Don’t fall for money myths

Bad advice can be dangerous for your financial health

IN this day and age everyone seems to have an opinion on everything. We’re bombarded with advice on every element of our life. That’s terrific but it doesn’t always mean those opinions are right.

In fact, especially when it comes to money, some opinions can be downright dangerous.

Here are some of the most dangerous pieces of financial advice that we regularly hear.

YOU’RE TOO YOUNG/BUSY/ BROKE TO INVEST

It’s easy to think you’ll put off investing until you’re older, or have more time or money.

There will always be competing interests for your money.

When you are younger it’s hard to see the long term – there’s cars, mortgages, school fees.

The first thing to understand is you have to save first and spend later. Have an automatic system – such as bank account direct debits to an investment fund. The younger you start investing, the better. Even small amounts added to an investment portfolio or super fund will multiply several times over many years because of compound interest.

Better advice: It’s all about discipline. Putting a little away regularly and starting as early as you can.

THIS HOT TIP WILL MAKE YOU RICH QUICKLY

We’ve all heard a hot tip from a friend, family member, Uber driver or even on social media. Usually they are based on hearsay and speculative investments rather than any proven winner.

The people who lose the most money are those who rely too heavily on one thing to make them money. That’s where your greatest risk is.

Even if you have inside information about a stock, it can still go belly-up. A lot of people who perpetuate these myths have a vested interest so they can get out at a higher price.

Looking for a quick fix with any investment is dangerous. While it might be uncomfortable to hear, our desire for a quick fix is driven by greed.

You need to accept that achieving what you want rarely happens overnight. It’s more likely to take a number of years… but it will be worth it.”

Better Advice: Slow, steady returns and the magic of compounding will always succeed.

YOU CAN’T GO WRONG WITH BRICKS AND MORTAR Property is arguably Australia’s most popular type of investment and many people swear it’s the only way to build wealth effectively.

However, there are many factors, primarily falling house prices and rising interest rates, that can turn real estate investments into a nightmare.

What people fail to realise is the enormous holding costs of investing in property… and you never really know its value until you decide to sell it.

With land tax, interest rates, council rates and other taxes, it’s a very expensive asset.

Some investors have purchased property and later found that it had major structural issues, they couldn’t rent it for what they expected, or they paid over-inflated prices and their asset has decreased in value.

Better Advice: Property success is all about price, position and gearing. Buy in an attractive area, do your homework to establish the right price and don’t borrow too much.

NEGATIVE GEARING IS A SMART STRATEGY

It may give people a nice deduction at tax time, but it means you are still spending more than you get back.

Investors need to be sure that the increase in the value of their negatively geared asset will offset the annual income losses they make on it.

If you are making a loss, how can it be good? High income earners save some tax (they get bigger deductions because their marginal tax rates are higher) but it’s not a good way for most people to build wealth.

Negative gearing can put the average family under huge financial pressure.

Rather than focusing on getting the taxman to help pay for your property, investors should buy property where the tenant is helping to pay for it.

Better Advice: Unless you’re on the top tax bracket, negative gearing really isn’t worth the risk.

BUYING YOUR HOME IS BETTER THAN RENTING Maybe. The cost of renting a house over the same period it would take to pay off a mortgage is almost always more expensive and, at the end of the day, you don’t own the asset .

But we can give you a very good financial argument for renting and then investing the difference between the rent and the mortgage payment somewhere else. The key is the discipline of investing the difference.

Property can also go down in value.

We’re

seeing that now.

Better Advice: Do the numbers and take in all the costs. If you don’t have the discipline of investing the difference between owning a property and renting one, then own it and pay off the loan as a forced savings program.

IT’S A GOOD IDEA TO CONSOLIDATE CONSUMER DEBT INTO YOUR MORTGAGE

It is a fast-growing myth that the best way to clear high interest consumer debt is to consolidate it into a mortgage. Using longterm borrowing, such as a mortgage, for short- term needs is not a good mix.

While the interest rates may be lower for a home loan, the amount repaid over the life of the mortgage will cost you much more.

Better Advice: The only way to make it work is consolidate the high interest debt into a home loan, isolate what you’ve done and pay that bit off as quick as you can. Don’t make it part of your long-term home loan. Illustration: JOHN TIEDEMANN