There are all sorts of misconceptions about finance, business, taxes, investing and economics that people believe. Sometimes I’ve been guilty myself. So, here are 5 of my current pet peeves and I’d like to hear what yours are as well:
- “He Only Donates to Charity Because He Needs the Writeoff” – This is utter nonsense. I’ve heard this enough times now that I have to call it out. No good deed goes unpunished and that certainly goes for virtually anything that well-off people do. A lot of Americans are under the mistaken belief that it is somehow financially beneficial for wealthy Americans to use the tax code to their advantage by donating to charity. No matter what your tax rate (even if it were 100% confiscation!), you would never have a net positive by donating money. You simply get to avoid paying taxes on the “amount” you donate. I’ll make it simple. If you made a million bucks and paid half in taxes (sad but true with state, local, Obamacare, etc.), you’d be left with $500,000 net cash to spend. But if you donated $100,000 as well, you’d get to deduct $100,000 off your income, so you’d only have been taxed on $900,000 from federal. Assuming only federal writeoff of ~40%, then you’d pay $40K less in taxes. So, you’d take home $$460,000 after that deduction. But that’s still a hell of a lot less than $500K! See how that works? Whoever thinks it is some sort of loophole or benefit to the rich to donate money, please forward this to them.
- “My Car Payment Will Stay the Same!” – People do all kinds of dumb things when buying cars. Aside from the complete fear of doing research in advance and negotiating hard, they are also under the mistaken belief that as long as their car payment on the new car is the same as their old car payment, they are somehow “winning”. They just look silly, really. If you had a 4 year loan on a car, drove it for 2 years (while paying 2 years of loans and probably just barely breaking the depreciation loss barrier) and then trade it in, a typical car salesman tactic is to ask what your old payment is, or what your budget is. That’s one of the worst (and most offensively stupid) questions someone could ask me during a transaction. Aside from the fact that what you have available in your budget is irrelevant to whether you’re getting a good deal or not, salesmen can modify all sorts of terms to get your new monthly payment to match your old one – all at YOUR EXPENSE! They can extend the term out to 5 years, they can have you increase your down payment, etc. This is foolish thinking. Once you’ve selected a make and model that you want, you should research what other people have paid to get a sense for what you should expect to pay. You can use all sorts of resources online and tactics like going dealer to dealer or even online pre-bidding before even setting foot in a showroom, and then shoot for that final sales price. Basing a purchase on a monthly number is only going to cost you more than what you’re getting in the long-run.
- I Can Beat the Market – Stop. Just stop. You can’t and you won’t. So, you bought Apple at $300. That’s great. I bought it at $90. And I’m still not beating the market over a decades-long period. Have I picked some winners? Sure! I used to make occasional stock recommendations and I’m down to just 1 per year now (my 2013 stock pick is up 23% (more than double the S&P500) and it’s the only stock I bought all year). But people mistake discreet small successes with long-term average returns. When you factor in that nobody talks about all the stocks they’ve lost money on, all the commissions and taxes on capital gains along the way, most of us would be better off in low-cost index ETFs and mutual funds (see ETF Base to learn all about ETF investing). And if there’s a “stockbroker” who claims he beats the market? Run. Because aside from that fact that he or she can’t either, you’re going to pay for the priveledge.
- I Heard the Market’s About to Crash – Should I Sell out of Stocks? – My mom just sent me this email. She said she just watched a video online about a pending market crash and wanted to know if she should liquidate all the equities in her retirement account. I didn’t see the video, but these videos are usually by idiots with no accountability for all their horrible calls and probably trying to sell gold. How’s that gold trade worked out for all the permabears anyway? As of this week, gold is now as low as it was 3 years ago, and sinking fast. Listen, the world is full of blowhard idiots with a really great-sounding thesis. CNBC rotates them in and out. They’re all losers. Every last one of them. They come on and tout a stock thesis or asset class thesis and then they cite their past “successes” when one call comes true. But there’s no mention of all the bad calls they made. People need to have a long-term strategy and stick to it, no matter what their stockbroker friend told them, Jim Cramer, or the 79th version of “end of America” ads I used to hear on Sirius daily.
- Multi-Level Marketing – This is the worst. MLMs are the sleaziest of sleazebags and they’re legal because they sue the crap out of anyone that criticizes them – and they lobby hard to ensure there’s no legislation to take them down. They also send their minions to harass and attack anyone that criticizes them (at a prior blog, I was threatened by both lawyers and members for pointing out their ridiculous scheme, and of course, the company’s fizzled out by now). So, I won’t mention any by name, but there are hundreds of them. They tend to prey on lower income and minorities which is even more appalling, but we have a few more affluent friends who are part of one of these “business ventures” (jewelry?, early mortgage payoff “system”, etc) and while they’ve given up hitting us up to join or buy their overpriced and useless products, it’s still frustrating that smart people continue to fall for them. It goes like this. There’s this “new, exciting business venture”. You can get in on the ground floor. You can become “financially independent” and work out of your home. You’ll be a small business owner! (they all use the same language). It’s a load of crap. With most of them, you’re not selling real products that anyone wants (or you could buy similarly themed/similar quality products elsewhere for less) and they make most of their money simply by recruiting more members. These companies usually last a couple years during the growth phase and then when their members stop paying their fees and drop out because they realize they’ve invested a TON of time and money into something with no return, then the companies fade away and the same schemers behind one MLM just start up another. If you research who’s involved in past and present MLMs, it’s often the same cast of characters from the founders to lawyers, etc. The big pitch that often entices people to sign up is that “you have to act now!”. Because then you’ll be higher up in the pyramid (even though they avoid that term). It’s so slimy, I’ll never be part of one. You basically have to hound your friends and family to join so you can have some underlings to at least break even initially, and in the end, they’ll all resent you for getting them involved in the scheme. First off, recognize an MLM when you see one. And then run.
What Are The Most Foolish Things Americans Believe?
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