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4 Money Myths: The (Non)Secrets of the Rich

Most Money Myths have to do with a lie about a shortcut or a lie about safety. We yearn to become healthy, wealthy, and wise with no effort and with no risk, but it will never happen. Why else is the lottery so successful in pulling in millions of dollars? Why do people stay in jobs they hate, seeking false security? The Total Money Makeover mentality is to live like no one else so later we can live like no one else. A price has to be paid, and there are no shortcuts. While no one goes looking for needless pain, risk, or sacrifice, when something sounds too good to be true, it is. The myths in this chapter are rooted in two basic problems. First is risk denial, thinking total safety is possible and likely. Second is easy wealth, or looking for the magic key to open the treasure chest.

Risk denial takes several forms in the world of money. Sometimes risk denial is a kind of laziness, when we don’t want to take the energy to realize that energy is needed to win. Other times, risk denial is a kind of surrender in which we settle for a bad solution because we are so beat down or beat up that we wave the white flag and do something stupid. At still other times, risk denial can have an active component when we search for a false security that simply doesn’t exist. This is the risk denial of someone who keeps a job he or she hates for fourteen years because the company is “secure,” only to find life turned upside down by a layoff when the “secure” company files for bankruptcy. Money denial always involves an illusion, followed by disillusionment.

The second underlying problem is the quest for easy wealth. Quick, easy money is one of the oldest lies, or myths, in the book of the human race. The secrets of the rich don’t exist, because the principles aren’t a secret. There is no magic key, and if you are looking for one, you’ve set yourself up for pain and the loss of money. One of my pastors says that living right is not complicated; it may be difficult, but it is not complicated. Living right financially is the same way—it is not complicated; it may be difficult, but it is not complicated.

In addition to Debt Myths, we must dispel several other Money Myths as part of your Total Money Makeover. Most of these Money Myths are rooted in the problems we have already discussed: denial and/or a shortcut mentality.

Myth: Everything will be fine when I retire. I know I’m not saving yet, but it will be okay.

Truth: The Cavalry isn’t coming.

How can I put this delicately? There is no shining knight headed your way on a white horse to save the day. Wake up! This is the real world where sad old people eat Alpo! Please don’t be under the illusion that this government, one that is so inept and dim-witted with money, is going to take great care of you in your golden years. That is your job! This is an emergency! The house is on fire! You have to save. You have to invest in your future. You won’t be FINE! Do you get the picture?

Things won’t be okay unless you make them that way. Your destiny and your dignity are up to you. You are in charge of your retirement. We’ll talk about how to take charge of it later in the book, but for now, you’d better be 100 percent convinced that this area deserves your full attention right now—not tomorrow or pretty soon.

Myth: Gold is a good investment and will cover me if the economy collapses.

Truth: Gold has a poor track record and isn’t used when an economy collapses.

The truth is that gold is a lousy investment with a long track record of mediocrity. The average rates of return tracked as far back as Napoleon are around 2 percent gain per year. In recent history, gold has a fifty-year track record of around 4.4 percent, about the same as inflation and just above savings accounts. During that same time frame, you would have made around 12 percent in a good growth-stock mutual fund.

It is also important to remember that gold is not used when economies fail. History shows that when an economy completely collapses, the first thing that appears is a black-market barter system in which people trade items for other items or services.

Myth: I can get rich quickly and easily if I join these groups, buy this DVD set, and work three hours a week.

Truth: No one develops and makes a six-figure income on three hours a week.

Have you seen the midnight infomercial about ordering the DVD set with the “secrets” so that “you, too,” can become wildly wealthy by buying nothing-down real estate or by learning the hidden formula to success in the stock market? Small-business ideas abound, such as getting rich at home by stuffing envelopes and doing medical billings. Be realistic. Envelopes are stuffed by machines at a rate of thousands a minute and at a cost of tenths of a penny; they are not stuffed by a stay-at-home mom trying to supplement the family income! One person in every thousand who attempt the oversold, overdone medical-billing concept does so at a profit. The legitimate, profitable medical biller is usually someone who came from the medical industry, not someone who got ripped off taking a weekend course. Don’t fall for this!

Real estate can be purchased for nothing down, but then you owe so much on it that there is no cash flow. I bought foreclosure and bankruptcy real estate for years and know it can be done, but the players with cash are the ones who win. The good deals are one in two hundred if you are experienced and very good at the business; I worked sixty hours a week, and it took me years to get to a six-figure income in real estate.

