Many of our common beliefs about money come from rules of thumb that have been passed down from previous generations. Old adages, such as pay yourself first and spend less than you earn, have stood the test of time. Other ideas, however, don’t hold up as well today, or were flat-out wrong to begin with. We reached out to a group of personal finance experts to tell us which money myths they believe are the most widely misunderstood. Here are nine of them:

Nine Money Myths (from the experts)

9 Money Myths Experts Wish You'd Stop Believing

1. Income and happiness

Andrew Hallam, author of Millionaire Teacher, says:

Many people think they’ll be happier with more money or with a higher salary. But studies show that there’s an increase in happiness up to about a $68,000 annual income. Beyond that, added income doesn’t correlate with added levels of contentment. I meet so few people who say, “Yes, I earn enough,” or “Yes, I have enough money.” 

But those that do say (and believe) such things tend to be some of the most grounded people I know.

In many ways, the pursuit of “more” detracts from things that are far more important than money, like relationships.

2. Spending in retirement

Manulife financial advisor Kurt Rosentreter says:

All the old retirement planning textbooks said you could expect to live off less than your working income (e.g. 70%). The reality of what we are seeing in the trenches doing this work everyday is that there are three phases: Age 60 to 70 where we are seeing as high as 110% of pre-retirement spending; age 75 to age 85 where costs can drop to 80% after the first spouse death; and costs in the final phase of age 85 onward than can be lower or higher depending on health care. And then there is inflation on all of this – none of the old ways apply to retirement today.

3. Savings rates

Gail Vaz-Oxlade, host of Til Debt Do Us Part, says:

The “save 10%” rule does a lot of people a disservice. If you’re in your 40s when you start accumulating retirement savings, 10% just ain’t gonna cut it. You need to be saving 18% — oh look, the RRSP contribution limit — to stash away enough for the future. But if you’re in your 20s and have heaps of time on your side, as little as 6% all through your life will get you to the same goal.

Speaking of savings rules, investment analyst Ben Carlson, adds:

Saving money on lattes is not how you’ll get rich. Focus on the big picture and not minor things to build wealth.

4. Housing and affordability:

Bruce Sellery, author of Moolala, says:

Mortgage rates – they will NOT always be 3%, people!

Vaz-Oxlade says:

Hearing things like, renting is a waste of money! It’s not, it’s a lifestyle choice and as long as you’re happy and you’re investing to build up your net worth, renting is just fine.

Don’t even get me started on the debt service ratio calculations that banks use to qualify people for credit. Why the hell is gross income even on the table? Even after years and years and years of saying, “You don’t make your gross income, you and the Tax Man make your gross income,” no one in the ivory towers has woken up to this reality.

Banks want to see a GDSR (Gross Debt Service Ratio) under 32%. But that’s just for the mortgage. Can you imagine if you have a car payment and you’re shelling out big bucks for day care? And what if you have a whole bunch of deductions off your pay cheque aside from tax: CPP, EI, union dues, retirement savings, medical benefit premiums, and the like. Is it any wonder that people turn to credit cards and lines of credit to make ends meet?

It’s gotten to the point where the banks don’t even use your “credit limits” to calculate debt service anymore, now they use minimum payment amounts. Lord love a duck! 

And Carlson adds:

It’s a myth that housing is your biggest investment. I consider it an asset, not an investment.

5. Investing

Jonathan Chevreau, Financial Independence Hub, says:

I’m not sure the “Bonds should equal your age” rule of thumb still stands up, given both the record low interest rates and expectations for rising life expectancy.

And I keep hearing the saying “you can’t time the market” yet every time I go to financial conference someone is selling essentially a market-timing service. The message seems to me “Most people can’t time the market — except us.”

‘You get what you pay for’ manifestly does not apply to the age-old investing debate about active vs. passive funds and fees.

And you could predict that it bugs me that most of the industry’s wealth accumulation focus is geared to something called Retirement, when Findependence is a better goal.

Carlson says:

It’s a myth that your investment strategy will separate you from other market participants. There are many decent strategies, but discipline matters more than strategy.

Also, we always hear that for every winner in the market there’s a loser. But that doesn’t take into account time horizon or reasons for buying & selling.

