December 11, 2017

Know How: Busting your pre-conceived money myths

Ryan A. Wagner is a financial representative with Robert Fine & Associates in Framingham. Reach him at rwagner@robertfineassociates.com.

Financial literacy should be taught in school, but is rarely spoken about in the home. As a result, most people get their education in bits and pieces from a combination of family, friends, co-workers, HR, TV, radio, the internet and professionals they have dealt with throughout the course of their lives. This leads to lots of financial myths repeated so often, they can seem to be fact.

Rethinking retirement savings

Take for example the beloved 401(k). It seems as though everyone has one. You might even get a match from your employer, which your friend said was free money. The internet and TV seem to think having one is a good idea. So, you think, "Let's do it." Well, maybe not so fast.

If you don't have a sufficient emergency fund, then a 401(k) is probably a bad idea, at least right now. Or if your goal is to buy a house soon, putting money into a retirement plan won't help you there. See, once you put money into a retirement plan, you typically can't access it until you are 59 .

But, HR said you can take out a loan? Stop! When you repay that loan, you have to repay it after taxes are taken out of your check, even though you originally put money in before you paid taxes (contributions are tax deductible). So, if you borrow $10,000 of your own money, and you are in a 25-percent tax bracket, it will actually cost you $2,500 in taxes to repay the loan, nevermind the interest you have to pay. Plus, when you take the money back out when you hit retirement, you have to pay taxes again. Not good! This is not to say retirement plans are bad, but it may or may not be a good fit depending on your individual situation.

Maximizing your money

Financial planning is exactly like the order of operations from math class in school (remember PEMDAS?). If you do things in the wrong order, you will get an answer, but it will be the wrong answer. The same applies to financial planning. If you start to plan for retirement before you take care of what can happen tomorrow, you will get an answer (your amount of retirement savings) that will be far from what your potential could have been had things just been done in a different order.

Savings should be a priority

Don't be afraid of debt. It has been drilled into our collective minds that debt and the interest from debt is the boogeyman and should be avoided at all costs, saying all debts should be paid back as quickly as possible to pay as little interest as possible. This is simply not correct. While interest from debt is certainly a factor in building wealth, it is not the only factor. It isn't even in the top three. Do yourself a favor by rearranging your debt to accommodate your savings first. If you can save 15-20 percent of your gross income first – and then pay your debts – you will be far ahead of the game when it comes to all of your other financial goals.

Lastly, know not every financial advisor is going to have an account minimum. Many advisors are willing to work with clients just starting out or are in debt and need advice.

Always make sure you work with a properly qualified advisor and will do what is in your best interest. Find an advisor not only fitting your needs, but your personality, and one to help educate you on the truths and myths of financial planning.

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