The top three worst money myths

Neil Faulkner reveals three common money myths that cause a great deal of damage to your finances.

The hunt for the Loch Ness monster lasted from the early 1930s right up to the most comprehensive and conclusive attempt in 2003. However, the search could arguably have ended 22 years ago today, on 11 October 1987. 24 boats with sonars gave up after scouring the Loch and finding no monster. However, Operation Deepscan did receive three 'blips' from what could have been very large fish or seals. The researchers believe this vindicates the people who think they saw a monster.

Nevertheless, the loch still gets visitors hoping to see the monster and, even if they fail to spot it, they will enjoy the beautiful scenery. This was a fun 20th century myth and we must wonder why the beast is called a monster when it's never done anyone any harm.

I've found three blips for you myself. This time, they really are monsters causing a great deal of damage to our finances and, unlike Loch Ness hunters, I've caught them in my dragnet. Here are the three monster money myths:

Monster myth one: borrowing enables you to buy more stuff sooner

People often borrow because they want to buy more things sooner. It's true that if you borrow £1,000 today, that's £1,000 more to spend immediately than you otherwise could. However, borrowing comes at a cost. That cost isn't just, say, 10% interest or a 3% fee. Let's not shrug the cost off with reasonable-sounding rates and percentages!

The real cost is that you will be able to buy less stuff. Indeed, the more you borrow (or, more specifically, the more interest and fees you pay) the less stuff you'll be able to buy in your lifetime.

Furthermore, in, perhaps, six months, someone who decided to save up rather than borrow will have caught up with you. What's more, they will then go on to buy more than you, sooner than you, because they've not had to pay any interest. Assuming your spare incomes are identical throughout your lives, that person will always have more stuff than you and will get to buy it earlier.

The reality is, the less you borrow and the less debt interst you pay, the more you'll be able to buy - and the sooner you'll be able to buy it.

There are a few specific exceptions where borrowing makes sense. Read more here.

Monster myth 2: we should switch energy after price change announcements

When one supplier says it's changing prices, the other five tend to follow over the next two or three months. It is said (by customers and financial journalists alike) that we should not switch gas and electricity tariffs when the big suppliers are announcing major price changes in the press - we should wait till they're all finished to find out which is cheapest.

In practice, however, these major announcements impact just a few tariffs. When price reductions were announced this year between February and May, for example, the cheapest tariffs available were exactly the same before and after the changes. This means you would have actually paid more if you waited, because you would have stayed on a more expensive tariff for the remainder of the cold months. You see, the energy suppliers know our tactics and are using them against us.

The real cynics spread an even more costly myth: that switching saves no money. The argument they use is that all the suppliers copy each others' price movements, which is to some extent true. However, most suppliers have hundreds of tariffs and they're not equal. If you don't switch every now and then your supplier will let your tariff move upwards in price faster than new tariffs, and it will give discounted tariffs to new customers only.

These are the same techniques that are used in the finance industry, with just the newest customers getting good savings interest rates or cheap insurance prices, for example. Loyalty to your energy supplier is punished to the tune of £200ish, on average.

Monster myth 3: we must save a huge amount for our retirements

The industry wants us to invest more, because that means they earn more in fees and commission. It's certainly true that if you start late then you're going to need to invest much more to reach a sizeable retirement pot. However, if you start saving with decades to go, you won't need to invest such large amounts.

If you follow my four-step guide to a comfortable retirement, you can work out for yourself how much you'll need when you retire and how much you need to save. For most of you, it'll be a lot less than you think.

On a related myth, professional fund managers want us all to believe that they are best-placed to turn our retirement savings into a big enough pot at the end. What may amaze you is that the majority of them don't do well compared with funds called index trackers, which simply use computers to copy the movements of the market. What's more, even during this downturn, managed funds have still not done well, on average!

The returns of the market may frighten you at present, having returned not a great deal in the last ten years. However, despite the ups and downs of stock-market investing, in 90% of rolling ten-year periods since the beginning of the 20th century, the stock market has performed better than cash in savings accounts, and over 18-years or longer it has almost always been very rewarding. If you're looking at retirement in many years, the risk doesn't seem all that frightening.

Switch to a cheaper debt so you can buy more in your lifetime!

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