The Amateur Financier

I imagine that most of my readers already have a pretty good grasp on personal finance; most of the people who have commented on my posts are financial bloggers themselves, after all, so there’s the sense that I’m preaching to the choir (or to a group of other preachers, which might be more accurate).  But for much of the population, there seems to be a number of persistent myths that keep them from taking action toward improving their financial situation.  So today, I attempt to address some of those myths, and if I can change just one person’s mind about investing and other personal finance issues, it’ll be a successful column.

1) Understanding my finances is too complex – Nonsense.  Yes, it requires some time and effort to learn about things like Net Asset Value, annualized return, and ask-bid spreads.  But it’s no more complex than researching the performance of baseball players for your fantasy league.  A little bit of basic reading to learn how to interpret your financial statements, and you should have no problem following your investments.

2) Keeping up with my accounts takes too much time – This one has an element of truth; if you have three savings accounts, five checking accounts, four IRAs, two brokerage accounts, and a half dozen 401(k)s from various old jobs, then yes, it will take time to monitor them.  The one word solution: Consolidate.  Roll over your old 401(k)s, combine your IRAs at your favorite mutual fund company, and close down extraneous accounts.  Yes, all this consolidation will take time, but if you can cut down the number of accounts to a minimum, you’ll have a much easier and quicker time reviewing your account information in the future.

3) You need to be an expert to invest properly – This one is clearly false; just take a look at how many hedge funds ended up closing last year to see how even experts can make errors.  It’s not too difficult to assemble a simple portfolio of mutual funds with a major fund family; just use some broad based index funds to build a portfolio that meets your needs.  If that’s still too much trouble, most major fund families offer target date funds that will automatically adjust to your changing investment needs for your whole life.  Just regularly contribute to one, and you’ll do well financially.

4) I’m too broke to invest – I might let this one slide, if you are genuinely poor and not just broke.  If your household income falls below the poverty line, you could genuinely have trouble meeting all your living expenses and still having money left over for investing (especially if you live in an area with a high cost of living).  If you are making more than that amount, then for the most part, having money to invest is more about having control over your spending and less about how much you actually earn.

5) Why should I deprieve myself now by locking up my money for decades? – Possibly the most pernicious myth, particularly among younger people.  The simple fact is that compound interest means every dollar you invest at twenty will be worth thirty-two dollars by the time you turn sixty-five (assuming a somewhat conservativea 8% annual return on your investment).  A five thousand dollar investment will turn into $160,000 without another dollar being added.  Delay saving for only five years, and that total shrinks to $108,000; put off saving until you’re thirty, and you’ll have only $80,000, half of what you end up with had you started a decade earlier.  The lesson to be learned: small sacrifices when you are young can lead to large potential profits by the time you are ready to retire.

If you can get past these and the other savings and investment myths that exist, you’ll be well on your way to

• Great Debates: ETFs vs. Index Funds
• Should you invest in a 401(k)?
• Investing Advice for Students

• Financial Guru Review: Dave Ramsey
• Link roundup: Handbell edition
• Gifts for Your Financially-Minded Valentine