When it comes to personal finance, there’s no shortage of advice and opinions out there. Along with that, there are also a lot of myths and misinformation about managing your finances. In this episode, we tackle five of the most common myths we come across, including: 1) I need to change my investments based on XYZ headline, 2) Once I have $XYZ portfolio value, I’ll be content, 3) A tax refund = good tax planning, 4) Whole life insurance helps cover your insurance needs while allowing you to efficiently save/invest at the same time, and 5) Just save 20% of your income toward retirement and you’ll be fine. We explain why each myth exists, why it’s misguided, and provide an alternate way to think about each underlying topic.
Outline of this episode
- Myth #1: Changing investments based on headlines [1:29]
- Myth #2: Once I have $XYZ portfolio value, I’ll be content [5:34]
- Myth #3: A tax refund = good tax planning [8:48]
- Myth #4: The benefit of whole life insurance [11:13]
- Myth #5: Saving 20% of your income for retirement [15:24]
Listening to headlines and setting retirement dollar amounts
The first myth is thinking that you should change your investments based on the headlines or what the financial media is worried about on that day. As we discuss in the episode, the financial media has different goals than you have, and giving you sound investment advice isn’t one of them. By tuning out the day-to-day noise, you'll end up with a better long-term investment return.
The second myth is thinking that once you have a certain investment account balance you'll be content and won’t have to stress anymore. While there's nothing wrong with having an aiming point, it's important to not place too much emphasis on a precise dollar amount because it won't actually feel different once you're there until you internalize what enough is for you on a general level. Two million dollars may sound like enough when you initially set the goal, but it may not “feel” like enough once you obtain it.
Getting a tax refund is good but not getting one isn’t necessarily bad
The third myth is that getting a refund or owing taxes indicates good versus bad tax planning. For some of you, seeing the amount you had to pay in taxes last year may still be lingering, while others may have moved on. Regardless of where you stand, there's often a lot of confusion around taxes and what represents good versus bad tax planning. When you look at your taxes and file your tax return, the main number you focus on is the amount of refund you'll receive or the amount of taxes you will owe. However, the difference between getting a refund or owing taxes is simply the difference between what you withheld for taxes throughout the year and what your actual tax liability was. This is where you want to understand the difference between tax preparation, which is reactive, and tax planning, which is proactive.
Saving with permanent life insurance and financial rules of thumb
The fourth myth is thinking that permanent life insurance can be the best of both worlds, combining life insurance coverage and investing at the same time. The reality is that permanent life insurance typically results in you overpaying for insurance and investing additional cash into a product with a lower than average expected return. For most physicians, a better approach here is to purchase term life insurance and invest the saved premiums elsewhere.
The fifth and last myth is around general rules of thumb, such as thinking you’re on track for retirement if you just save 20% of your income. While 20% is a fair starting point, you need to understand how that equates to a dollar amount and whether that savings amount is enough to meet your unique situation and goals. It may be spot on, but it could also be more or less than needed to reach financial independence in the timeframe that works best for your life.
Resources & People Mentioned
- Download our guide: The Toolkit for Optimizing Your Finances as an Employed Physician
- Download our guide: The Financial Checkup