Information floods our minds every day. TV, radio, podcasts, and the internet is constantly at our fingertips. With access to unlimited information, companies compete for your attention. They use “click bait” to reel you into clicking on their blog post or website. Given that their number one priority is to grab your attention, information can be skewed or even outright false. So how can you determine if the information is fact or fiction? Specifically, regarding your personal finances, how can you be sure that you are reading accurate, nonbiased information?
A good starting point is to use trusted, credible sources for your research. That said, let’s look at five financial planning myths that may negatively impact your financial plan.
Myth #1: Click here to find out if you can retire.
Many online retirement calculators are for illustrative purposes only. Each calculator likely has this written in small print at the bottom of the page. However, it’s easy to click on the calculator, fill out a few details, and then make a conclusion regarding your retirement plan status. Do not rely on these calculations as a substitute for your personal retirement plan.
Retirement planning has a multitude of assumptions built into your plan. Basing your retirement success on a 5-minute calculator can either be falsely positive or unnecessarily devasting. The estimated rate of return, assumed inflation rate, Social Security timing: all of which are cookie-cutter assumptions when entered into an online calculator. Everyone should have a retirement / financial plan that is specific to their needs, risk tolerance, longevity, etc. That said, some people need a financial plan more than others. If you are a young affluent investor looking for a generic, high-level status update on your retirement progress, sure, give the calculator a spin. However, if you are 5 to 10 years out from retirement, a customized retirement plan may better suit your needs.
Myth #2: All Debt is bad.
Like anything else in life, debt can be good or bad. In this case, the bad is compounding debt in the form of interest that keeps you from moving forward in your financial journey. These are things like credit card debt and personal loans. This type of debt usually comes with higher interest rates and can be hard to climb out of if ignored. A common best practice is to avoid carrying a credit card balance altogether. If you currently have a balance, write out a time-oriented payment plan to pay it off to avoid long periods of compounding interest.
On the other hand, there is also good debt. Home mortgages and even student loans fall into this category. Historically, home mortgages offer relatively lower rates, the interest may be deductible, and it allows you to own your home and build wealth over time. Student loans, if used properly, should be used to expand your education and your earnings potential.
However, both examples of good debt can be converted into bad debt if used inappropriately. For instance, some people buy “too much” house and end up with a larger mortgage payment relative to their household income. This tighter budget can cause problems in the future if your income changes, your expenses increase, or there is a sudden emergency. Likewise, student loans have been known to get people into trouble as well. The amount of student loans you take out should be comparable to the estimated earnings potential after completing. $100,000 in student loan debt to then earn $40,000/year may cause long-term damage to your financial plan.
Myth #3: Everyone should have life insurance.
While life insurance is a necessity for a lot of individuals and families, it’s not for everyone. Life insurance is for your dependents and/or for final expenses. Period. If you do not have anyone depending on you or your earnings, life insurance may not be needed. Life insurance is sold, not purchased. In other words, life insurance agents sell insurance to everyone, in some cases whether it is needed or not. It’s often a good idea to take inventory of how much life insurance you may need by calculating which debts would need to be paid off and how much of your income would need to be supplemented. Consider asking yourself the following questions:
- Is someone dependent on my earned income? How much of my income would need to be supplemented should I pass away?
- Are there things that need to be paid off upon my passing? Think home mortgage, credit card debt (held jointly), etc.
- Are there things that I would like to pay for upon my passing? Think upcoming college tuition, etc.
- Can my current assets cover my estimated funeral and other final expenses?
Myth #4: Estate planning is only for rich people.
Estate planning can be very complicated. Charitable remainder trusts, irrevocable life insurance trusts, etc. However, estate planning has basic key elements. No matter your financial situation, estate planning is for everyone. At a minimum, everyone should have a will in place.
Consider meeting with an estate planning attorney to review your estate plan. While your retirement accounts and life insurance policies have beneficiaries, your taxable accounts or primary residence may be subject to probate. Some of the most common estate planning documents include, but are not limited to:
- Revocable Living Trust
- Pour over will
- Power of Attorney
- Power of Attorney for Healthcare
- Living will
Myth #5: All financial advisors have a fiduciary responsibility to their clients.
A fiduciary is someone that manages property or money for another person’s benefit. For financial advisors, this means acting in the best interests of their clients. To be clear, not all people who hold themselves out as financial advisors are held to this standard. Note that anyone can call themselves a financial advisor legally. Financial advisors that work for a Registered Investment Advisor (RIA) are held to this standard. In addition, financial advisors that are CERTIFIED FINANCIAL PLANNER™ professionals also hold themselves out as fiduciaries.
Fee-only, fiduciary advisors are required to act in your best interest and not charge commissions. This allows for nonbiased financial advice when considering they are only paid by you, the client. Tull Financial Group is a fee-only Registered Investment Advisor (RIA) that has CERTIFIED FINANCIAL PLANNER™ professionals on our team. Give us a call today at (757) 436-1122 to discuss your specific financial situation.