MONEY financial advice

How to Become a 401(k) Millionaire

Fidelity Investments' Jeanne Thompson lays out three simple steps.

For millennials, retirement is something that feels like it’s forever away, which is a good thing when it comes to preparing for it. Jeanne Thompson, Fidelity Investments’ vice president of thought leadership, lays out three simple steps for hitting the ultimate 401(k) milestone: a million dollars.

1) Save a lot. Seriously, save as much as you can. One of the BrightScope co-founders phrases it simply as “Save until it hurts.

2) Start now. When you start saving while you’re young—Thompson says 25 at the latest—you give your money as much time as possible to mature alongside you.

3) Invest for growth. Keep your eye on stocks, and don’t shy away from aggressive investments.

Read next: The Painful Secret to Retirement Success

MONEY stocks

How China’s Stock Market Crash Affects You

Even if you (and your mutual funds) don't own a penny in Chinese stocks

At first glance, it may not seem as if troubles in China directly impact you.

For instance, the Vanguard Total International Stock fund, a popular way for investors to gain exposure to overseas stock, currently holds less than 4% of its assets in Chinese equities. Assuming you keep one quarter of your stock investments in foreign funds like this—which is a big assumption, as MONEY’s Taylor Tepper points out—that would mean China at most affects about 1% of your strategy.

Hardly worth mentioning…until, that is, you start considering the indirect impact of China.

#1) The role of Chinese consumers.

Not only is China the second biggest economy in the world, its households have finally started to have a major impact on global consumption. Right now, companies in the Standard & Poor’s 500 index of U.S. stocks generate more than 40% of their sales overseas, with Asia Pacific (led by China) accounting for about 8% of revenues.

But for some big American companies, the numbers are actually much, much higher. Right now, around 40 companies in the S&P 500 routinely break out their revenues specifically from China, according to Bloomberg. And Bloomberg reported that those firms — led by companies such as Intel and Yum! Brands — generate more than 18% of their overall sales from this one market.

The trouble is, as powerful as Chinese consumers are, they’ve just been hit with not one, but two market crashes in rapid fire succession.

The first was in the country’s over-developed real estate market, which accounts for around 15% of the Chinese economy. For nearly a year now, home prices in China’s major cities have precipitously fallen. This has put serious pressure on Chinese consumers, since around two thirds of the typical Chinese family’s wealth is tied to their homes.

When housing started going bust, Chinese investors shifted gears and started to pour their money into the stock market, which helps explain why the Shanghai composite index soared in the 12 months through mid June:

^SSEC Chart

^SSEC data by YCharts

That is, until the Chinese market started selling off, and investors lost around a third of their investments in equities in less than one month’s time:

^SSEC Chart

^SSEC data by YCharts

How big was this sell off, given the size of the Chinese market? Ken Peng and Steven Wieting of Citi Private Bank say that so far, the sell off has erased $3.3 trillion worth of wealth. “For perspective,” they say, “the value wiped out is equivalent to 14 times Greece’s GDP.”

#2) The impact on the dollar.

The crisis in China—coupled with the separate debt crisis in Greece—is already being felt by U.S. investors through the dollar. Since the Shanghai market started crashing in mid June, the U.S. dollar has gained 3% in value against global currencies, as investors seek shelter in the relatively safety of the U.S. economy.

A strong currency sounds like a good thing. But it raises the prices on goods that U.S. exporters sell abroad, crimping their sales and profits.

Even before this bounce in the dollar, U.S. companies have been having trouble lately at generating profit growth thanks to the already strong buck. As the dollar has risen in general in the past year or so, S&P 500 profit growth has slowed from a pace of around 10% last year to less than 1% this year.

If China’s market continues to plummet, expect more investors—including the Chinese themselves—to seek refuge in U.S.-denominated assets such as Treasuries, stocks, and just plain cash.

And if that’s the case, it will be that much harder for U.S. companies to boost their profits. And ultimately, that’s trouble for U.S. stocks.

MONEY

Don’t Let Greece or China Stop You From Investing Overseas

Stock prices at a brokerage office in Beijing, China, July 6, 2015
Kim Kyung Hoon—Reuters Stock prices at a brokerage office in Beijing, China, July 6, 2015

Despite all the bad news you've been hearing.

These are heady times for the global economy, and investors can be forgiven for wincing in terror as they stare at their nearest computer screen wondering why they even bother buying foreign securities.

Greece is on the verge of bankruptcy and possible exit from the euro, while China’s stock market seems to have burst. Meanwhile, the U.S. continues to add jobs at a solid clip, housing prices are jumping and consumer confidence is high. Why bother?

