What are money myths? Money myths are those old sayings that are repeated so often that they become myths. They are very popular with many people living by them as a guide for creating and protecting their wealth.
Which money myths are true? We take a look at five popular money myths and deliver our verdict.
1. Where there’s muck there’s brass (money): Our verdict - [highlight]TRUE[/highlight]
An old English saying believed to have originated out of Yorkshire. The presumption is that working in ‘muck’ (dirt to manure), can create brass (slang for money) as few people want to work with muck.
In Australia, the BRW 200 Rich List for 2011 shows that four of the top five wealthiest individuals all made their fortune through mining. They mine for coal, gold, copper and iron ore in the Australian red dirt.
The real working miners, the ones who actually do the hard work are also doing just fine. The miners are averaging over $2,172 as a weekly wage. This is far better than their ‘white collar’ friends from financial services who are earning $1,374 per week. (Source: Suncorp Bank Wages Report 2012).
The evidence strongly suggests that this myth is true.
2. Penny wise, pound foolish: Our verdict - [highlight]TRUE (most of the time!)[/highlight]
The saying assumes that obsessing with small things (pennies) will hold back from making sensible decisions with bigger opportunities (pounds).
Consider this: If you are the sort of person that would drive all over town to try and save on every deal, the saying would be true. The reason is simple, the cost of driving equates to $0.74 per KM (Source – Australian Tax Office). This is the tax office estimate and takes into account fuel, wear and tear along with depreciation of your car.
If you drive 50 KM to find the bargains, you’ll burn $37.00 in motoring costs. Add to that the time (and time is money!), shoe leather, food and drink while you are shopping, you’ll have to make some extraordinary savings to justify the expense.
Rather than burning up your motoring costs, you would (probably) be better off putting that bargain shopping time to good use. For example, use your time to better your education and training for a higher paid job.
This myth, in our humble opinion is true (most of the time).
3. As safe as houses: Our verdict -[highlight] FALSE[/highlight]
This saying can have a few meanings. For example, houses are meant to be ‘safe’ because they are made of ‘bricks and mortar’ (Won’t blow down!).
The saying is often used by investors who like to ‘see and touch’ their investments and believe that no matter what happens, housing will always give a good investment return.
House prices right around the western world have taken a severe beating over the past few years. They can no longer be seen as a safe bet when it comes to your money.
If you are not convinced that house prices do fall in value take a look at this great chart from The Economist - Interactive Global House Price Chart. Have a play and see what has happened across the world to house prices. You can even select prices in ‘Real Terms’
All the information tells us that this myth is false.
4. Don’t put all your eggs in the one basket: Our verdict - [highlight]TRUE[/highlight]
No guessing how this myth was developed. In money terms it is often used to highlight safety by diversifying (spreading) your money around as opposed to placing it all into the one investment; just in case that one investment fails.
A large number of the very rich have made all their money through one investment. For example the miners as mentioned in Myth 1 above, Bill Gates through Microsoft and so on. These examples would suggest that the myth is false.
Before declaring the myth as ‘false’, we need look at those who poured everything into the one investment and lost. Right across the world we are seeing everyday people apply for bankruptcy because of an inability to make mortgage repayments. They have lost everything through one investment.
As the myth is emphasising the need for safety, we declare the myth as true
5. Investments will always come good because of the investment cycle: Our Verdict - [highlight]FALSE[/highlight]
Investment advisers and economists often talk about investment cycles and quickly point to the ‘investment clock‘ to prove their point.
If you look at the Dow Jones stock market back to the 1900, you’ll see that it is very difficult to highlight a series of investment cycles with any predictability. Dow Jones 1900 – Present
Many will say ‘The stock market always goes back up’ and to be fair that appears true, at least for the Dow Jones.
Now, take a look at the Japanese stock market. Today it is only worth one quarter of what it was when it peaked in 1990. 22 years of suffering for every investor and still no signs of a quick recovery.
We declare this myth to be false as there is not enough consistency in the investment markets to justify the myth.
What are your thoughts? We would appreciate your comments along with any money myths that you believe in.