When it comes to investing there are many man-made myths out there.
Or simply, things we have told ourself to keep investing at an arm’s length away.
When I have more savings
When I have no debt
When I buy a house
When I get older
These just a few things I have heard come up for women. But today I wanted to debunk the top 5 myths of investing so that you could start taking advantage of this very important wealth-building strategy.
Myth # 1: You should have no debt before you start investing.
This is not necessarily true!
Not all debt is actually created equal. Not all debt is bad either.
Some different types of debt could be auto loans, personal credit cards, student loans, and a mortgage.
The key when deciding if you should invest while you have debt is knowing what the interest rate for your debt is.
The average return in the S&P 500 after inflation runs about 7% per year. So, if your debt interest is higher than that, you will be better off getting the high-interest debt paid down first.
However, things like car loans and mortgages usually have pretty low-interest rates. This is especially true because we’ve experienced a decade of impressively low-interest rates thanks to the financial crisis of 2008.
Rates are starting to even come back down, so take a look at your rates and decide if there is any room to get them even lower.
I have known people that have been dead set on paying off a car loan (that they’re paying very low interest on) before they even think about contributing more to retirement.
This can be a grave mistake in the long run of allocating funds to the wrong places when it could be working harder for you.
So, myth busted!
Myth # 2: You have to have an emergency fund to begin investing.
Emergency funds are a crucial part of every financial plan.
They’re so important because if you don’t have one, you can be forced to charge up high-interest debt again or take money out of retirement plans with a penalty (and you have to pay taxes on it, too).
Ideally, you want 3-6 months of living expenses saved up.
However, depending on your situation, you may be able to both contribute to retirement and save for your emergencies.
It’s all about balance & finesse here.
There is a benefit for tax purposes for deferring money into a qualified retirement fund, so that is also something to keep in mind. It’s basically an extra bonus while you balance retirement savings and emergency savings.
The key is to have a strong handle on your budget and cash flow every month and know how “high-risk” you are in terms of needing your emergency fund.
Do you work from home and avoid a lot of driving? This could help your odds of any type of car accident and needing to shell out an unexpected deductible.
Do you have longevity at your job? This also may reduce your risk of losing your job.
Do you have a pretty easy backup plan that could save you a lot of living expenses? Like, living with a friend or family member? This would help cut down on your need for a large fund while you figure things out.
Lastly, do you have kids? This could increase your need for an emergency fund and you may need to focus more on it than others.
How much debt do you already have? Do you live in a 1 or 2 income household (spouse)?
Do you see how situations can really affect the need?
So, if you’re lower risk, you may be able to easily contribute to both investing and your emergency fund at the same time.
If you’re higher risk, you may need to focus more on your emergency fund, but that doesn’t mean you can’t put something into retirement, even if it’s small.
Myth #3: You need a financial advisor to properly invest.
This is absolutely false.
Things like ETFs (electronically traded funds) have made investing easier for everyone. They are basically securities that you can buy that are invested into a diversified basket of stocks.
Investment managers do the work for you by creating the diversified ETFs and they’re available to buy and sell on an exchange, just like a stock. They usually carry a very small yearly fee called an expense ratio (usually around a tenth of a percent or so).
To put it into perspective, financial advisors may charge you anywhere from 1-2% to use them, plus you have to pay fees on whatever investments they put you in (ETFs, mutual funds, etc..)
I go into more details about ETFs in my YouTube video which I highly suggest you watch to learn more!
One important thing to research if you plan to do it yourself is proper asset allocation. This could mean how much to invest in stocks vs. bonds vs. commodities. Asset allocation is based upon your risk tolerance, your age and your goals.
This is something a financial advisor usually helps you figure out and does for you. However, it’s certainly do-able on your own as well with enough research.
There are many people that simply don’t have the time to learn enough about this, but, it’s quite attainable to do if you wanted to, and there are many resources to teach you how.
There is nothing wrong with using a financial advisor, however, don’t be afraid to interview a few of them to find the right fit and one that doesn’t charge exuberant fees or stick you in high fee securities.
If they do, make them explain to you the return you can anticipate by using their suggested offerings if they do carry higher fees.
Investing and wealth building is all about educating yourself to have confidence in your choices and even confidence in choices others make for you (like financial advisors).
This is why you’re here, I imagine, so pat yourself on the back!
Myth #4: The stock market is for serious investors only.
Guess what? Investing in the stock market has been one of the best ways to generate wealth for decades and decades.
For who you may ask? Literally everyone.
Most people are invested via a retirement plan, such as a 401k.
Just because you’re not a serious investor with 10,000 computer screens of charts, you can actually still be invested and benefiting!
Your employer usually hires an investment firm to do all the work for you if you’re invested in an employer plan. You defer money from your paycheck into the plan, and they do all of the work if you want them to. You don’t have to even know what a stock is (but, I encourage you please do).
If you’re self-employed, you can still hire a financial advisor or do it yourself as explained above.
Myth #5: I can’t make any money investing unless I have a lot of money.
Investing isn’t an overnight wealth-building tactic.
Investments all make money over time. Ever heard the term “get rich slowly”? It’s the reality of wealth building.
There is no shame in starting small and growing your contributions over time. Something is better than nothing and the earlier you start, the harder compounding interest works in your favor.
Now that you know these myths hold no weight when it comes to investing, you can start today! Head over to www.shetalksfinance.com for my free Maximize Your Money guide if you haven’t gotten a chance to download it yet. It is a great first step!