Despite recent developments, chances are you’re not invested enough internationally. In fact most American investors have a home bias, as Charles Schwab’s chief investment officer for equities Omar Aguilar recently told me. Now is no time for protectionism in your portfolio.

You’ve probably heard that investors have a nasty habit of buying high and selling low, as those who bailed out of stocks and into cash in 2009 can attest. This phenomenon tends to occur when well-meaning investors pay too close attention to noisy financial news and act on fear.

To be fair, folks are worried for a reason. Actually, multiple reasons:

Europe’s economic union is flux: On Sunday, the Greeks took to the polls and voted against a proposal offered by the nation’s creditors after Prime Minister Alexis Tsipras called for the referendum as negotiations with European leaders of broke down. After a less-than-productive meeting yesterday, European Commission President Jean-Claude Juncker said Europe has a plan to kick Greece out of the euro. Whether Greece and the rest of Europe can find a path to monetary coexistence remains a fifty-fifty proposition, which is slightly vexing given that no one understands the full impact of what a Greek exit will entail.

A bubble is bursting in China: The Shanghai Composite Index recently fell to a three-month low, despite strong governmental efforts to stem the decline. Close to a thousand companies have suspended trading, while the government has cut interest rates and announced plans to investigate short-sellers.

This pullback, though, comes after a dramatic increase in Chinese equities. Valuations are still frothy and the Shanghai Composite Index is up year-over-year. Chinese investors are experiencing market turbulence as national economic growth downshifts to around 7% growth, well below it’s pace ten years ago. Whether equities have more room to drop, or have found a bottom, remains to be seen.

Why no skip the dram? Because if you’re not investing overseas you’re missing out on a key element of your portfolio: diversification.

A little more than half of the stocks in the world are located outside of the U.S., yet U.S. mutual fund investors held only slightly more than a quarter of their portfolio in international stocks, according to a 2014 Vanguard study.

“The rationale for diversification is clear—U.S. stocks are exposed to U.S. economic and market forces, while stocks domiciled outside of the United States offer exposure to a wider array of economic and market forces,” says the study. Because one market can rise as another falls, investors holding between 20% to 40% of their equities in international funds experienced lower overall volatility.

Right now, it may appear obvious that the U.S. is the place to be. But other times, foreign markets outperform our own. In fact, that’s been the case for much of this year so far.

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As MONEY’s Susie Poppick points out here, Greece is a tiny fraction of the world’s economy. And while China’s stock market free-fall may pose a larger threat to world finance, most stocks are owned by Chinese investors and most Chinese citizens don’t own stocks.

To get broad expsure to global market, look to a couple of MONEY 50 recommend funds. Fidelity Spartan International FIDELITY SPARTAN INTL INDEX INV FSIIX 0.7% offers investors access to blue-chip European fare like Nestle. Or if you want a one-decision fund, look to Vanguard Target Retirement 2035 VANGUARD TARGET RETIREMT 2035 FD VTTHX 0.16% , which mixes U.S. stocks, foreign stocks, and bonds. About a third of its stock portfolio is in foreign companies.

MONEY financial advice

The Painful Secret to Retirement Success

The co-founders of retirement and investment analytics firm BrightScope share the secret of a well-funded retirement.

BrightScope co-founders (and brothers) Mike and Ryan Alfred say saving is the most important thing you can do for your retirement. Start saving early and start saving a lot—way more than the 5% or 6% that workers put in their 401(k) to get an employer match. Ryan, president and chief operating officer, said he knows it can be hard to start saving when you’re young and just started a career, but he thinks you should start saving a little bit and try to increase how much you save each year.

MONEY Financial Planning

9 Money Lessons from Baseball

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Haila Rosero / EyeEm—Getty Images

Just like on ball field, financial planning involves optimizing for past results and probabilities.

From time to time we bring you posts from our partners that may not be new but contain advice that bears repeating. Look for these classics on the weekends.

As you cheer your team in this year’s World Series, consider that America’s favorite pastime can teach you a lot about America’s main preoccupation: money.

How does baseball resemble your investing or financial decisions?

1. Probability of outcomes matters, whether concerning stolen bases or investment returns and financial goals.

2. Separating a manager’s skill and luck takes a long time.

3. A quality process matters more than immediate or short-term outcomes.

4. Dazzling past performance clouds present decisions and doesn’t guarantee future outcomes.

5. Specialists work best where they add the most value.

6. Scouts are to fans as investment managers are to average investors, making informed decisions using advanced data and resources. No informed decision is foolproof.

7. Best to worry only about what you can control.

8. Good teams and investment plans use a documented approach to evaluating present conditions and building for the future.

