MONEY: The Latte Lie and Other Myths

MONEY: The Latte Lie and Other Myths

In recent times, everyone is fixated on improving their personal finances. They want an excellent idea that covers everything about managing, saving, and investing their money. Personal finance is all about achieving personal financial goals. Everybody has personal financial goals that they want to fulfil and they often fail to do so because they are forced to believe many unfounded personal myths regarding finance. These baseless myths must be busted in order to make everyone’s life easier.

These ill-founded beliefs have become so prevalent in recent times that even personal finance professionals hold forth these false notions, thinking that they are giving the right guidelines to their clients. If these misapprehensions regarding personal finance are not put right, they can engender a lot of financial problems for you in the long run. It’s high time that we differentiated between what’s fiction and what’s fact.

You need to make yourself financially literate if you want to meet your short-term and long-term personal financial goals. By ignoring the fallacies associated with personal finance, you can make the most of your money. From retirement planning to saving money for your child’s education, you can have it all if you punctiliously plan your finances. You need to be apprised of all the false notions and all the right ones.

People genuinely want to improve their finances. This sentiment is common. However, they can’t even take the first step right because they frequently receive faulty advice from people regarding personal finance. If you want to move up on the ladder of personal financial success, you need to shut your eyes to these ill-founded personal finance notions:

Myth 1: The Latte Lie

“Giving up that Latte today will let me buy that Porsche tomorrow.”

This is one of the most groundless notions associated with personal finance. This idea asserts that if you give up small expenses and invest that money, you’ll be able to gather a lot of wealth. This notion is somewhat correct but it does not speak the entire truth. Giving up your latte can help you buy a Porsche only if you have given up more than a hundred thousand lattes and have constantly invested that money over time. People often believe that relinquishing small expenses for a while can help them buy a Porsche. This is never going to happen. Buying a Porsche is going to cost you much more than your lattes. In order to make it big, you need to do it for decades. This specific notion of relinquishing your everyday espressos only stands a chance if you manage to do it consistently over decades.

Myth 2: A Bank Savings Account as the most prudent place to keep your money.

“It’s a wise decision to keep your money in a savings account.”

Yes! It is undoubtedly a wise decision to save money but, a bank savings account is not really the most prudent option for that. When you save money, you are basically protecting your money and a savings account does quite the opposite to your money. People often think that a savings account protects their cash. It is deemed as a secure place for keeping money by many. On the other hand, the fact that they are oblivious to is that their money can actually lose its purchasing power over time. We live in a world where the economy is continuously fluctuating. One moment, it is depressed and the other moment, it is booming. Investors are often subjected to financial ordeals due to inflation. In these unpredictable economic times, bank savings accounts rates often lag behind inflation. As prices typically go up in the future, inflation can decrease the value of your savings. This happens over time and is particularly observable with cash. You don’t actually lose money this way but end up with a much smaller net worth. Keeping money in bank may earn you interest that offsets some of the upshots of inflation. Banks typically pay higher interest rates when inflation is outrageous. An Investor can lose a lot of money if the inflation rate overshoots the interest earned on a bank savings account. The reduction in the buying power of your money corroborates the fact that a bank savings account is not as prudent as deemed by people. It is crucial to strategize according to your time horizon and risk tolerance. You need to come up with a strategy that perfectly suits your personal goals.

Myth 3: Saving equals Earning

“A penny saved is a penny earned.”

Many assume that this phrase is telling you to spend your money carefully and not wastefully. This is true to some extent but, that is not all. People are extremely quick to think that ‘scrimping and saving’ is the answer to all their distressing financial problems. What Benjamin Franklin actually meant is that a penny saved is two-pence clear. A penny that has not been spent can never really equal a penny earned in revenue. Business is more of a game of balance sheets than income statements. Here is some magical economic thinking involved. What Benjamin Franklin meant by saving a penny is rescuing money from being wasted in ‘being saved’.

Two-pence clear actually means:  If you save a penny by not buying something foolish, you get two pennies free from debt. A foolish debtor always runs in the opposite direction in the ultra-competitive marketplace. This way every penny ends up on somebody else’s balance sheet. If you make inessential expenditures, you fall two pennies behind those who never spent unnecessarily.

The lack of financial literacy that is racking the American economy often gives rise to these misattributions. Younger Americans are actually moving faster in the opposite direction. They are going deep into this commercial debtors’ river. The gap between their assets and their liabilities is much larger than older Americans.

Long story short, Franklin basically told us to not spend a penny on buying something on credit. Because when you buy something on credit, we spend one penny for the item and one penny for the credit. All Franklin was encouraging is: Avoid owing money!

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