The stock market attracts the brightest business minds on the planet. These meganerds study, track, chart, eat, and breathe the stock market, and have for generations. Still, every other year, a book or con artist comes out claiming to have “discovered” little-known keys, patterns, or trends that will “make you rich.” The Beardstown Ladies published a New York Times best-seller about their cute little quilting group who started investing and discovered how to get unbelievable returns. As it turns out, the whole thing was a fraud; they never got those reported returns, and the publisher got sued.

It is really hard to sell books and DVDs that teach the necessity of lots of hard work, living on less than you make, getting out of debt, and living on a plan, but I’m trying—because it’s the only way that will work. Meanwhile, the sooner you understand that no one gets rich quick by using secret information, the better.

Myth: Cash Value life insurance, like Whole Life, will help me retire wealthy.

Truth: Cash Value life insurance is one of the worst financial products available.

Sadly, over 70 percent of the life insurance policies sold today are Cash Value policies. A Cash Value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible. Your insurance person will show you wonderful projections, but none of these policies perform as projected.

Let’s look at an example. If a thirty-year-old man has $100 per month to spend on life insurance and shops the top five Cash Value companies, he will find he can purchase an average of $125,000 in insurance for his family. The pitch is to get a policy that will build up savings for retirement, which is what a Cash Value policy does. However, if this same guy purchases twenty-year level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100. Wow. If he goes with the Cash Value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses. Expenses? How much? All of the $93 per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds. These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers.

Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of the policy, the $125,000 of our example. The truth is that you would be better off to get the $7 term policy and put the extra $93 in a cookie jar! At least after three years you would have $3,000, and when you died your family would get your savings.

As you continue in this book and learn how to have a Total Money Makeover, you will begin investing well. Then, when you are fifty-seven and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured. That means when your twenty-year term is up, you shouldn’t need life insurance at all— because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance.

Myth: Playing the lottery and other forms of gambling will make you rich.

Truth: The lottery is a tax on the poor and on people who can’t do math.

This is a rip-off instituted by our government. This is not a moral position; it is a mathematical, statistical fact. Studies show that the zip codes that spend four times what anyone else does on lottery tickets are those in lower-income parts of town. The lottery, or gambling of any kind, offers false hope, not a ticket out.

Myth: Mobile homes, or trailers, will allow me to own something instead of renting, and that will help me to become wealthy.

Truth: Trailers go down in value rapidly, making your chances for wealth building less than if you had rented.

People who buy a $25,000 double-wide home will in five years owe $22,000 on a trailer worth $8,000. Financially, it’s like living in your new car. Please don’t kid yourself on this. Call it “manufactured housing,” put it on a permanent foundation, add lots of improvements around the yard, and it is still a trailer when you are ready to sell it.

If the typical consumer considering buying your home can walk up and tell it was ever a trailer in any form, your home will go down, not up, in value.

The only exception to the “no trailers” rule is Ron’s plan. Ron graduated from Financial Peace University and was on track for a Total Money Makeover. Ron and his wife prayerfully decided to sell their nice $120,000 home on which they owed only $50,000. They bought a small farm and a very used $3,000 trailer. With no payments and an income of $85,000, they saved and built a very nice, paid-for $250,000 home in just a couple of years.

Myth: Prepaying my funeral or my kids’ college expenses is a good way to invest and protect myself against inflation.

Truth: Plans for prepaid funerals and college expenses give low rates of return and put money in the other guy’s pocket.

When you prepay something, your return on investment (interest) is the amount the item will go up in value before you use it. In other words, by prepaying, you avoid the price increases, and that is your return. Prepaying items is like investing at the item’s inflation rate. For example, prepaying college tuition will save you the amount tuition goes up between the time you lock in and the time your child begins his college education. The average inflation rate for tuition nationally is about 8 percent, so prepaying tuition is like investing money at 8 percent. That is not bad, but mutual funds will average about 12 percent over a long period of time, and you can save for college tax-FREE. (More about college saving later in your Total Money Makeover.)

The same concept is true for prepaid burial plans. Preplanning the details of your funeral is wise, but prepaying is unwise. Sara, age thirty-nine, paid $3,500 for a prepaid funeral. Why? If she were to invest $3,500 in a mutual fund averaging 12 percent, upon an average death age of seventy-eight, Sara’s mutual fund would be worth $368,500! I think Sara could be buried for that, with a little left over, unless of course she is King Tut!

