Don’t Believe Everything You Hear

April 18, 2014

Over the last few weeks, I keep hearing that women are paid only 77% as much as men and that claim boggles my mind. My first thought when I hear that is “businesses should fire every man working for them and hire women at a discount.” Apparently, I’m not the only one that wonders about the implications of that oft-repeated statement.  A Wall Street Journal column wonders the same thing.  It’s an interesting read, and clarifies some of the numbers that don’t get nearly as much press. But most people I know, when asked (and I’ve asked a few people today), know the 77% statistic because it’s repeated in the news so often. That made me wonder: “what other things do we “KNOW” that aren’t really as simple as the “fact” that gets repeated very often?

The stock market is too risky.  I hear that a lot when talking with people about their asset allocation. So being a bit of a numbers geek, I like to look at actual statistics.  From 1926 through the end of last year, inflation has averaged around 3% per year.  Investing in government-backed treasury bills (a short term investment, continually rolled over into the next bill) would have produced a return of ~3 ½% per year in that time frame. After inflation, that’s not a very big return! But, it is safe. Long term government bonds did a bit better with a return of nearly 6% annually, which is far better than inflation.

What about that “risky” stock market?  Large company stocks returned almost 10% per year and small company stocks nearly 12% per year in that time frame, significantly outpacing inflation. Over a long time frame, is there more risk in being IN the stock market or OUT of the market? In a short time frame, yes the stock market can be volatile. But if your goals are long term, you may be doing a disservice to your wealth if you opt out of the stock market because you think that it’s just too risky.

Making minor changes in your budget can produce big benefits.  This is actually something I’ve written about fairly often and I do believe that it is very true.  But, as often as I say it and as often as I hear other people in the financial world talk about this concept, I think we all miss a major opportunity to get an even more important point across to people.  Making BIG changes produces enormous results very quickly.  For instance – if you stop buying Starbucks as frequently and direct those dollars into savings, you could have an extra $100,000 or more in your 401k at retirement.  That is factually accurate, but it misses an important element.  If you were able to live well below your means and reduce the two biggest costs in most people’s lives (housing and transportation), you might be looking at $1,000,000 instead of $100,000 in your 401k or setting yourself up to retire years earlier than projected today.

I talked with someone last week who feels a bit “cramped” in his townhouse and he and his wife are moving into a bigger place.  They are paying an extra $200,000 in market value, plus the interest on the mortgage, plus an extra $500-700/month in taxes and utilities to move into a bigger house.  What if they decided that “cramped” is OK and paid off the townhouse mortgage twenty years before the big hose mortgage?  What if the tax/utility savings were invested rather than moving up to a bigger house?  By age 50 (they are mid 30’s now), they could be debt free and able to withstand a downsizing far better than with the big house with the big mortgage.

Everybody has debt.  I hear that from people all the time.  It’s the American Way. Congress does it, why shouldn’t we? But, there is a growing movement toward a debt free lifestyle. Dave Ramsey, Suze Orman and other personal financial celebrities are all out there pitching the concept of becoming debt free and more and more people are moving in that direction because of the economic uncertainty that exists today.  Our level of debt keeps rising, both individually and as a country, but not EVERYONE has debt.  Don’t let yourself off the hook so easily with that justification.

There are a lot of things I hear that are accepted bits of wisdom, but when you look a little bit deeper, maybe that wisdom isn’t all that wise.  As you give yourself financial messages, be a bit critical with the language you use.  Analyze the statements you make to yourself and those that you hear.  Numbers/statistics can say almost anything that you want them to. Dig a little bit to find an answer that challenges conventional thinking and use that digging to help propel you to a better financial life.