Sellery adds:

Investment returns – 7% might be accurate for the equity portion of your portfolio over time, but with a balanced portfolio it might be aggressive.

6. Safe withdrawal rates

Justin Bender, Canadian Portfolio Manager, says:

The 4% rule is kind of irrelevant – I feel as though it gives investors the sense that they don’t need to plan as long as they just take out 4% each year (and increase it by inflation).

Investors who focus on the amount of dividend and interest income the portfolio is expected to receive each year may make poor investment choices. For example, a portfolio that is managed from a total return and tax-efficient basis would be expected to have very low current income (usually around 2.5%). An investor who sees this 2.5% yield may incorrectly assume that since they are not receiving 4% each year, that they will run out of money in retirement. They may then look to take on more risk or change their tax-efficient strategy into a tax-inefficient one. 

7. Life insurance and disability insurance

Rosentreter says:

A common belief is that you don’t need life or disability insurance because your company group plan has it. Almost no one has private disability coverage because they rely on the corporate plan – not realizing that almost all corporate group plan coverage is almost no coverage at all, rarely covers all their income, may only pay for two years and you lose it if you quit or are fired.

8. Estate planning

Lee Ann Davies, founder of Agenomics, says:

The one that makes me squirm is to put the adult child on the title to the parents’ home to avoid taxes at time of death. There are numerous problems with this including risks for the parents that they are sharing title but also the loss of the capital gains shelter when it’s not a primary residence for the child. 

9. On Rules of Thumb

Vaz-Oxlade says:

I wrote a book about this – Money Rules – where I debunk some of the “rules of thumb” we’ve been told to live by. We aren’t all thumbs. Some of us are little fingers, some index fingers, and so I give the middle finger to the one-size-fits-all rule of thumb.

Sellery says:

I am a fan of rules of thumb. Even if they aren’t totally accurate, they give people a way to start thinking about things. Seen in that light, as a starting point, I think they are very helpful. It cuts through the complexity of personal finance (i.e. fixed income = age). Sure that is a very broad rule of thumb, but it is a starting point.

If we could JUST get Canadians to the starting point we would be so, so much better off.

Readers: Do you have anything else to add to this list of money myths? What rules of thumb do you abide by and which ones do you wish would disappear for good?

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15 Comments

  1. Keith Anderson on April 17, 2015 at 5:43 am

    don’t invest in anything you don’t understand and don’t put all your eggs in one basket. I’m a retired banker who is invested 50/50 in equities/fixed assets. My equities are all Cdn banks (paying dividends). My theory is if the banks go down the toilet, there won’t be any other attractive alternative investments. Worked pretty good thru the 2008 financial crisis.

    • Ha ha on April 22, 2015 at 9:05 am

      Don’t put your eggs in one basket. All my equities are in Canadian banks. Do you hear yourself?

      • Pearce on April 23, 2015 at 3:23 pm

        He said only his equities are in Canadian banks and paying divided ends. The rest is elsewhere.

        • Grant on April 23, 2015 at 4:36 pm

          Pearce, putting all your equities in Canadian banks (or for that matter all in the Canadian market) is a very undiversified portfolio, i.e all your eggs in one basket.

  2. Robert on April 17, 2015 at 7:16 am

    Don’t trust yourself to just one source (or guru) of financial advice.

    There are some good ideas listed listed here (consider what actually makes you happy), some corny ones (inventing a new word like “Findependence” to sound savvy), some disagreement (e.g. regarding rules of thumb), as well as some new myths (the percentages from Rosentreter fit squarely in this category – I am so far finding the real percentages to be closer to half what he suggests).

    Read widely even if you use an advisor, and preferably read from sources like this one, which present a variety of opinions. The truth for you is out there, but it will be a different truth every few years.

  3. Barry @ Moneywehave on April 17, 2015 at 8:15 am

    Love how Gail and Bruce always speak the truth. Great advice that everyone should follow.

  4. Grant on April 17, 2015 at 10:22 am

    Keith, I think investing all your equities in Canadian banks is putting all your eggs in one basket. The next financial crisis will likely not look like the last one. My rule of thumb would be to diversify globally.

