Money myths - How true are they?
We’ve all heard them – the personal finance maxims many people rely on to make crucial financial decisions.
Buy don't rent. Always haggle. Shop around. You need life cover. Get a pension.
Let’s face it, as most people don’t do a huge amount of research into even the most crucial personal finance decisions, these home truths are what they rely upon.
But how true are they?
Are they urban myths – or a handy way to remember useful ways that save you money.
Here are some home truths about those, well, home truths!
Buy don't rent
Verdict: usually true
Rent will cost you over a million euro over 30 years. A mortgage will cost half as much and you'll end up with a nice home. No brainer? Usually, but not if you're likely to switch jobs in an increasingly mobile jobs market. Germans, for example, don't buy until the settle down in their forties as they could need to move to further their careers.
Buy when everyone else is selling
Verdict: True (but not for the faint hearted!)
The stock market crashes immediately post-Brexit and post-Trump highlighted the truth of this old chestnut. The market doesn’t like surprises and usually falls when something unexpected happens. But cute (and brave) investors know it soon regains its nerve and dive in to buy as it hits bottom. Within hours, they were selling again at a nice profit. This tactic requires nerve, speed and deep pockets – but can also go horribly wrong!
Haggle for a better deal
Verdict: True (but pick your moment)
Certain professions charge large percentage-based fees that may be reduced with a quick haggle. So by all means have a chat about paying 5% of your €200k nestegg to a financial advisor in commission, or 2% of your €900k pile to your estate agent. But you’ll only look foolish haggling with banks over loan rates set by computer programmes. So don’t do it unless you’re sure there is room for manoeuvre.
Tax the rich (and solve all our problems)
Verdict: Myth
This is the mantra of the populist parties. It would make us feel better, sure, but a study by the ESRI think tank showed only €22m would be raised by a tax on the super-rich. The problems is, there’s not as many of them as we like to think.
You financial advisor will look after you
Verdict: True (if you watch him like a hawk)
You need advice before dealing with an advisor!
Financial advice is well regulated – some say by too much.
The red tape is so daunting that few people have the stomach to read through it all.
A few basic tips can set you right. You must first establish who you’re dealing with?
Is the agent tied to one company, and therefore likely to sell – and advise on – only its products? Or can he or she advise you on several products but only from certain companies in a limited way.
Or is it a fully qualified advisor who can offer broad and independent advice?
The first time you deal with a financial advisor they must give you their ‘Terms of Business', which explains their authorised status and a description of the services they offer.
It will also explain whether they are tied to one financial services firm for any products they advise on. (For more details, look up financial advisor on Consumerhelp.ie)
Don’t pay fees for advice
Verdict: False
The biggest mistake greenhorn investors make is to think they are getting advice for free when the advisor is in fact taking a huge cut in commission.
For some reason we balk at paying €150 in fees to get sound advice – but don’t seem to mind having five grand trousered by advisors semi-surreptitiously in commission.
However, if you know how the system works, you can negotiate a better deal.
You could even ask to get paid back some of the commission paid by investment firms to the broker for winning your business.
Buying insurance is always sensible
Verdict: Partly true
Beware the marketing myths. An ad once proclaimed: “you wouldn’t jump out of a plane without a parachute, so how can you not have life cover.”
Well, excuse me, but a parachute will save your life. Life cover won’t. All it does is pay a sum to loved ones after you’re gone – if you avoid the small print pitfalls.
You need it if you have dependents – but not if you’re young, free and single.
Older people often also keep paying for increasingly expensive cover long after their family is grown up and self-sufficient.
Insurance is a bet between you and the insurer, where the latter usually wins because it sets the rules.
Buy it when you have to. Or where it involves big ticket items you can’t afford to lose – like your home or your health.
But gadget insurance? I don’t think so. For small ticket items, you’re better off saving the money you would have spent on cover to dip into when “disaster strikes” (like dropping your phone down the toilet.)
Put every spare cent into your pension
Verdict: Mostly true
Pension benefits are real – but exaggerated by marketing.
A typical ad depicted an “older” couple (who look about forty but have totally grey hair) walking along a tropical beach, trailing a bottle of champagne, the warm ocean lapping their feet and a tuxedo draped casually over his shoulder.
He looks like James Bond badly-disguised as a pensioner – she’s a well-preserved supermodel.
The marketing bumf also tells us how we can write off pension contributions at the top rate of tax.
It won’t tell us that we’ll have pay tax again when we take it out, that our money will be locked away until we are 68 and our pension pot can be raided at will by needy Finance Ministers any time there’s a crisis (through Michael Noonan’s pension levy for example).
A pension should indeed a major financial priority – but only after you’ve bought a home, as owning one will be the best pension you’ll ever have.
Also beware of onerous charges that can gobble up so much of your retirement nest-egg.
And if you’re a low income earner who doesn’t qualify for a contributory pension, there’s no point having a small private pension.
Your non-contributory pension will be means-tested and reduced accordingly.
Shop around
Verdict: Jaded, but truer than ever
The old cliché was ‘shop around’ to get a better deal.
We’ve moved on since then. Now it’s shop around and switch regularly – or else you will be absolutely fleeced.
There are so many things to pay for, we are so time-poor that few have the time or inclination to assess, compare and switch the many services and financial products we have to buy on a regular basis.
And so they lure us in with tempting short term deals for mortgages, health insurance, energy, TV and broadband bundles.
When they run out, hardly any of us will switch. Only 15% change energy and TV/broadband bundles – while only a mere handful move mortgages.
When they don’t, these borrowers get clobbered with ‘standard rates’ that really men ‘mugs rates.’