Top 10 Money Misconceptions

1. A higher salary means greater financial security

While earning more money can seem like the answer to many financial problems, this will only ever be the case if your expenses don’t creep up alongside your income. Anyone can easily spend more than they earn, so without the right discipline, big salaries can still mean big problems. The key here is to reach a level of expenditure that satisfies what you want out of life and treat everything on top of this as a bonus.

2. Cash is the safest place for savings

Cash can often seem like the safest of safe havens for our money. This is true to a degree, but if you want a sure-fire way of losing money relative to the rising cost of living, cash will be sure to deliver. That is not to say cash has no place in a well balanced portfolio, for it certainly does and I would always encourage holding a small portion of cash in any portfolio. Just don’t think you’re doing the right thing by hoarding everything in the bank. Cash – safe for today; disastrous over decades.

3. Money means happiness 

Another common misconception people get wrapped up in is the idea that having more money will make them happier. Of course, money is a huge part of life and shouldn’t be ignored – it is, after all, the fabric of human society.

Thing is though – the happiest people are often those who don’t constantly have their ‘mind on their money’. Those who focus on living their lives rather than how much money they have in the bank – liberated from social pressure and ‘keeping up’ with others around them. If it’s happiness you’re looking for – stop spending money on ‘things’ and worrying about your bank balance. Instead, focus on stuff that is truly important in your life.

This isn’t to say money won’t make you happy. If managed properly, money can provide endless freedom and options that will enable you to live life on your own terms. It’s about finding the right balance and not obsessing over your cash.

4. More money, fewer problems

Having more money won’t be the cure to all your problems – they’ll just become more expensive. ‘Lifestyle Creep’ – the phenomenon where our expenses creep up along with our income – can land even the smartest people in mountains of debt from which they’re unable to free themselves.

Living for now is commonplace among society. People want  big houses, flash cars and luxury watches. It’s not our fault; social status is a key part of human nature. Unfortunately however, too many of us leverage these things up to our eyeballs and become trapped – often having to work a lot longer and harder just to pay for ‘things’ we’ve already purchased, because we somehow think having a new BMW will earn us more respect. Don’t buy stuff you can’t afford.

5. “I work for money” 

With this mindset, I’m afraid you will spend your whole life doing just that. Put yourself in control and make money work for you! The cycle often looks like this; go to work, get paid, pay bills, spend on things and stuff, try to save whatever’s left over (inevitably nothing), wait for the next pay day, rinse and repeat.

Don’t be a slave to your money. The key here is to pay yourself first. Set up an automated way of saving money out of your income BEFORE it is used for anything else. Turn the cycle on its head, and use your money for saving and investing first, before using the rest to fund your lifestyle. Your regular bills are a known expense and should take care of themselves. It’s easy to budget this way, the difficulty is changing the mindset. Pay yourself first!

6. “I can watch my investments grow”

In pretty much all other walks of life, the more effort, energy and focus you commit towards something, the better the outcome is likely to be. However, when it comes to being a successful investor, less is well and truly (inevitably) more. In the words of Warren Buffett “Benign neglect, bordering on sloth, remains the hallmark of our investment process.” Far be it from me to ignore the words of the world’s greatest investor.

If you want to build incredible wealth, the key is to invest and forget. The more money you add to your portfolio over time through automatic savings, the sooner you will reach financial independence. Focus your energy on what goes in, rather than what it’s actually going into – a globally diversified mixture of bonds and equities is all you need to get started. Allow the advance of human ingenuity take care of the rest.

A watched portfolio never grows.

7. Adjusting Lifestyle vs Adjusting Income

Many people think that in order to achieve their desired lifestyle, they first need to achieve a certain level of income in order to make that possible. The issue here is that there isn’t a finish line when it comes to working towards a goal or objective. Once we achieve our goals, we often simply move on to the next target. I can tell you from personal experience that my goals are very different now to what they were five years ago. This, I feel, is a constant cycle.

The quickest way to achieve your desired lifestyle is to adjust your expectation on what that actually is. Think about your life as it is today. Would any major changes make you feel happier or more fulfilled? If the answer is no, then you’re already living the life you want.

Try to reach a level of income that provides the lifestyle you want on a day to day basis. Once you’re at this point, treat every additional £ of income as a bonus and put it to work. That portion of your income isn’t for you, it’s for future you, who I guarantee will love you for it.

8. “What can you guarantee?”

Many people I come across in the day job ask me what I can ‘guarantee’ about their financial future or what I might ‘expect’. The answer to these questions is invariably “I don’t know”. I will not under any circumstances try to make predictions on what to expect in the future, nor will I make any unfounded promises.

One thing I can say with some degree of certainty however, is that seeking perceived ‘security’ or ‘guarantees’ through low risk investments or hoarding money in cash, is the wrong path to take if you’re seeking financial freedom. A flight to safety will not make you rich.

The only way to achieve financial independence in the long run is to invest in the future value of human ingenuity, captured by the stock market. A globally diversified portfolio, made up of mostly stocks and shares (equities), is the way to go for long-term sanity and serenity.

9. The “risk” of investing

I wrote separately on this in my previous post, and find that a lot of people are confused about the concept of risk when it comes to managing their finances in line with their desired lifestyle.

Risk isn’t about swings in the value of your portfolio from one day, week or month to the next. Volatility in the stock market is simply the short-term price we pay for ultimate wealth creation in the long run. Once we understand that declines are temporary, yet the advance is permanent, we begin to appreciate the real risks to our financial freedom run far deeper.

The real risks lie in; running out of money during retirement, loss of income through an accident or sickness, not being able to help your children through university or being helplessly unable to support elderly relatives through their final years. Falling short of our deepest desires is the real risk we all face. Only through investing can we hope to achieve our financial aspirations in comfort.

10. I have plenty of time to start saving / everything will work out eventually.

There is only ever one best time to start saving towards your unknown future, and that is right now. The sooner you start, the better you finish and for a number of reasons.

The first is the power of good habits. Creating habits early in life mean they are more likely to stick. If you begin by putting away just a small percentage of your gross income each month, this can go a long way towards setting you on the path to financial freedom. Even if you achieve nothing more than embedding this habit into your life, you will be a step ahead of the rest.

Small increases to the amount you save each month gradually over time, will ensure that you can easily reach a point where you’re saving a decent percentage of your monthly income, without even noticing a difference to your lifestyle.

Second is the power of compounding. I’m sure you’ve read a lot about this so I’m not going to bore you with how this works. Instead, I will let the following example do the talking:

If you had invested £10,000 in the S&P500 index in 1990, it would now be worth approximately £113,500. Not a bad return by any means. However, let’s now consider that £10,000 invested 10 years earlier in 1980 would now approximately be worth just over £417,400 in 2018. You would have almost quadrupled your overall return, just by simply investing the same amount 10 years earlier. I’m sure you’ll agree that’s a difference worth making.

The third and final reason why it is so important to start saving and investing as soon as you can, is the fact that so many people fall short of their desired income in retirement by leaving it too late.

If you dream of retiring in comfort and dignity on your own terms, investing in your own future as early as possible is imperative to ensuring a comfortable transition into financial independence.

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