  5. Richard on April 17, 2015 at 10:47 am

    The biggest myth I see is that making money is extremely complicated and you have to be a genius to do it, so you might as well just hope your salary covers the bills. There are so many simple ways to earn more or to invest so you can be in a better position in a few years.

    I don’t really have any specific rules of thumb that I think would work for everyone, but I really believe a lot of people would find themselves better off if they start investing in an indexed portfolio as soon as possible (even if it’s not a large amount).

  6. Mary Fitzgerald on April 17, 2015 at 11:33 pm

    I have learned in the past 2 years as am new to financial planning and investing that starting to save no matter how little and doing it by automatic transfers or discipline is the key.

    I have maximized my RRSP’s in the last 2 years and beefed up my non-registered accounts, $15,000+$10,000 total and I know interest rates, dividend yields will go higher in coming years.

    I will stick to reinvesting dividends and buying compound interest bonds known as zeros.

  7. Mark A on April 22, 2015 at 9:26 am

    What is a Manulife financial advisor doing in this post?

    All the other people had excellent things to say.

    Then the manulife guy comes on and suggests that retirees need MORE money than when they worked until one of them dies, when numerous studies suggest retirees generally spend well less than the 70% rule of thumb. Hmm, I wonder why a financial advisor would want people trying to build bigger retirement funds.

    And his other bit of advise it to buy more insurance. Hmmm

    Even if that is good advice, it would be better received coming from an impartial source.

    • Richard on April 22, 2015 at 10:13 am

      There was an excellent post on Michael James on Money that looked at several studies. It seems that people who have more savings spend more in retirement, and those who have less spend less. So for the vast majority of people it’s the available income that determines their spending. Put it this way – if you saw that the average retired person spent 10% of their previous income, would you think that you don’t have to save much or that you want to save more than average?

      Since it’s not easy to save more, the question is really about the tradeoff between spending before retirement and spending during retirement. Guidelines can’t tell you what you want, so it’s good to be aware that a generic rule might be too low.

      • Mark A on April 22, 2015 at 1:33 pm

        That is an interesting post and hypothesis.

        But I’m not sure how it relates to a question of how much you’ll need for retirement. I’m sure if any of us found ourselves with an excess we’d find a way to spend more, even if it was just more charitable donations or contributions to RESPs of grandchildren.

        But the 70% ‘rule’, that this guy is turning into ‘110% for the first 10 years’ is meant to be about how much you’d need for the same lifestyle. And a retiree no longer needs to allocate the income they were saving, if they did well no longer have a mortgage, no longer spend money commuting, etc, so I don’t know where you’d get the idea they need more.

        Now I agree that the rule is both not accurate at the figure and not totally helpful as the spending profile will change over time, but the numbers that guy threw out are simply a sales pitch.

        A pitch similar to how many banking/insurance/financial planner calculators will ignore OAS/CPP when telling you how much to save.

  8. Anthony S on April 22, 2015 at 9:37 am

    “The one that makes me squirm is to put the adult child on the title to the parents’ home to avoid taxes at time of death. There are numerous problems with this including risks for the parents that they are sharing title but also the loss of the capital gains shelter when it’s not a primary residence for the child.”

    What should make you squirm are attribution rules which make this strategy tax-avoidance if capital gains are not paid by the estate.

  9. Steve M on May 19, 2015 at 7:42 pm

    Get yourself out of debt as soon as you can. Avoid as many avoidable fixed costs as possible (i.e. cable tv, expensive internet subscriptions, etc) and be disciplined at putting that 15% away each and every year. Always check the costs involved in investing. All of these are simple things but are overlooked far too often.

  10. Kathy on July 25, 2017 at 5:26 pm

    A couple of years after I was divorced, I was ready to own a house again. I went to my bank to see how much I could afford. They told me some crazy figure and I told them I’d only be able to afford Kraft Dinner and I’d have to give up the car (which btw was paid off). I point blank told them the way they calculate on gross income is WRONG … and not fair to those who weren’t experienced in owning a home, raising a family etc. … they were setting folks up for failure. I walked out and did my own math, knowing the top amount my own bank would give me. Then I contacted a mortgage broker, my first experience outside of the traditional bank, and told them what I was looking. Today, I am 6 years away from paying off my mortgage and retiring without it over my head. My message – live within your means!!

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