Today, Americans believe in what our Advisory Team calls financial myths. Many of the absolute "truths" that we hold dear about finance are simply myths. A Financial Myth is a common sense explanation for something we see in finance that is just simply wrong. How can this be? Common sense is a good thing you say. Yes, common sense is desirable when it is based on good information. However, if you start with poor or tainted information then any conclusions you make from there are bound to be inaccurate. This is the state that we find ourselves in today. We truly believe that certain financial myths that are leading us down a path of ruin.

Myth: All debt is bad. In our Advisory experiences, we have found many people who adamantly feel that all debt is bad. The truth is that debt is neither bad nor good; it is just a tool. Debt is like fire, you can use it to cook and heat, or you can burn your house down with it. Nothing is wrong with fire; you are simply responsible for how it is used. Let’s look at a practical example.

Many people proudly tell us that they avoid paying interest on depreciating assets such as cars by paying cash for them. That makes sense, if you have the cash to buy a car. Why pay interest? If you look deeper, however, this is a myth that costs you money. If you were to purchase a $20,000 car today, it depreciates roughly 25% immediately. So tomorrow it is only worth $15,000. If you paid cash for that car, you immediately lose $5,000. At 8% over 60 months you would pay $405 per month and $4,866 of interest over the whole term. Which is worse, to loose $5,000 of your hard earned cash right away or to loose $4,866 in interest over 5 years? Also, by paying cash for the car you loose another $1,500 worth of interest you should have made on the $20,000 over the next 5 years. Finally, this assumes that you are keeping the car for the full five years. This rarely happens.

Myth: I need to be debt free so I can retire. This is the myth that saddens us the most. If we wrote a check today and paid off all of your debt, could you retire? Most of you could not. Retirement is a function of income outside of your labor, not of how much debt you have. Put another way, no one can retire until the income from their savings exceeds their cash needs for the rest of their life. We have forgotten that the key to retirement is not being debt free; it is being cash rich. If you still think being debt free is a means of retiring, go down to Wall-Mart or McDonalds and find an employee over 65. Ask them if they live in a paid off house? Most do! If you had $1,000,000 in an investment earning 12%, it would produce $10,000 per month. If you had a perpetual income of $10,000 per month right now could you retire even though you owe $1,000 per month on your home? Of course you could. We squander so much cash trying to pay off good debts that we do not save enough money.

Myth: I need to pay off my home because it costs so much interest over thirty years. Nothing could be further from the truth! Mortgage interest is extremely cheap interest, and on top of that it is tax deductible! The only reason we are under the illusion that it is expensive is that we know that over thirty years we pay "almost three times the cost of my home" because of interest. Again, that makes perfect common sense but is dead wrong. When you add up all the payments you make over thirty years and look at them as a single number, that number is totally meaningless to you. Money, over that thirty-year period, changes value because of inflation. When you say $300,000, what will that buy? In 1940, $4,000 would have bought you a home. Looking from your vantage point today, would you be concerned about having paid $12,000 for a home including interest? Of course not! We would be glad to have paid "three times the cost of that home." Why? Money has changed value.

The truth about the comparison of a 15 and 30 year mortgage is that the 15 year mortgage is much more expensive than the 30 year mortgage because of opportunity cost! If you have a $100,000 home with a 15-year, 7.5% mortgage you pay $924 per month. That same house with a 30-year mortgage at 8% would cost you $733 per month, $194 per month less.

All the payments on the 15-year mortgage total roughly $166,000. If you then continued to save your mortgage payment for the next 15-years in an investment at a 12% rate of return you will have $463,000! That sounds great, even though we ignored taxes.

If you add up all the payments of the 30-year mortgage you pay $264,000! That’s $97,500 more than the 15-year mortgage. BUT, if you save the $194 difference in the payments in an investment over thirty years at the same 12% return you would have $678,000 in cash before taxes!

Let us sum this up this way. After paying the extra $97,000 of that nasty mortgage interest, we made an extra $215,000 in cash by taking a 30-year mortgage and not saving in our home.

These myths are just the tip of the iceberg. Many more financial myths exist in our thoughts today. Be willing to challenge conventional wisdom and it will lead you to a more secure financial future.

Try our Cash Advancement Procedure^SM Analysis to see just how much we can help you today!