We all grow up with a money personality and sometimes multiple of them.

These personalities or our beliefs about money may be inherited from either or both parents, the neighborhood we grew up in, the environment, circumstances and experiences.

There is nothing wrong or right in most cases. For example, people in Asian countries due to the scarcity environment, government apathy or other reasons develop a “money is scarce, hence save a lot” mentality. On the other hand, most western countries have a spending culture and the government encourages that to keep the economy afloat.

With all the different beliefs and personalities, there are four money myths that adds the most pain to personal finance and hence to our lives.

• You have to be Financially Right to be Happy
• You have to get the Highest returns for your Investments
• You have to do a Budget to Save Money
• You have to have a Lot of Money to be Financially Free

Nothing can be farther than the truth. As I studied more people and their personal finance behavior, the above myths confuse them and sometimes prevents them from living their best life.

You have to be Financially Right to be Happy

We think we have to be very smart with numbers, economy and decision making to manage money. But that is not true. As Morgan Housel said in “The Psychology of Money” –

“Doing well with money has a little to do with how smart you are and a lot to do with how you behave”

So it is really the behavior around money that matters how we make decisions. Not only in everyday purchases, but also in investing decisions, if we keep it simple and common sense, there is no need to be extra smart or Financially Right to lead a happy life.

John Bogle said –

“Rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance.”

If you really want to be nerdy with money, then do a simple health check of your finances.

You have to get the Highest returns for your Investments

Another myth that has been with us but proven wrong time and again. Many smart investors and individuals lost millions investing for highest returns with Bernie Madoff. The returns Bernie promised were not mathematically possible and yet, investors poured money into him.

To keep it grounded, couple of quotes by John Bogle.

“The greatest enemy of a good plan is the dream of a perfect plan. Stick to the good plan.“

“Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy. “

Instead of chasing highest returns for your investments, tie your investments to your goals. The goals will define your needed risk adjusted returns .

You have to do a Budget to Save Money

The scarcity mindset propagated by most financial coaches is that you need to do a detailed budget to live your life.

Now who loves a budget? You may, if you are starting to get serious about money, but I can guarantee you, it will be over within a few months.

When I look at a credit card statement, even if it is organized nicely into categories by a budgeting tool, I do not know whether to regret all the spending or be happy about it.

I would rather look at my goals and how far they are funded. Then just keep my monthly expenses under check, so that my goals can still be funded.

Do a macro budget, allocate money to goals and some to your expenses. Then automate it. It’s that simple.

” The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.” – Morgan Housel, The Psychology of money

I understand life happens. Some months, your expenses may go over the limit. It is a good idea to check your detailed budget only for that month, do a course correction and then get back to auto-pilot goal based budget.

You need a lot of money to be Financially Free

The usual Financial Freedom, Retire Early (FIRE) concept has given us a very simple formula. It also came from the corollary of the Trinity Study.

You need to save up 25 times your annual expense. Then you can quit working and live off the dividends or withdrawal of this money.

All sounds good, but for most people it is intimidating to think of this FIRE number, which will be in the few millions. For example, if you are spending $100,000 today, you need $2.5 million to be Financially free. And that’s only basic living, not considering the travel and medical expenses you will incur in your retirement years.

But it does not have to be that way. Financially free does not mean you don’t work. It simple means you can work in something meaningful.

Retirement and doing nothing should not be the goal. Otherwise, why do Jeff Bezos and Warren Buffet still work today?

So you need to save up only the amount of money that will help you pivot to a new career, new business or anything else that will be meaningful work for you. The monks who leave the worldly pursuits do not have a lot of money, but their purpose and joy of life keeps them going.

Make a Freedom Bucket as one of your goals.

The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

Morgan Housel in The Psychology of Money

Conclusion

We have just broken the 4 most common beliefs about managing money.

The solutions or alternatives to each of them comprise the 4 step process I take my clients through in their Financial Transformation to Prosperity.

Email info@startyourfinancesright.com if you want to know more and to drop your own myths.