Are You Fooling Yourself?
If you’re not saving money, maybe you tell yourself it’s because you just “can’t afford” to set money aside right now. (Not true.) If you’re splurging on items you actually can’t afford, maybe you tell yourself that excessive credit card debt is normal. (Also not true.)
Whatever lies you’re telling yourself about money, the truth is they’re holding you back from financial success. “Many people tell themselves these excuses because they are afraid to address the [underlying] issues,” says Cristina Briboneria, CFP, vice president of oXYGen Financial, Inc., in Alpharetta, Ga. But that won’t make them go away — in fact, it may make them even worse.
Ready to face the truth? Here are 10 of the most common money lies we tell ourselves, and how to overcome them.
The Lie: I’m Never Going to Retire So I Don't Need to Save a Lot
Why people believe this: Some people have worked for years without managing to save, “so they feel despair,” says Chris Nicholson of FutureAdvisor, a San Francisco-based registered investment advisory firm. “Others are young and don't realize that their ability to generate income will decrease when they are old.” Some may genuinely love their work and don’t believe they’ll want to ever stop working. But they don’t consider the possibility that they may not be physically able to keep working.
How to overcome it: “We are all human beings and subject to our health,” says Ken Moraif, CFP, senior advisor at Money Matters, a wealth management and investment firm. “Assuming that we can work forever is very dangerous. With no savings, if our health fails, we not only have lost our income but we now also have a large expense. The combination of those two could surely put us into the poor house.”
Instead of assuming you’ll be able to work for the rest of your life, realize that a little money saved each month through your working life — you can start right now! — will become “a lot of money over decades if it's invested well,” Nicholson says. Rather than thinking about saving as a way to stop working someday, focus on the type of lifestyle you want to have and realize that savings may be the only way to sustain that lifestyle in the future.
The Lie: My Bank Account’s the Best Place to Keep My Money
Why people believe this: Many people associate saving with, well, a savings account. But while it’s good to have an emergency fund that can cover your living expenses for several months, many people keep “far too much” of their savings in a low-interest savings account, Nicholson says.
How to overcome it: Understand that “cash is not an investment,” Nicholson says. “Its value always decreases over time because of inflation.” It’s important to understand that while stocks go up and down in the short run, they’ve historically risen in value over the long term, he says, whereas the value of cash goes down because of inflation. Rather than placing all your savings in a low-interest account, putting some into basic investing vehicles like low-fee funds or ETFs can help you build wealth.
The Lie: Investing is Too Risky — and Complicated
Why people believe this: “People tend to get intimidated about investing because they don’t always understand the terminology or the right questions to ask,” says Samantha Fraelich-Rohe, Certified Financial Planner and vice president of financial planning firm Bernard R. Wolfe & Associates. “After all of the press over Ponzi schemes and people like Bernie Madoff, they also don’t want to be taken advantage of or make uninformed decisions either.”
How to overcome it: Realize that “not investing at all is a bigger risk since you lose purchasing power every year due to inflation,” Fraelich-Rohe says. Your investment portfolio should include a diversified mix with varied levels of risk and return potential. But it doesn’t need to be complicated: just look for a mix of bonds and stocks that fit your risk profile. (Read more on risk tolerance here.)
A financial advisor can provide additional guidance, Fraelich-Rohe says. Be clear and candid about what your time horizon and goals are, she adds, so the advisor can guide you to find something that’s suitable. (Want more information on investing? You can read more about how our own financial advisor-in-residence Jocelyn Black Hodes invests her money.)
The Lie: I Can Borrow From My Savings and Pay it Back Later
Why people believe this: When you have savings sitting available in a bank account, it can seem logical to take money out when you need it. But the reality is that it’s often more difficult than it seems to catch back up on savings, and, in the meantime, you will lose any interest that would have been incurred.
How to overcome it: “Once you've fallen behind, it is very difficult to catch up,” says Susan Fulton, founder of FBB Capital Partners in Bethesda, Md. “If you have no other choice, then recognize your lifestyle will have to change in order to pay yourself back. You will have to give up certain items in order to replenish your savings and to stay on track with your annual savings goal.” (And if you’re in a bind, it’s better to borrow from yourself than to use a credit card. Just make sure you have a plan for replenishing those lost savings as quickly as possible).
The Lie: Only Rich People Can Build Wealth
Why people believe this: Sometimes it may seem like it will take decades to build substantial savings, so it can feel daunting. But it’s important to remember that “saving is not really about getting rich,” Fulton says. “Saving is working toward the goal of having financial security throughout your lifetime.”
