Common Financial Myths Get in the Way of Real Success

When we were kids, certainly when we were teenagers, many of us had conversations at one time or another with our parents where we tried to convince them that we should be allowed to do something, or maybe not be penalized after the fact for having done something, simply because “everyone else is doing it.”

In my family, that argument was always met with a variation of the same response: “If all your friends were jumping off a bridge, does that mean you should be doing it, too?” My dad was a brilliant lawyer and it was hard to beat him in any argument, but overcoming his “bridge jumping” objection was virtually impossible to do. On the other hand, any good lawyer learns to argue both sides of a case, so he could also be heard to say on occasion that “the whole world can’t be crazy” when I would object to a suggestion that was clearly mainstream.

The point, I guess, is that there are times when it’s appropriate to deviate from the herd mentality but it’s hard to do. At a minimum, this kind of “uncommon thinking” requires an open mind. Previously, I touched upon the idea that doing what everyone else does—just because everyone else is doing it—is not, by itself, a good reason to do anything. In fact, many people do things because they have been conditioned to think there is only one way when, in fact, they have no idea why they are doing them and never even think to challenge the underlying reasons.

It follows, then, that the idea of “uncommon thinking”when applied to the financial decisions we make can be uncomfortable at first, at least until we understand the myriad common financial myths to which we often blindly adhere.

There’s an old story about a bride who, with a kitchen full of wedding gifts including pots and pans, and utensils, asks her mother to teach her how to make a roast for her new husband. She’s instructed to cut off both ends of the meat before putting it into the oven so she asks her mother “why?” Her mother tells her that’s how she was taught; she’s always done it that way, and directs her to her grandmother for the rationale.

Her grandmother tells her that her mom did it that way, too. So the bride visits her great grandmother and asks the question. The answer she was given was simple: her great grandmother only had one pan and it was too small for the roasts she bought, so cutting off both ends was the only way the meat would fit!

Point: three generations did the same thing, blindly, without any idea why.

Worse, still, the original reason didn’t even apply anymore. This kind of behavior looks pretty silly—not to mention wasteful and inefficient---when the original reason is articulated. A similar theme can be seen in the long held theory of paying off your mortgage as fast as possible. In fact, not too long ago people used to have “mortgage burning parties” where they would literally light the paid mortgage note on fire when they received it in the mail from the bank.

The idea was if you paid off your mortgage the bank could never take your house, which happened to many people in the 1920’s and1930’s. Sounds like a good plan, huh? Well, again, people buy in blindly, adhering to the concept with absolutely no idea why. It turns out that at the time of the Great Depression the typical residential mortgage had a “demand” clause that allowed the bank to call the note at any time, for any reason……even if the borrower had been paying without fail.

When the run on banks became a crisis at the start of the Depression, many banks had no alternative to raise funds other than to call or “demand” payoff of mortgages. Most people couldn’t pay and many—sadly—lost their homes. In fact, the harsh “demand” clause has not been part of a home mortgage for years yet people still think they should hurry to pay off their mortgages, unaware of where the idea came from and without regard to the economic inefficiency of doing so.

Today, there are several other financial myths which people similarly continue to follow blindly to their own detriment, without understanding, never mind challenging.

Among them are the following:

1. “My money only needs to keep pace with inflation.”

2. “I will be in a lower tax bracket when I retire.”

3. “My 401(k) plan creates tax savings which I can spend or invest.”

4. “Compounding interest creates a financial miracle.”

5. “I won’t need life insurance when I retire.”

6. “A 15 year mortgage costs less than a 30 year mortgage.”

7. “Rate of return is more important than regular savings habits.”

8. “My financial plan meets all of my needs.”

9. “To get more protection, I must spend more money.”

At Bulfinch Group, we understand that many of these financial myths get in the way of peoples’ financial success and we have a unique tool that allows us to demonstrate why that is the case. We can evaluate a variety of scenarios and stress test each on an individualized basis for our clients so they can satisfy their “wants” not just their “needs.” Our ultimate goal is to develop a holistic strategy that overcomes the many drags on wealth building that are imbedded in these myths and help our clients to optimize the efficiency of the dollars they spend, thereby increasing their access to and enjoyment of their wealth.

So, you can keep “jumping off the bridge like everyone else” and continue to “cut off both ends of your roast” before you cook it, or you can call me to get educated about some of these myths and discover there is a better way. Sometimes, “the whole world is crazy!”