replacement. This is a radical concept in our culture, but going with the flow is keeping us broke.
Myth #2: If I pay off my credit card balance every month, using the card for routine purchases is no problem.
Did you ever stop to think why merchants accept credit cards? Using credit cards causes us to spend more freely than paying with cash. Cash lets us quickly see what’s left before we buy, and forces us to ask, “Do we really need this item or can we get by without it?”
Impulsive spending is dramatically reduced. In the book Master Your Money, Ron Blue says that “the mere use of credit cards will cause a family to spend 34 percent more, regardless of whether the full statement is paid off each month or not.”
My wife and I carry a credit card primarily for travel; the balance is paid off every month.
Using cash greatly curbs unnecessary spending. A bank president, after refusing to give me a loan, told me about the envelope system. We now put cash in envelopes for discretionary spending such as eating out, entertainment, recreation and pocket money. When the money runs out, the spending stops until next month. This may seem restrictive, but we never fell deprived. Achieving financial goals requires controlling spending.
Myth #3: “If I made more money, my financial worries would be over.”
I made this statement many times, but when the income increased, spending increased. I finally learned that if I couldn’t live within my current income, there will never be enough.
How do we avoid increasing spending every time income increases? Here are four steps:
Learn the secret of contentment. The Apostle Paul speaks about this in 1 Timothy 6. Being content doesn’t mean giving up our goals because things are never going to get any better. It simply means to become truly thankful for what God has given us.
Identify important financial goals and prioritize them. Decide how much per month is needed to fund goals and build it into the budget. Ninety-six percent of Americans never reach financial independence, mainly because they don’t designate an amount in their monthly budget to apply toward financial goals.
Start living on a budget. Budgeting has gotten a bad rap from people who failed while trying to live on one. Yet, in their book The Millionaire Next Door, authors Thomas Stanley and William Danko say that 55 percent of the millionaires they surveyed live on a budget, which was key to accumulating their wealth.
In my book, Breaking Out of Plastic Prison, I outline a simple approach for setting up a budget and tracking where money actually goes.
Look for ways to accomplish the same things with less money. Stanley and Danko point out that most millionaires are frugal, contrary to popular myth. Become a wiser spender and redirect savings for important financial goals.
Myth #4: Keeping a car longer will cost more in repairs than making payments on a new one.
I love new cars, and I used to justify my need to trade in a car before 50,000 miles by convincing myself it was more expensive to maintain the old one. Then I reached the point where I couldn’t make payments on a new one.
Through research and personal experience I found the keeping a car well-maintained, even up to 200,000 miles, costs no more than $100 to $125 a month. This is much cheaper than paying for and maintaining a newer car.
The calculations I include in my book—show that paying cash and driving a car for eight years instead of four can reduce monthly car-buying costs by one-third. That may not seem like much, but suppose we reduce car-buying costs by $100 a month and invest the savings at a 10 percent return. After 20 years we would have almost $76,000, and after 40 years over $632,000!
Buy cars that have a history of giving reliable, dependable service over 100,000 miles, and then save consistently to buy the next one. Drive your current car for eight years instead of four and set aside the monthly payment after it’s paid off.
Myth #5: When paying off credit card debt early, pay off the card with the highest interest rate first.
Economically this makes the most sense because it gives us the highest return. Great in theory, but does it work in reality? For most people, no. It may take well over a year to aggressively pay off the highest interest rate debt. This can be discouraging because we see little change in the balance owed.
Apply any extra funds above the minimum to the smallest debt first and get it out of the way quickly. Seeing results helps to stay committed until all debts are paid off.
Stop using credit cards while they are being paid off. To avoid having to use the cards in an “emergency,” save every month for irregular but expected expenditures, such as car repairs, vacations and Christmas. When the expenses happen, we reimburse ourselves from savings.
Suppose we estimate that car repairs will average $1,200 a year, and we set aside $100 a month to cover them ($1,200 divided by 12). Six months later a car repair costs $480, and we take the money from savings to cover the payment. It might be necessary to use the card if that much has not been saved, but only as a last resort.
Myth #6: Don’t pay off your mortgage early because you lose the tax deduction. Take any extra funds and invest them instead.
Mortgage interest is a great tax deduction, but this doesn’t cover 100 percent of the interest cost. As long as we are making mortgage payments we have a significant after-tax cost to bear.
Paying off a mortgage with an 8 percent rate is the equivalent of an 8 percent guaranteed return. You may come out ahead by investing the money and keeping the mortgage for 30 years. Then again, you may not.
Historically, homes have been a good investment. But this may not remain true in the future. Some financial forecasters speculate that when retiring baby boomers start unloading their large homes in 10 to 20 years, the marketplace will be flooded, causing their value to decrease.
Homes have already lost significant value in certain parts of the country, and I have heard tales of the financial hardship created by selling a home with a mortgage balance significantly higher than its value. We all need shelter, and a paid-for home can insure our ability to have that when we approach retirement, regardless of the home’s value.
More than ever, Christian men are trying to get completely out of debt—including their home mortgage. It may take years of commitment, but is God calling you to do it?
These radical ideas, considering the culture we live in. When you decide to live your financial life differently, you will feel like a fish swimming upstream with the strong current of popular opinion trying to pull you downstream. As you listen to the advice of friends, relatives and co-workers, ask yourself: “How are they doing with their own financial lives? Are they headed where I want to go financially?”
May God give you contentment and commitment as you go forward.
By James D. Dean, a family financial counselor and co-author of Breaking Out of Plastic Prison (Revell).
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