How to overcome it: Thanks to the power of compounding, your savings can grow faster than you might think. Even if you start small, you can build substantial savings by setting aside money consistently. “Remember: The vast majority of rich people are first-generation rich people who started with very little,” Moraif says. “You are where you are going, not where you came from.”
The Lie: My Credit Score’s Not That Important Unless I’m Buying a Home
Why people believe this: If the so-called American dream of homeownership isn’t your idea of happiness, maybe you feel like you can avoid managing your credit score. But applying for a mortgage isn’t the only time your score comes into play. Your credit score can save you — or cost you — a lot, depending on how high it is.
How to overcome it: Think hard about every time your credit might be checked. “Manage your bills and debt wisely,” Fulton says. “It is a critical component.” For instance, many landlords take your credit score into account before renting a property to you, and utility companies often require a credit check before allowing you to open an account for household utilities. Banks will also examine your score before lending money for other types of loans, including personal loans, credit cards and business loans.
The Lie: If I Ignore Those Debt Collectors, They’ll Go Away
Why people believe this: Maybe some people have convinced themselves that “out of sight, out of mind” applies to debt collectors. Or perhaps they’ve decided that a life spent avoiding collection calls is a desirable way to live.
How to overcome it: Face the facts: “Debt collectors will not go away,” says Fulton. “If you are in this situation, don't panic and be proactive.” Start by learning your rights, which include disputing the debt if appropriate. Don't be afraid to negotiate, Fulton adds; in many cases, you can work with the debtor to arrange a payment plan or erase some of the debt if you promise to pay it off by a certain date.
If necessary, consider getting help from a credit counselor. Fulton recommends using a non-profit organization like one of those listed on National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies.
The Lie: I Can Depend on Social Security and Medicare When I’m Older
Why people believe this: “We tell ourselves this so that we don’t have to save as much when we’re younger and can spend more money, but the younger and wealthier you are, the less likely it is that you will be able to depend on Social Security,” says Fraelich-Rohe. Social Security was never meant to be the main source of retirement income; it was created to be a safety net.
Today, the average Social Security payout for retirees is equivalent to a minimum wage job. “On average, it takes most Americans about $2,500 to $4,000 per month to be truly independent in retirement,” says Brian Heckert, founder of Financial Solutions Midwest, LLC. “Many can live on less but there is not much living going on.”
How to overcome it: Instead of depending on a system that is close to bankruptcy, “take charge of your own retirement and start saving in employer-sponsored retirement plans with matches whenever possible and IRAs for additional tax efficient savings,” Fraelich-Rohe says. If you take a look at recent studies on the Social Security trust you’ll see that “something has to be done to keep the program solvent past 2033 and the recent chatter is that younger people may only be able to depend on 70 to 75 percent of their Social Security payments,” she adds.
The Lie: I’ll Never Dig Out of Debt so What’s Another Charge?
Why people believe this: “Since we live in a very consumer-driven economy, resisting the temptation to spend is very difficult,” Heckert says. “Many people I have worked with over the years actually use spending to help them feel better about their debt situation, almost trying to convince themselves they can handle it. But that attitude is like standing at the bottom of a large hole saying you will get out by digging the hole deeper.”
How to overcome it: Rather than convincing yourself you are powerless, realize it is within your power to change your financial situation. “It took you some time to get into debt, it will take some time to get out of debt,” Fulton says. “It is possible to get out of debt. And once you are out of debt, you will be surprised how great it feels to have peace of mind about your finances, how good it feels not to live from paycheck to paycheck.”
Focus first on one debt to pay off — either the one with the highest interest rate, which can save you the most over the long term, or the one with the smallest balance, which can be paid off the quickest. Then move on to the next and so on until they’re paid off.
The Lie: I Deserve This Even If I Can’t Really Afford It (Yet)
Why people believe this: It’s easy to tell yourself you “deserve” something when trying to justify a purchase you probably know isn’t necessary, but really want.
How to overcome it: Reframe it. What we really deserve is “to have financial peace of mind,” Fulton says. Ask yourself whether you need it or just want it, and the honest answer will provide some clarity. Think about how you’ll feel when you can’t pay other bills because of this purchase or when you receive a credit card bill you can’t afford. If this is an important purchase, save to buy it, Fulton says. “Set up a separate savings account and make regular paycheck deposits into until you can afford to buy what you want.”