Myth: I don’t have time to work on a budget, retirement plan, or estate plan.

Truth: You don’t have time not to.

Most people concentrate on the urgent in our culture. We worry about our health and focus on our money only after they’re gone.

John Maxwell has the best quote on budgeting I have ever heard. I wish I had said it: “A budget is people telling their money where to go instead of wondering where it went.”

Earl Nightingale, motivational legend, said that most people spend more time picking out a suit of clothes than planning their careers or even their retirements. What if your life depended on how you managed your 401k or whether you started your Roth IRA today? Actually, it does— because the quality of your life at retirement depends on your becoming an expert in money management today.

Myth: The debt-management companies on TV, like AmeriDebt, will save me.

Truth: You may get out of debt, but only with your credit trashed.

Debt-management companies are springing up everywhere. These companies “manage” your debt by taking one monthly payment from you and distributing the money among your creditors, with whom they’ve often worked out lower payments and lower interest. This is not a loan as with debt consolidation. Sometimes people get the two confused. Both are bad. Companies like AmeriDebt and Consumer Credit Counseling Services can help you get better interest rates and lower payments, but at a price. When you use one of these companies and then try to get a Conventional, FHA, or VA loan, you will be treated the same as if you had filed a Chapter 13 Bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t do it.

Another problem with debt management by someone else is that your habits don’t change. You can’t have someone lose weight for you; you have to change your exercise and diet habits. Handling money is the same way; you have to change your behavior. Turning all your problems over to someone else treats the symptom, not the problem.

Our firm does financial counseling and trains counselors around the nation for referrals. We will not handle your money for you. We lead you into a mandatory Total Money Makeover. We are not babysitters.

Of the debt-management companies, Consumer Credit is the best. They do the most thorough job, and they are the most powerful in the renegotiation of your debt. You still destroy your credit by using them, though, so don’t do it; but if I absolutely can’t talk you out of it, they are the one to use. AmeriDebt has one of the worst business reports of any bad management compant, stay away.

Myth: I can buy a kit to clean up my credit, and all my past misdeeds will be washed away.

Truth: Only inaccuracies can be cleaned from credit reports, so this is a scam.

You can’t have anything taken off your report unless the item is inaccurate. If you have an inaccuracy that needs to be removed, you need to write a letter pointing out the error and ask them to correct this error right away. Accurate bad credit stays unless you lie. Lying for the purpose of getting money is fraud. Don’t do it.

Clean your credit with a Total Money Makeover. I will show you how to live under control and pay cash for stuff so you don’t need credit, and over time your credit will clean itself.

Myth: My divorce decree says my spouse has to pay the debt, so I don’t.

Truth: Divorce decrees do not have the power to take your name off credit cards and mortgages, so if your spouse doesn’t pay, be ready to. You still owe the debt.

If your ex-husband keeps his truck that you both signed for and then doesn’t make the payments, your credit is damaged, the truck gets repo’ed, and you will get sued for the balance.

If you are going to leave a marriage, make sure that all debts are refinanced out of your name or force the sale of the item. Don’t have the attitude: “I don’t want to make him sell his truck.” If you are that much in love, don’t get divorced; but if you are walking away, make it a complete, clean break even though it’s painful now. The only other option is mega-risk, and you can count on heartache and even more anger coming your way.

Myth: That collector was so helpful; he really likes me.

Truth: Collectors are not your friends.

Your Total Money Makeover will cause you to pay your debts. I want you to pay what you owe, but collectors are not your friends. Any deal, special plan, or settlement you make with collectors must be in writing BEFORE you send them money. Otherwise, you will find that you don’t have a deal, that they lied. Never allow collectors electronic access to your checking account, and never send postdated checks. They will abuse you if you give them this power, and there will be nothing you can do, because you owe them money. Clear?

Myth: I’ll just file bankruptcy and start over; it seems so easy.

Truth: Bankruptcy is a gut-wrenching, life-changing event that causes lifelong damage.

I have been bankrupt and have worked with the bankrupt for decades, and it is not a place you want to visit.

Bankruptcy is listed in the top five life-altering negative events that we can go through, along with divorce, severe illness, disability, and the loss of a loved one.

