When I talk to people, I often hear their opinions about money – strong opinions that they think are facts. But some of these “facts” are actually money myths and they can do real damage to people’s finances if taken as the truth. I want to write about these common money myths.
Real Estate Always Goes Up – many people have the false belief that you can never go wrong with real estate. In their minds, real estate in Toronto always goes up and always outperforms the stock market. Data from the Canadian Real Estate Association shows the average annual gain for resale homes was 5.4% from 2004 through 2014. Stocks did just under 8% in the same time period. If we look at a span of 20 years, average national house price rose 4.5% and Canadian stocks rose 8.3%. Over 30 years, Stock market increased by 8.5% and houses by 5.5%.
So why do people think real estate is a better investment? Because people take a much longer-term view when it comes to housing. Whereas when it comes to their investments, people are very good at noticing the short-term fluctuations produced by the investment market which gives the false belief that markets perform worse.
Interest rates will always stay low – our interest rate is low because the government wants to stimulate spending, and people are accumulating debt at alarming rates. The biggest debt people carry is their mortgages and with the low interest rate, people have over extended themselves and got much bigger mortgages than they should have. The problem is when interest rates do eventually rise, it could be financial ruin for some. It’s a good idea to start building a financial reserve fund to prepare for when the interest rate does eventually increase along with your mortgage payments.
Good investment returns with no risk – people seem to think these types of investments exist. They don’t! If we want our money to grow, we must take a healthy amount of risk. With low risk, comes with low returns.
Using debt to fund your lifestyle – I see this one often. People will put all kinds of things on their LOC – vacations, buying new furniture, the list goes on and on and it becomes a habit to always put big-ticket items on this list even though they can’t afford to pay the balance off. This is a vicious cycle.