When it comes to money, conventional wisdom may not be worth much. Don’t fall for these common myths.
1. If you want to save money, stick to a budget.
That’s what we’ve always heard, and we feel guilty about not taking grandpa’s advice. But researchers from Brigham Young University and Emory University found that budgeting can sometimes backfire. They conducted a study revealing that people who shopped with a spending limit actually forked over 50 percent more on a single item than consumers who weren’t budgeting.
“The results were always the same – a preference for higher-quality, higher-priced items,” said Jeff Larson, the study’s co-author. “The most surprising aspect of this study was that people’s decision-making process can change so easily. Doing something as simple as asking, ‘Hey, how much would you budget for this product?’ completely changes their thinking.”
Larson suggested that when consumers shop for an item with a budget in mind, they tend to gravitate towards items priced close to the budget’s upper limit. So when people had $1,000 budgeted for a flat-screen TV, they tended to pass over the cheaper items and look at TV that cost between $800 and $1,000 —without even checking out the features.
He noted that perhaps consumers would be better off basing their selection on qualities and features before looking at price. So instead of deciding that you are looking for a TV in the $1,000 range, you should start out thinking, “I want a 42-inch TV” and study the prices from there.
2. The more you earn, the richer you are.
You would think that would be a no-brainer, but it turns out to be totally false.
Stephen Goldbart, co-author of Affluence Intelligence and co-founder of the Money, Meaning & Choices Institute explains that earning more just makes most of us spend more. “As people acquire more money, they almost immediately start purchasing things that they’ve felt they’ve always wanted rather than thinking about what percentages that they should put away and the consequences of changing their spending habits.”
Lottery winners are a famous example of how this works. They are more likely to go bankrupt than people who never won a thing.
When they retire, a whopping 78 percent of NFL players go bankrupt within five years, and NBA players don’t fare much better: 60 percent of them go belly up within five years of leaving the game.
Overspending is thought to be a major cause of elite athletes’ financial stress — they typically spend like crazy and burn through their savings at an alarming rate.
When you earn a big salary, it’s hard to remind yourself that peak earning years don’t last forever.
3. When you retire, you shouldn’t touch the principal and just live off the interest.
Um, that would be nice, and it might have worked for your parents, but it’s unlikely to work for you, in part because dividends and interest aren’t what they used to be. With disappearing pensions and Social Security payments that don’t keep up with costs for seniors, not to mention a lackluster job market, many of us will need to get creative to figure out how to retire comfortably even if we’ve been able to accumulate something in a 401(k).
Marc S. Freedman, author of Retiring for the Genius, suggests what’s called a “total-return approach.” The idea is to give yourself a paycheck in your golden years. If you can manage to save enough for an investment portfolio, you can then leave about 5 to 8 percent of your investable assets in cash. Then, once a month, you have a check for a predetermined amount withdrawn from the cash account and deposited into your checking account.
As the cash portion of your portfolio depletes to 3 to 5 percent of the value, you rebalance the portfolio and replenish the cash account. This takes more attention and homework than, say, an annuity, but it can also be more cost-effective.
Other strategists recommend what’s called the “bucket approach.” That means you that you create a dedicated pool of assets, made up of cash and other very liquid holdings, which can cover your near-term income needs. Then you can take what’s left over and gradually invest them in more aggressive investment vehicles.
In any case, living off the interest is simply a fantasy for many people today.
4. Money won’t buy happiness.
Well, actually it can buy at least some happiness for some of us.
Researchers from Princeton University have found that if you are a low- or middle-income earner, your life outlook tends to improve if you earn more income. Boosts in salary and happiness increased at the same rate regardless of economic class: a 20 percent increase in salary increased happiness at the same rate for both low-income and high-income people.
Jumps in income also enhanced peoples’ “emotional well-being” – the perception of the quality of their daily life. This effect held true until they reached the $75,000 mark. On the other hand, making over $75,000 did nothing to improve subjects’ daily attitudes. As income fell below $75,000, people were more stressed and less happy.
Another interesting thing that researchers at San Francisco state have found is that the old saw that buying experiences rather than things with our money will make us happier may not be true. It really depends on the authenticity of the experience. If your income goes up and you decide that you should buy tickets to the opera, unless you really enjoy the music such spending will not make you any happier. In fact, you may feel worse. The trick is to spend money on things that really reflect who you are. If you’re a basketball fan, buy a ticket to a game. If you love the water, spend money on a sail. Doing what you think you should do with the money is just a buzzkill.
5. Collecting coupons isn’t worth it.
The folks at Mint.com have concluded that if you are savvy about it, collecting coupons is indeed worth it.
This comes with a few caveats. You have to avoid the temptation to buy more than you need. Mint recommends keeping a 3 months’ supply of non-perishable food and condiments on hand so that you’ll buy things when they are on sale or when you have the coupons instead of being forced to buy them just when you need them. They also suggest checking to see if the coupon is saving you more than you would save if you were to buy generic.
But the real secret is in something called “coupon stacking.” That means that you apply more than one coupon to the same item. For example, you combine a manufacturer’s coupon and the store coupon for that same box of cereal. Mint notes that you can also usually use an e-coupon and a printed coupon for the same item.
Yes, it can take a bit of time to collect and sort coupons, but one survey showed that people who spend 10 minutes or less per week clipping coupons save an average of $7 off their weekly grocery bill. Not a bad hourly rate for your time.
6. Buying a home is better than renting.
This really depends on a lot of factors, like how long you plan to stay in the home and the details of your mortgage. But certainly it’s not true across the board that buying is best. TheWall Street Journal reports than in many places — including large metropolitan areas like Phoenix, Austin, and Sacramento — renting is the cheaper alternative.
Most people think that investing in homeownership pays off over time, but the financial crisis proved that the value of your home can take a nosedive, and if this happens at a time you need to sell, you’re pretty much screwed. When they consider the cost of buying v. renting, many folks don’t calculate the costs of things like maintenance, fees, property taxes, and repair.
If you rent, you have more flexibility in terms of moving, which can be the key to taking a job with higher income. And because many renters pay less per month than buyers, they can invest the extra money, as well as the money they would have used for a down payment.
7. You can save money on gas by not running the air conditioner in your car.
Ever heard this one? Let’s hope you haven’t sweat too much over it, because according to Consumer Reports, it’s pretty much a myth.
Turning on the A/C in the car doesn’t put more load on the engine and it only slightly decreases fuel economy. At higher speeds (over 55mph), putting the windows down can reduce fuel economy by up to 20 percent, depending on how aerodynamic the car is. However, experts say that when you’re just cruising around town, you’d probably burn a little less gas by having the windows down and the A/C off. Your fan speed doesn’t affect fuel economy, so you can go ahead and turn that up. And park in the shade.