9. Most mutual fund managers are the equivalent of common baseball cards.

Baseball is our most statistically driven sport; we can digest piles of data about each game. Investing offers a similar ton of data to evaluate company stocks, bonds, economic conditions and investor psychology, to name just a few conditions. Beyond past returns and the price/earnings ratio of a stock, investment evaluation goes much deeper with formulas, algorithms, and even a measure called “batting average” that evaluates how an investment manager’s results compare with an unmanaged benchmark.

When I was a kid I loved Strat-O-Matic Baseball, an old-fashioned game in which you roll dice to manage a team and consult player cards for the outcome based on probabilities from past performance. Luck did figure heavily in any single roll of the dice; play long enough, though, and probabilities won out. Much as on Wall Street.

Baseball also evolved into a game of specialists filling specific roles. Pitchers, catchers and shortstops use distinct skills. Investment management is similar: A balanced approach that considers the broad universe of return-seeking opportunities and risk management requires a diverse mix of specialists.

The mix of luck and skill can be hard to evaluate in investment managers. Sometimes you misinterpret a single lucky event to the point of inflating the performance of the manager for years to come.

The probability of any investment manager consistently identifying winners and timing entry and exit with such holdings is low. Just as past performance doesn’t stop baseball general managers from offering obscenely lucrative long-term contracts to players whose careers are fading, investors steer a lot of capital toward money managers based on past market performance and returns.

How does the probability of scoring change if a baseball team has no outs and a runner on first base, compared with one out and a runner on second? Who’s at bat and what’s that batter’s past performance against the pitcher?

Will company earnings continue to grow and justify higher stock prices? How far and fast will interest rates ever climb? Will eurozone stagnation drag down the global economy, and, if so, how far?

To cite one financial firm as an example, my partners and I rely on probabilities of outcomes when creating long-term financial planning and asset projections. We use Money Guide Pro software – the Strat-O-Matic of financial planning – to model how assets, future income streams and expected investment returns might satisfy your retirement income, college savings, travel, health care and other long-term goals. We’re comfortable with a 70% to 80% probability. Insisting on much higher probability means building a plan for only the worst possible financial scenarios and can cause shortfall in your funding.

The investment world always carries an element of uncertainty, the relationship between risk and reward. Even if we accurately gauge the probability of investment outcomes, we won’t make successful money decisions every time. Fluid factors can disrupt probabilities.

An untimely double play quickly ends a promising rally. Retire a year early or spend more than you planned right before your golden years and your probability of funding retirement income changes. Lose your job and automatic payday funding to your investments temporarily dries up.

The challenge in financial planning and on the ball field: We optimize for past results and probabilities and still retain little control over outcomes, especially when we move beyond numbers and into your situations and goals changing through your game of life.

Gary Brooks is a certified financial planner and the president of Brooks, Hughes & Jones, a registered investment adviser in Tacoma, Wash

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MONEY financial independence

Financial Lessons of America’s Founding Fathers

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation.

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Here are some of the lessons, still applicable today, that can be drawn from these historic financial lives.

Have a Back-up Plan

Alexander Hamilton may have been the greatest financial visionary in American history. After the Revolutionary War, as Washington’s Treasury Secretary, Hamilton steered the fledgling nation out of economic turmoil, ensured the U.S. could pay back its debts, established a national bank, and set the country on a healthy economic path. But it turned out that he was far better at managing the country’s finances than his own.

When Hamilton was killed in a duel with vice president Aaron Burr, his relatives found they were broke without his government salary. Willard Sterne Randall, biographer of multiple founding fathers, recounts that Hamilton’s wife was forced to take up a collection at his funeral in order to pay for a proper burial.

What went wrong? Hamilton’s law practice had made him wealthy and a government salary paid the bills once he moved to Washington, but he also had seven children and two mistresses to support. Those expenses, in addition to his spendthrift ways, left Hamilton living from paycheck to paycheck.

The take-away: Don’t stake your family’s financial future on your current salary. The Amicable Society pioneered the first life insurance policy in 1706, well before Hamilton’s demise in 1804, and term life insurance remains an excellent way to provide for loved ones in the event of an untimely death. Also, don’t get into duels. Life insurance usually doesn’t cover those.

Diversify Your Assets

Conventional wisdom holds that investors shouldn’t put all their eggs in one basket, and our nation’s first president prospered by following this truism.

During the early 18th century, Virginia’s landed gentry became rich selling fine tobacco to European buyers. Times were so good for so long that few thought to change their strategy when the bottom fell out of the market in the 1760s, and Jefferson in particular continued to throw good money after bad as prices plummeted. George W. wasn’t as foolish. “Washington was the first to figure out that you had to diversify,” explains Randall. “Only Washington figured out that you couldn’t rely on a single crop.”

