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Nine Financial Planning Myths
By Mitch Swanda
Summer 2005
The Financial Planning Association reports that 86 percent of Americans believe financial planning is important to them personally, but less than half (46 percent) actually have developed a financial plan of their own.
Most of us would like to improve our personal finances. But too often, doubt and confusion about financial decisions - many times caused by misinformation - stifle our good intentions. Here, we set the record straight on some common financial planning myths that can sabotage your future:
Myth: Financial planning is all about investing.
Reality: Investing is one building block toward meeting long-term financial goals. But there's much more to a solid financial plan. Budgeting for day-to-day expenses, maintaining the right insurance coverage and making smart tax decisions are equally important. A financial planning professional can offer assistance in all of these areas.
Myth: I can't afford professional financial advice.
Reality: Guessing can cost you much more than paying for professional help. Some financial services companies offer basic financial advice for free, or full plans for as little as $200. Paying a few hundred dollars now can be a bargain to obtain a roadmap for long-term financial success.
Myth: Estate planning is only for rich people.
Reality: Individuals of all income levels should consider drafting a will, as well as creating a Durable Power of Attorney, Medical Directive and Letter of Instruction. These tools will help your family handle your affairs in the event of death or disability. If you have children, the will also should designate who will serve as their guardian if both parents die.
Myth: I don't have enough money to start investing.
Reality: You don't have to be a business mogul to have a healthy investment portfolio. Starting early is the key. You can open a mutual fund account for as little as $20, with minimum contributions of $20 per month. And some online brokerage firms allow investors to buy individual stocks with no minimum account balance. Over time, the power of compounding returns can help make your modest contributions grow.
Myth: I won't need life insurance until I'm old.
Reality: If someone depends on your income (especially young children) or if you have significant debt, life insurance is an important consideration at any age. If tragedy should occur, the insurance proceeds can help ease the burden on your loved ones to pay for remaining debt and funeral expenses, maintain their quality of life, pay for college and afford retirement. Military members are automatically covered by Servicemembers' Group Life Insurance (SGLI), which currently provides $250,000 of life insurance coverage for you and the option to purchase $100,000 of coverage on your spouse. If you opt to purchase additional life insurance from a private company, making the purchase while you're young and in good health helps you lock in lower premiums.
Myth: I have plenty of time to save for retirement.
Reality: As life expectancy increases, future retirees will need significantly larger nest eggs so they don't outlive their savings. Meanwhile, the Federal Reserve reports that Americans' personal savings rate has dropped to an all-time low: one percent. Bucking this trend and investing early is essential to take advantage of compounding returns and secure the funds you'll need through retirement. The military's Thrift Savings Plan is a good place to start.
Myth: There is a secret formula for beating the stock market.
Reality: No one can predict what the stock market will do. A winning investment strategy involves maintaining a diversified, disciplined approach to weather the ups and downs of the market through many years. Seeking professional advice and avoiding high fees may help achieve higher returns, but it's no substitute for a long-term commitment to systematic investing.
Myth: My landlord's insurance will protect me.
Reality: When a fire, burglary or other unfortunate event occurs, a landlord's insurance usually covers damages only to the building itself, leaving tenants responsible for their belongings. Studies show that nearly two-thirds of renters don't have insurance, despite the fact that the average two-bedroom apartment can contain $20,000 in personal property. Renters' insurance, also called personal property insurance, is an important consideration for anyone who doesn't own his or her home, including servicemembers in government housing.
Myth: Saving for my kids' college tuition comes first.
Reality: There are loans, grants and scholarships to help pay for college, but "retirement loans" don't exist. Parents need to save for their own retirement before socking away money for the kids' college expenses. Your kids will thank you when they don't have to support you in your old age, because providing retirement income is the single largest expense we each face.
Separating fact from fiction is an essential step toward building a sound financial plan. A well-researched plan is your most powerful ally in your quest for long-term financial security.
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Mitch Swanda served six years in the U.S. Navy and is a salaried Certified Financial Planner™ practitioner with USAA Financial Planning Services, one of the USAA family of companies. USAA is a diversified insurance and financial services organization that has served the military community since 1922.
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