In our podcast episode, Nelson Soh, CPA, CA, and CPABC Financial Literacy Program volunteer shares with Vivian Tse, Manager, Communications, his thoughts on common money tips discussed on the Internet. Part of our Coffee Chats with CPABC podcast series.
The Internet is filled with financial “tips” that can be more myth than truth. Whether you encounter them via YouTube, TikTok, Instagram, Reddit, or Facebook, it’s very important to validate financial tips by doing your own research and speaking to a professional, such as a CPA or a financial advisor.
Many money myths also lack clarity. To seek clarity on some of the most common money myths, we interviewed Nelson Soh, CPA, CA, a volunteer with CPABC’s Financial Literacy Program, co-founder of FSQ Consulting, and best-selling Amazon author for his books 100 Day Money Mindset Journal and Life Literacy.
Myth 1: “You need to be rich to invest.”
Nelson: This is a super common money myth that many people hear and sometimes continue to throughout their lives. But it’s not true. You don’t need to be rich to invest. You can start with as little as you want, even if that means just $20 a month. And if you break that down, it's like $5 a week. And if you have the means to save or invest more, that’s even better. But you certainly do not have to be rich to invest.
Myth 2: “It’s too late to invest.”
Nelson: People often say the best time to start investing is when you're 18 or in your 20s, and it makes a lot of people feel not the best about themselves, especially if they're in their mid or late 20s, 30s, maybe even 40s, 50s, and they haven't started yet. I always tell people that the best time to start investing or to start working on your financial situation, if you haven't already, is right now because we can't turn back time.
It's never too late to start. If you look hard enough, there's always going to be some sort of opportunity to start building wealth or working towards your financial goals. You first have to start with the belief that you can do it and then from there, take really small steps and break it down in order to get to achieve your goals.
Myth 3: “Time the market to make the most of your money.”
Nelson: Shorting the stock market, or trying to time the stock market to buy low and sell high, can be very risky. You never know when it's going to go up or down. And there are professionals that do this for a living and the stock market is a zero-sum game. So, when you gamble in the market, usually the odds are not in your favour, especially when you're going up against experts.
Myth 4: “Borrow money to invest in cryptocurrency and win big.”
Nelson: Whether it’s borrowing money to invest in cryptocurrency, enter the stock market, or other investments, this is an extremely risky tactic. It’s not the best idea to take out loans to invest unless you really know what you are doing. The cryptocurrency market, for example, is volatile with huge ups and downs, so using loans to invest in cryptocurrency puts you at an even higher risk. Don’t put yourself at risk unless it’s money you are okay with losing.
Myth 5: “Let your money grow in your savings account”
Nelson: Having a savings account alone will not help you build wealth overtime. A savings account generally will pay around 1% or less in interest per year. However, the annual inflation rate is approximately 2-3%. Therefore, if you are getting paid 1% interest on your money, but your money is actually getting devalued every single year by 2-3% (because of inflation), you are actually on the losing side. The money in your savings is not even earning enough to offset inflation.
Myth 6: “Got a tax refund, let’s spend it!”
Nelson: Many people feel the impulse to upgrade their lifestyle once they earn more money or get a bit of extra cash from a tax refund or a bonus. I like to call this a “lifestyle creep”, where your spending increases as your earning and income increases. Whether you're buying a new car, house, electronic devices, additional streaming services subscriptions, or whatever else with this extra cash, it’s important to make sure you are not decreasing how much you can save. The goal should be to earn more and save more. If you can take that extra income and put it towards some sort of asset, it'll go a really long way.
Myth 7: “Financing/leasing a new vehicle is the way to go.”
Nelson: Some people prefer new cars for many reasons. It could be that they just want the newest and latest technology. And maybe they don't want to worry about repairs and maintenance or other things that may go wrong with an older car. But from a financial perspective, new cars aren't the best because they are depreciating assets. Once you drive your new car off the lot, they're losing effectively 5 to 10% of its value right then and there.
If you have the cash to pay it in full and you don't need this cash to pay for other assets such as business or school expenses, it’s best to pay off a car in full. However, since new cars are expensive, buying a used car and paying it off right away is often a more viable option. This will save you from financing or leasing a new car and ultimately creating a cash flow liability that you’ll take on for the next five, six, or seven years, depending on the term of your lease or finance. Remember that this cash flow liability affects your future ability to borrow money from the bank, and if you plan to buy a home in the next one or two years, this may affect how much the banks will loan you.
Leasing and finance can be good options if you don't have the cash up front, but you need a car. Say you only have a couple thousand dollars, which is not enough to buy a reliable used car. In this case, it makes sense to explore financing and leasing. However, even if you are financing or leasing, I recommend ensuring you purchase a car that's within your budget. Monthly payments stack up and auto dealers can manipulate your monthly payments to fit whatever your budget is.
For example, if the monthly payment is too high for you on a five-year term, the dealership might suggest stretching it to an 84-month term to bring the monthly payments down. However, because of the additional term length, you will be paying more in interest. Do your math carefully to find out how much you’re paying for the car at the end of your financing/lease term.
Vivian Tse is the Manager, Communications at CPABC.
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