Personal Financial Myths

Elvis is alive, the Earth is flat and the Moon walks were a hoax. We humans cling to myths even when they are patently false. Our natural gullibility sees us embrace almost any invented story, no matter how unreal.

As a Doubting Thomas, I am a natural sceptic. For me, reported sightings of Elvis have as much credibility as e-mail chain letters which threaten a lifetime of bad luck if one “breaks the chain”.

When it comes to personal financial management, the myths are not pure fantasy like the Loch Ness Monster. Nonetheless, people do carry around notions about money that may or may not be valid.

The Internet continually regurgitates false information and sometimes offers misleading advice for those seeking to make sound financial decisions. Please allow me to dispel some of the common misconceptions about money.

Debt is dangerous and should be avoided.

This is a sweeping generalization and only applies to “bad debt”, not “good debt”. Indeed, good debt is to be encouraged as it builds wealth and financial stability. Bad debt, on the other hand, should be shunned as it detracts from your finances. It makes sense to go into debt to buy a home as it’s an asset which invariably rises in value over time. Conversely, it’s financial suicide to finance day-to-day living expenses using credit to fuel a continuous debt cycle. The key to smart money management is to reduce bad debt.

No one will give me more credit than I can handle.

The Global Financial Crisis debunked this myth. Around the world, dubious and risky lending practices created a Devil’s kitchen where institutions gorged on a diet of toxic loans. Opportunistic lenders behaved poorly and were too willing to advance credit to those who could not afford it. Many households chose to super-size their debt and found themselves overcommitted. Hapless borrowers learnt that “wealth” born of leverage (even “good debt” for housing) comes with risks if you can’t afford to pay it back.

More earnings mean more wealth.

Anyone who has won the lottery and then gone broke will tell you this is not true. As a general rule, the more people earn the more they spend as more money enables them to acquire the things they have always wanted. And the more we have, the more we want and this cycle of compulsive buying creates shopaholics whose catchcry is “I’ll take that, that and that”. In our materialistic society people tend to live to their income, so it takes a disciplined individual to ensure that higher earnings do, in fact, equate to higher net worth.

Insurance is a waste of money.

Insurance is an investment and the return you get is peace of mind. You can’t put a monetary value on protecting yourself from the unexpected. It’s penny wise and pound foolish not to take out insurance. Insurance premiums are minimal compared to the hundreds of thousands of dollars you can lose. Without insurance you risk a life of financial hardship in the event of an untoward incident. Shop around to cut your premiums but not your coverage. Insurance is a necessary evil but it’s better than the alternative.

Finally, always remember that financial wellness is like physical fitness – it’s a choice. Just as we can choose to be trim, taut and terrific we can also choose to be a savvy saver, spender or investor. Being healthy in both a physical and fiscal sense requires some personal discipline and hard work, but it’s certainly worth the effort – and that’s the truth!

John (JT)Thomas

This opinion piece is provided by John (JT) Thomas, a 48-year veteran of the financial services industry and since 1987 a specialist in commercial mortgage funds. Considered by many to be the father of the modern commercial mortgage fund sector, JT helped establish and then managed – for 17 years – what became the largest and most successful commercial mortgage fund in Australia – The Howard Mortgage Trust – with assets exceeding $3 billion. Under JT’s stewardship, investors never lost one cent of their investments and indeed, investors always received competitive monthly returns. JT was also Chair of the $40 billion mortgage trust industry sector working group.

JT has been proudly involved with Princeton for nine years and sits on both the Princeton Credit Committee and the Princeton Compliance Committee as well as being an advisor to the Princeton Board.