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It can be difficult to separate financial fact from fiction.
CNBC interviewed eight personal finance experts to help answer one question: What are the biggest money myths for consumers?
Here are 9 of the top mistakes that finance gurus have debunked.
Myth #1: Giving up a daily coffee purchase is a financial game-changer
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You’ve probably heard this refrain: Buying that daily cup of coffee kills your chances of building your retirement wealth.
But savers don’t need to be so extreme or austere with their financial decisions to be financially successful, said Douglas Boneparth, Certified Financial Planner and CNBC Advisory Board Member.
Sacrificing small expenses that bring us joy isn’t as critical as big decisions like choosing where to live or what car to drive, for example, said Boneparth, president and founder of Bone Fide Wealth.
“Of course, every penny counts,” Boneparth said. “But [housing and transportation] have the ability to change results far more than popping your cup of coffee.”
“To go through our entire existence without some level of joy seems like a bit of a waste,” he added. “At the same time, it takes discipline and consistency to give you a chance to achieve your financial goals.”
So think about your budget for discretionary spending and consider what purchases you want to prioritize.
Myth #2: Car dealerships give you the best rate on a loan
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Car buyers often believe that when they finance a purchase through the dealership, the dealership gets the best rate available to them, said Erin Witte, director of consumer protection at the Consumer Federation of America, a group defense. This may be true sometimes, but it is not always the case.
“What consumers may not know, and what dealerships will almost never tell them, is that the dealership is paid by the lender to give them their business, and that’s often structured around the interest rate. ‘high interest,’ Witte said.
Dealerships may therefore have an incentive to charge a higher rate because they will also make more money, she said.
“Consumers would be much better off going to their own local credit union or bank and shopping around for their own financing,” Witte said. “It can save hundreds or thousands of dollars over the life of the loan.”
Myth #3: Financial “advice” always has your best interests at heart
There’s a misconception that every financial adviser is a “trustee,” said George Kinder, who pioneered the “life planning” branch of financial advice.
“That’s just not true,” he said.
A fiduciary advisor has a legal obligation to put your economic and financial interests before theirs. Lawyers also have distinct fiduciary duties to their clients and physicians to their patients, for example. But not all financial intermediaries are obligated to act as fiduciary with their clients.
“There are many financial advisers who are fiduciary, and many advisers who are not,” said Kinder, founder of the Kinder Institute of Life Planning.
It is important to weigh this point when choosing a financial advisor. You can ask a financial professional if he is a fiduciary before doing business with him.
Myth #4: You have to pay to access the credit report frequently
That used to be true, but that’s changed in the age of Covid, said credit expert John Ulzheimer.
“The Fair Credit Reporting Act entitles us to a free credit report every 12 months. That’s where AnnualCreditReport.com comes from,” said Ulzheimer, who previously worked at FICO and Equifax, two major players in the credit ecosystem.
“Since Covid started, however, the credit bureaus have basically unlocked this website and we can now get free copies of our credit reports every week for free,” he said. “Obviously, there’s no need to buy it from anywhere if you can get that much for free from the credit bureaus.”
Myth #5: Hiring an advisor only benefits the wealthy
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Holistic financial advice – advice focused on savings, debt and insurance, in addition to investments – can be worth an increase in income of more than 7% per year, said Shlomo Benartzi, behavioral economist and professor emeritus at the UCLA Anderson School of Management.
“Where does this huge gain come from? It comes from eliminating costly mistakes and leveraging sure gains,” said Benartzi, who along with Nobel laureate Richard Thaler pioneered the concept of “push” investors to increase their savings over time.
For example, Benartzi said: Many people choose the wrong health insurance plan, choosing to pay excessive premiums for slightly lower deductibles. People often fail to pay off credit cards with the highest interest rates first, wasting money on interest payments. Older workers often fail to maximize their employer, even though they can withdraw these funds at any time without penalty after age 59½.
“Although households and regulators remain concerned about the cost of financial advice, it is the lack of holistic financial advice that is proving so costly,” he said.
There is many different pricing models for financial advice, and the cost doesn’t have to be significant: many advisers have hourly or project rates, for example.
Myth #6: Paying off your mortgage early isn’t worth it
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In some ways, this is a mathematical problem, said Brian Portnoy, expert in the psychology of money and author of “The Geometry of Wealth.”
Conventional thinking holds, where can you get the most return with your extra cash? If your mortgage interest rate exceeds your likely market return, it usually makes sense to pay off the mortgage sooner.
“There’s also a legitimate emotional component to it,” said Portnoy, who is also the founder of Shaping Wealth. “Sometimes people enjoy the feeling of complete ownership of their home. It’s a valuable psychological asset that shouldn’t be sniffed at.”
Conventional wisdom — comparing mortgage rates to investment returns — is also misleading, said Christine Benz, director of personal finance and retirement planning at Morningstar. Paying off a mortgage faster “almost never sounds like a good idea” compared to the stock market, she said.
But a mortgage payment is akin to a guaranteed “return”, she said. The only fair comparison is the return on an account that’s also guaranteed, like FDIC-insured investments, said Benz, author of “30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.”
Myth #7: You don’t need emergency savings
“The most glaring myth is that people think they don’t need a self-contained system emergency savings account, when in fact it is,” said personal finance expert Suze Orman.
These accounts shouldn’t be considered a nest egg or counted as part of a long-term savings plan for school fees, a new car or a vacation, for example, Orman said.
Instead, that fund is a safety net operated only for emergencies — like tracking mortgage and car payments if you’re laid off, for example, she said.
Myth #8: You need to monitor the stock market daily
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“There is hardly any valid information in the daily movement of the market,” Portnoy said.
In fact, advisors often warn that focusing on day-to-day market moves can contribute to making moves you later regret, like sell at an inopportune time.
“It can be interesting and even exciting to follow the latest news,” he added. “However, successful investing is really boring. Articulate your goals, make a plan, build a portfolio, and focus on other things.”
Myth #9: Money can make you happier
Studies have linked money to happiness. But that’s what people TO DO with that money ultimately making them the happiest, Kinder said.
The application of money to his personal fulfillment is central to his philosophy of life planning.
Having extra money in the bank “is always going to make you happier,” Kinder said. But that won’t make you the happiest version of yourself, he said.
“The main myth about money is that people think money is what will make their life the happiest,” Kinder said. “If you find out who you really want to be, it will make you happier. Because then you can bring in the money for that.”