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Eight great financial planning myths busted

1. Super is an investment class: How many times have you heard people say “I don’t believe in super”?

If I had a dollar for every time I’d heard that in my almost 20 years in this game, I’d have my feet up on a beach somewhere by now, not worrying about how I am going to afford private school fees for my children.

The fact is that super is just a holding structure. And what is there not to “believe in” about a holding structure that saves you tax on money going in and will provide most people an environment where they will never pay tax on their income from the time they retire until their last days?

If the value of your investments rises of falls, it has nothing to do with it being in super, and everything to do with how that particular investment has performed.

2. Tax deductions are a good reason to make an investment: Having your investment decisions driven by the tax benefits they derive is a shaky foundation for anyone wanting to build a solid portfolio.

Ask yourself whether the investments meet your requirements for income and capital growth, whether they are accessible when you need them, if the entry and exit costs are prohibitive for your investment timeframe — and, if all else adds up then things start to look more promising.

Rushing into something for the tax deduction alone often ends in a holiday to Bali after you get your tax refund, and tears in years to come when you’re left holding the proverbial baby.

Using high tech means, the ATO is cracking down on those not paying enough

3. You only need enough life insurance to cover your mortgage: The daytime TV infomericals are often the biggest culprits of spreading this myth, what with the picture perfect family, with perfectly white teeth and matching knitted sweaters, shown making a call to the lovely call centre lady, asking about life insurance to cover the mortgage. What garbage.

I’m yet to see a grieving widow or widower happy that their mortgage is paid off but with no prospects of feeding and supporting a young family.

In addition to covering debts, a lump sum made available to provide an ongoing income stream to dependants is vital, and that’s not mentioning the importance of proper, comprehensive income protection and other lump sum insurances like total and permanent disability and trauma.

And bear in mind, often these over-the-phone bought policies are underwritten at the time of claim, therefore not guaranteeing you have a valid policy at all.

4. Bricks and mortar investments are “safe as houses”: Not all properties are the same. And this is often overlooked by rookie (and sometimes seasoned) investors.

They get sucked in on big yields (such as the boom in rents in the WA towns over the past decade), or the location of a new set of apartments, or the great tax incentives on that house-and-land package on the outskirts of some regional Queensland town.

Often, the corresponding oversupply (think big apartment building ghettos, and new estates with land as far as the eye can see), or sudden drop in demand (think Karratha and Port Hedland etc), leaves investors with a property they can’t rent or offload on their hands

Stick to the basics — limited supply, steady demand, and value-added opportunities.

Buyers could save tens of thousands of dollars with this new apartment model

5. Investing in shares is “gambling”: “I’m not a shares person”. Second only to “I don’t believe in super” in the ranks of prejudiced, unreasonable and emotional proclamations.I know where this comes from, because I’ve been there too. A hot tip. A friend, who has a friend, who has a friend who’s a geologist and knows something others don’t. Not only is this illegal (it’s called insider trading) but it’s often bulldust.

Investing in small, tightly held, obscure start-ups can provide a big pay-off if you choose the right one. But so can putting $100 on 17 black.

This is not investing, it is speculating. Not quite gambling, because there is some thought or story to support the decision. But it is backing a potential winner and hoping for the best.

Contrast this to investing in big, stable, established companies with a track record of producing good, in-demand products, with a profitable business model.

These companies aren’t going to disappear overnight and provide a solid foundation for some good, long-term portfolio and wealth building.

6. This amazing investment I’ve made will solve all my problems: For the average punter, building wealth doesn’t come from some supposedly amazing investments or the double-digit returns they make.

They build wealth by limiting their spending, paying off debts and investing wisely, regularly and conservatively.

7. The wealthiest people are the ones who earn the most: Some of the wealthiest clients I’ve worked with over the years have been very modest wage earners.

But they’ve followed the principals outlined in point 6, and have been frugal and disciplined, brave with borrowing to buy assets, and diligent in paying them off as soon as possible.

On the other hand, some of our supposed “high flyer” clients have become victims of “lifestyle creep”, where the luxuries they allow themselves as payback for their hard work become the norm. Big houses, nice cars, private schools and holidays.

I’m no advocate for living like a pauper if you don’t have to – in fact, one of the biggest issues with those who understand the concept of delayed gratification is that they delay it so long it’s usually their children who benefit from the hard work and not them.

8. Financial planning fees are expensive: If you think hiring a professional is expensive, just wait and see what an amateur will cost you. Good-quality advice doesn’t come free but the value it can add to your end result can be tremendous.

Often we’ll see people look to save a few bucks by working with less skilled, cheaper service providers, or worse still, those that offer a “free” service.

And in my experience the supposedly free advice is the one that ends up costing the most.

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