There’s a scene in the popular sitcom Friends, in which Monica, nearly broke after having lost her job, tries to play the stock market in a final attempt to bounce back. She doesn’t really know anything about the stock market, and picks companies to invest in the strangest ways – a company with the stock ticker symbol ZXY is her favorite because she thinks it sounds “zexy”. She picks another company because it has the letters of her name. Are there superstitions in personal finance? Do people really make their financial decisions based on nothing but gut instinct, a bunch of rumors and a sign handed down to them by their dog? They certainly do. Here are a few choice articles of personal finance advice that get bandied about that are little better.
For instance, lots of people stay away from buying red cars because they believe that they are really doing the smart thing by their bank account. How is this supposed to be financially smart? They’ve heard of a particularly resilient rumor to do with how in their internal calculations, insurance adjusters tag on an extra few dollars for red cars because this, they believe, is the color of choice of raving maniacs who like to drive at 100 mph at all times. In truth, insurance adjusters don’t pay any attention at all to the color of a car. So when a friend buttonholes you and tells you in a conspiratorial whisper that he has this great piece of personal finance advice for you that he knows to be true, you know where you need to tell them to put their advice before you call and tell your dealer that you’ll go for that red little number. If there’s one thing that’s good about this advice, it’s that lots of people believe in it. So red cars tend to sell for a little less for the lower demand.
As far as many people are concerned, anyone who rents a home is a sucker. The money you pay each month in rent, they calculate according to a well-worn old formula, is all you have to pay as your monthly payment. After a few years, you’ll actually own the home. If you rent, you just pay all this money each month your whole life and have nothing to show for it in the and. On the face of it, this does seem to make a bit of sense. Just imagine – you own your own home!
Actually, this old mantra has a lot to do with how the real estate industry got all of America to buy overvalued homes they couldn’t afford up until the housing collapse took off. A lot fewer people would own underwater homes today if they hadn’t used this very persuasive argument. In truth, often, renting makes a lot more sense. Today for instance, it’s positively difficult to find a good house to rent because there are so many people who have been burned in the housing collapse, they don’t want anything to do with buying just now. There are quite a few costs and responsibilities that go with owning your own home. A life without that kind of responsibility is often a richer life to many people.
How about the argument that when you plan for the money you need to save for your retirement, you should assume that you’ll get about 8% a year for your investments? Well, numbers like this one have actually been quite real at certain times. For instance, throughout the 80s and most of the 90s, the stock market got you 13% every year. But then, at the end of the 90s, the dot-com bubble got busted, and then the housing bubble got busted. It’s been busted bubbles ever since. These days, you’d be lucky to get about 4% a year.