5 outdated advice on money that only lead to losses.
The financial world has changed a lot in the last few decades. The principles remain, but if you want to be successful in your finances, don’t follow what’s out of date.
Just as technology changes, so does everything that is based on it. Just think about, that 15-20 years ago, smartphones were a rarity, but today it’s almost a basic requirement to be online anytime, anywhere.
The same evolution is true for social expectations, the opportunities available and much more. We’re looking at the principles that were once a recipe for success, but have now been outdated by time.
1. Your property is an investment, so it’s better to buy rather than rent.
You may have read about when to buy your own home before. To summarise very briefly, the key point is that you should buy when
- you are going to stay in the property for a long period of time,
- it do not overburden your own budget, and
- in numerical terms, the repayment of the loan is cheaper than the rent in general.
In this article, I have also pointed out that owning your own property is not an investment, after all, just because it is a high value property, you typically have no regular income from it, but you do have expenses.
The fact is that there are investment properties that you can make a profit on. This is not the one you live in, however. And real estate is an investment (a different asset class from securities) that you either understand in the same way as any other investment, or it just depends on your lucky success.
Many people buy property as an investment at the advice of a neighbour/acquaintance/internet commentator. Fortunately, banks are serious about filtering who they lend to, so if they can see that you are guaranteed to fail, they will spare you that. If you’re new to the subject, read these 6 points on why you shouldn’t invest in property.
2. A student loan is always an advantage
Knowledge, if used well, will pay off and you can earn a higher income. This means that, after due consideration, many people have invested in either in-school or out-of-school training and come out on the winning side.
Before you misunderstand me, I would like to make it clear that for many young people, student loans are the only way to complete any kind of schooling and thus move up the ladder. So the problem is not with the student loan itself, it is just an option, let us say a tool. The problem is that there are many areas that you don’t see before you take out the loan, and these can be a serious burden for you later on.
What are these problems?
There’s no guarantee that you’ll make a win.
Either way you look at it, the average 20-something college/university student doesn’t have anywhere near the level of knowledge needed to plan for this.
Even if you assume that you have the financial discipline to spend the rest of your tuition money on necessities and not on partying, there is no guarantee that it is a winning idea. No one can guarantee that you will succeed in your studies, and certainly not that you will be a good candidate for the job market. So repayment is a problem.
You may be never able to pay it back, putting your pension at risk.
The repayment on your salary may not even be enough to cover the interest, and the debt will haunt you for the rest of your life. You can trick your way into earning money in the black so that no deductions are made, but the student loan does not expire. But black earnings put your own retirement benefits at risk, not to mention the fact that you can start with the peace of mind of the underdog when it comes to borrowing.
3. Don’t invest while you still have credit.
One of the biggest misconceptions that can cause the most damage in quantifiable terms.
The assumption here is obviously that repaying your loan won’t drain your budget, so you have investment options on top of that. It doesn’t have to be a lot, but let’s assume that you have at least a few hundred thousand forints (a few thousand euros) a year left over for this.
Then there are typically three options that can occur:
You are good with money.
You get more yield on your investment than the loan will take. Provided you don’t wait until the mortgage matures after you are 60.
Long-term plans usually require a lot of money. If you don’t want to work every last penny of it yourself, you can use the returns on your investments to help you do this. The longer you have, the more you can take advantage of compound interest.
Think about it, if your investment yields 10-12% a year and your loan yields 4%, you’re much more likely to be ahead with your investment.
You don’t understand money.
The good news is that you don’t have to despair. If you are looking for a solution, contact us to see how you can join the camp of the previous point.
On your own, mutual funds are the best place to start in such a case, whether actively managed or passively managed. Then it’s easy to see that, although you may not achieve the outstanding returns you could with a private banker, you can still have the compound interest effect.
You are in real trouble.
If you’ve over-loaned yourself, especially if you’ve managed to have loans with APRs above 10%, it’s a fact and a reality that the first priority is to get yourself in balance.
But that does not make the misconception any less wrong. After all, you’re not investing here to wait for your credit to run out, but to go through a whole bunch of cycles without which it’s not worth investing. What I mean:
- balance: as long as your credit overburden you, restoring your own financial balance as an ultra-short-term goal is a higher priority than long-term capital building
- risk mitigation: you may be a risk-seeker, but you have to pay monthly on your loans and the investment will pay off much later. If the plan doesn’t work, you can talk to the executor about your investment.
- cost-cutting: why risk a penny on any investment when you can give generously the banks a the return.
- increase in yield: if your loan can take you 15% and your investment can earn you 10%, then it is logical to either reduce the interest on your loan in the ways already mentioned, or to put your money where it will earn you the most (this obviously does not preclude you from investing a minimum amount in addition)
5. How you allocate your money is determined by your age
There used to be a rule that said that the older you were, the more % of your money should be in bonds, and subtracting that % from 100 would give you the % in shares.
Based on this, a 20 year old was recommended to have 20% bond and 80% in shares, while a 60 year old was recommended to have 60% bond and 40% in shares.
This is a belief that originated in America and was suggested for people near retirement age there. There and then, it was absolutely right, after all, in that environment bonds outperformed inflation, so retirement capital was held at value, but not at too much risk. Not to mention that mass management of customers was slow and cumbersome at the dawn of the internet, so a way was proposed that offered less risk and a return (thus ensuring satisfied customers) rather than one that might have put the retirement livelihoods of millions at risk.
What has changed that has made this belief unnecessary?
The world has sped up. Whereas many years ago you had to send people one letter at a time to come into the office and transfer their money, today it’s 2 clicks of a button. So in many cases this age link has become redundant.
However, the more important the investment is in keeping pace with the changes, the more important it has become.
Not to mention the fact that many of today’s 60-70 year olds are still in work, so they don’t want to use up the capital they have accumulated.
What should you do?
Don’t necessarily look at how old you are physically. Instead, look at what your goals are, by when you want to achieve them, and look for the right asset for you. If you can’t do it on your own, it’s OK, ask and we’ll help.