By Rita Cool, certified financial planner at Alexander Forbes
Throughout life you will come across financial ideas that you assume must be correct because everyone is doing it. You might believe that unless you follow suit, you are not successful.
By doing this, your brain is taking a shortcut in deciding by assuming that everyone else who is doing these things has done the research, checking the benefits and negatives. However, it might not be the best solution for you. For example, people may buy or sell shares because everyone else is doing it, not necessarily because it is a good or a bad share.
Here are financial beliefs that might not be right for you:
Myth 1: Property is always a great investment
Why property is seen as a good investment …
Property gives you an asset that can increase in value and could also give rental income in certain cases. It can be financed at a reasonable interest rate over a long term, which is classified as “good debt” as you will have a large asset when the debt is paid off.
… but you could also lose money when owning property
You always hope that the value of your property will increase over time and that you can sell the property for a profit. Unfortunately, this does not always happen if the area becomes less desirable over time, or if you have put too much money in the investment.
Have you considered the risks of renting out a property?
There is a difference between buying a house for yourself to live in and buying additional properties to rent out for investment purposes.
Possible risks:
- You are not guaranteed to get a good tenant or any tenants at all during periods.
- If your tenants don’t pay the rent, there will be costly legal fees to evict them.
- Tenants might also damage the property, which will cost money to fix.
Investing in property shares instead of physical property
Once you have bought your primary house it might be easier to invest in property shares instead of physical property. This can reduce some of the risk and effort involved in managing an additional property. Do your homework before you choose to invest in property and don’t just do it because everyone is doing it.
Myth 2: You have to own a house
Does it help to downsize property at retirement?
Buying a house gives you security and you can calculate whether a bond repayment is cheaper than a rental.
Consider:
- A house locks in a large amount of your money, which could be used to provide an income and pay for the rent if you need it.
- Your new property probably costs you the same or more than your older, bigger property and there are additional transfer costs and legal fees.
- If you own the property, you also still have maintenance and you might want to delegate that as you get older.
- Will this property be your last property or is it an interim destination before you move into a retirement complex with frail care?
- If you are not going straight to a retirement complex, you will not necessarily benefit from the property appreciation and potentially only your beneficiaries will realise the benefit.
Why not consider renting after retirement?
Not only does it transfer the burden of maintenance to the owner of the property but you can also move into a furnished property and move where and whenever you want to. Perhaps while you are a younger retiree you would like to see the world for a while and then move into a retirement complex or in with family when you are older. As a retiree, you can structure your retirement, such as where you want to stay, however you want to. If you are considering moving to a different province or country after retirement, it would be wise to rent for a while until you have looked at the areas that you would like to live in.
Myth 3: You have to own a car
Contrary to popular belief a car is not an asset but an expense. Not only do you have the cost of buying or paying off the premium monthly, including interest, but you need to pay for fuel, insurance, annual registration fees and maintenance. While a car is convenient to have, is it really necessary to own one?
When you think about buying a car take into account all the costs to see if you can afford it. If you can only afford the premium and petrol, what happens if you have an accident and you can’t fix the car? Compare the costs per kilometre for the different types of ownership and price points compared to alternatives like ride sharing or ride hailing solutions. Can you consider renting a vehicle for longer trips?
Myth 4: You must buy a new car for retirement
As you get closer to retirement you might feel that you need to buy a new car for retirement that you can pay off before you retire, or buy a new car at retirement. Do your calculations carefully for these options:
- Can you continue to drive your existing car for a few more years and save the premiums until you really need it?
- Can you afford to lock in a large portion of your money at retirement in a car or is it more important to pay monthly expenses like food and electricity?
- Can you redirect the money you wanted to spend on financing a car to saving for retirement?
If you do need a car after retirement, you have put away the money and can afford to buy the car for cash instead of financing it or giving up some of your retirement savings.
Myth 5: You have to save or invest
Saving in itself is not a myth, but when and where you save is important. Before you invest you need to save and before you invest you need to look at your debt. Don’t invest if you have a lot of expensive debt that is costing you much more in interest than the return you can get on an investment. Once your debts are under control you can consider investing in your retirement funds, unit trusts or a tax-free savings account. You still need a safety net for an emergency but once you have that, see if you can clear your debt with every available rand you have. By clearing your credit card you also create a further safety net for emergencies.
Myth 6: Be loyal to a service provider that you have been with for a long time
Although it is not a good idea to chop and change products and providers, you don’t have to stay in a product or use a service provider who no longer benefits you. It could be that your service provider is not the cheapest or most efficient or up to date with benefits. Or you feel an obligation towards a person who has given you service for a long time but can’t offer you the best solution for your current needs. Unless your products work for you and give you the best value (note, which is not necessarily the cheapest product), consider another option that benefits your situation. You might be losing out by not reassessing your financial structures, be it investments, banking products or insurance.