Chapter 7 Bankruptcy, which is total bankruptcy, stays on your credit report for ten years. Chapter 13 Bankruptcy, more like a payment plan, stays on your credit report for seven years. Bankruptcy, however, is for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. Ever. If you lie to get a loan because your bankruptcy is very old, technically you have committed criminal fraud.

Most bankruptcies can be avoided with a Total Money Makeover. Your Total Money Makeover may involve extensive amputation of stuff, which will be painful, but bankruptcy is much more painful.

Myth: I can’t use cash because it is dangerous; I might get robbed.

Truth: You are being robbed every day by not using the power of cash.

We teach people to carry cash. In a culture where the salesclerk thinks you are a drug dealer if you pay with cash, I know this suggestion may seem weird. However, cash is powerful. If you carry cash, you spend less, and you can get bargains by flashing cash. Linda e-mailed my newspaper column, complaining that she would get robbed if she carried cash. I explained to her that crooks don’t have X-ray vision to look into her pocket or purse. The crooks assume that your purse is like all the others filled with credit cards that are over the limit. Look, I’m not making light of crime. There’s a chance you may get robbed, because people do get robbed. And if it happens to you, the cash will be taken. But, trust me, you need to be far more worried about the danger of using credit cards than the danger of being robbed while carrying cash.

Myth: I can’t afford insurance.

Truth: Some insurance you can’t afford to be without.

Today as I went to lunch, I met Steve and Sandy in my reception area. They came by to say thanks. What for? This young couple in their twenties listens to our radio program, and because I constantly push people to get the right kinds of insurance, they did. This year they got term life insurance and a Medical Saving Account health-insurance policy. “Good thing we did what you said to do,” said Steve as he pulled off his cap to reveal a shaved head with a big scar across the top. “What in the world happened?” I asked. The scar was from a biopsy that revealed inoperable brain cancer. Sandy smiled and said, “The health insurance has already paid over $100,000 in bills, and we would be sunk if we hadn’t followed through as you push all the time.” Also, Steve was uninsurable, so he was thankful to have his term life insurance in place. By being responsible and buying the right kinds of insurance, they had covered life and death, which we all have to do.

We all hate insurance, until we need it. We pay and pay and pay premiums, and sometimes we feel insurance-poor. But you must have insurance in some basic categories as part of a Total Money Makeover:

• Auto and Homeowner Insurance—Choose higher deductibles in order to save on premiums. With high liability limits, these are the best buys in the insurance world.

• Life Insurance—Purchase twenty-year level term insurance equal to about ten times your income. Term insurance is cheap and the only way to go; never use life insurance as a place to save money.

• Long-Term Disability—If you are thirty-two years old, you are twelve times more likely to become disabled than to die by age sixty-five. The best place to buy disability insurance is through work at a fraction of the cost. You can usually get coverage that equals from 50 to 70 percent of your income.

• Health Insurance—The number-one cause of bankruptcy today is medical bills; number two is credit cards. One way to control costs is to look for large deductibles to lower your premium. The HSA (Health Savings Account) is a great way to save on premiums. The high deductible creates a much lower premium, and this plan allows you to save for medical expenses in a tax-free savings account.

• Long-Term Care Insurance—If you are over sixty, buy Long-Term Care insurance to cover in-home care or nursing home care. The average nursing home stay costs $40,000 per year, which will crack and scramble a nest egg in a heartbeat. Dad in the nursing home can use up Mom’s $250,000 savings in just a few short years. Make your parents get it.

Myth: If I do a will, I might die.

Truth: You are going to die—so do it with a will.

Estate planners tell us that 70 percent of Americans die without a will. Dumb, really dumb. The state, known for its financial prowess, will decide what happens to your stuff, your kids, and your financial legacy. The proverb says, “A good man leaves an inheritance to his children’s children” (Prov. 13:22 NKJV). I am a pragmatist, and so I don’t understand all the fretting over a will. A will is a gift you leave your family or loved ones. It is a gift because it makes the management of your estate very clear and light-years easier.

You are going to die, so go out in style, and die with a will in place.

We’ve revealed Debt Myths and Money Myths. If you have carefully read and understood why these myths are untrue, I have great news for you. Your Total Money Makeover has already begun! The Total Money Makeover is a remaking of your view of money so that you permanently change how you deal with money. You must walk to the beat of a different drummer, the same beat that the wealthy hear. If the beat sounds common or normal, evacuate the dance floor immediately. The goal is not to be normal because, as my radio listeners know by now, normal is broke.