After determining tobacco to be a poor investment, Washington switched to wheat. He shipped his finest grain overseas and sold the lower quality product to his Virginia neighbors (who, historians believe, used it to feed their slaves). As land lost its value, Washington stopped acquiring new property and started renting out what he owned. He also fished on the Chesapeake and charged local businessmen for the use of his docks. The president was so focussed on revenues that at times he could even be heartless: When a group of revolutionary war veterans became delinquent on rent, they found themselves evicted from the Washington estate by their former commander.

Invest in What You Know

Warren Buffett’s famous piece of investing wisdom is also a major lesson of Benjamin Franklin’s path to success. After running away from home, the young Franklin started a print shop in Boston and started publishing Poor Richard’s Almanac. When Poor Richard’s became a success, Franklin reinvested in publishing.

“What he did that was smart was that he created America’s first media empire,” says Walter Isaacson, former editor of TIME magazine and author of Benjamin Franklin: An American Life. Franklin franchised his printing business to relatives and apprentices and spread them all the way from Pennsylvania to the Carolinas. He also founded the Pennsylvania Gazette, the colonies’ most popular newspaper, and published it on his own presses. In line with his principle of “doing well by doing good,” Franklin used his position as postmaster general to create the first truly national mail service. The new postal network not only provided the country with a means of communication, but also allowed Franklin wider distribution for his various print products. Isaacson says Franklin even provided his publishing affiliates with privileged mail service before ultimately giving all citizens equal access.

Franklin’s domination of the print industry paid off big time. He became America’s first self-made millionaire and was able to retire at age 42.

Don’t Try to Keep Up With the Joneses

Everyone wants to impress their friends, even America’s founders. Alexander Hamilton blew through his fortune trying to match the lifestyle of a colonial gentleman. He worked himself to the bone as a New York lawyer to still-not-quite afford the expenses incurred by Virginia aristocrats.

Similarly, Thomas Jefferson’s dedication to impressing guests with fine wines, not to mention his compulsive nest feathering (his plantation, Monticello, was in an almost constant state of renovation), made him a life-long debtor.

Once again, it was Ben Franklin who set the positive example: Franklin biographer Henry Wilson Brands, professor of history at the University of Austin, believes the inventor’s relative maturity made him immune to the type of one-upmanship that was common amongst the upper classes. By the time he entered politics in earnest, he was hardly threatened by a group of colleagues young enough to be his children. Franklin’s hard work on the way to wealth also deterred him from excessive conspicuous consumption. “Franklin, like many people who earned their money the hard way, was very careful with it,” says Brands. “He worked hard to earn his money and he wasn’t going to squander it.”

Not Good With Money? Get Some Help

In addition to being boring and generally unlikeable, John Adams was not very good with money. Luckily for him, his wife Abigail was something of a financial genius. While John was intent on increasing the size of his estate, Abigail knew that property was a rookie investment. “He had this emotional attachment to land,” recounts Woody Holton, author of an acclaimed Abigail Adams biography. “She told him ‘Thats all well and good, but you’re making 1% on your land and I can get you 25%.'”

She lived up to her word. During the war, Abigail managed the manufacturing of gunpowder and other military supplies while her husband was away. After John ventured to France on business, she instructed him to ship her goods in place of money so she could sell supplies to stores beleaguered by the British blockade. Showing an acute understanding of risk and reward, she even reassured her worried spouse after a few shipments were intercepted by British authorities. “If one in three arrives, I should be a gainer,” explained Abigail in one correspondence. When she finally rejoined John in Europe, the future first lady had put them on the road to wealth. “Financially, the best thing John Adams did for his family was to leave it for 10 years,” says Holton.

As good as her wartime performance was, Abigail’s masterstroke would take place after the revolution. Lacking hard currency, the Continental Congress had been forced to pay soldiers with then-worthless government bonds. Abigail bought bundles of the securities for pennies on the dollar and earned massive sums when the country’s finances stabilized.

Despite Abigail’s talent, John continued to pursue his own bumbling financial strategies. Abigail had to be eternally vigilant, and frequently stepped in at the last minute to stop a particularly ill-conceived venture. After spending the first half of one letter instructing his financial manager to purchase nearby property, John abruptly contradicted the order after an intervention by Abigail. “Shewing [showing] what I had written to Madam she has made me sick of purchasing Veseys Place,” wrote Adams. Instead, at his wife’s urging, he told the manager to purchase more bonds.

Make A Budget… And Stick To It

From a financial perspective, Thomas Jefferson was one giant cautionary tale. He spent too much, saved too little, and had no understanding of how to make money from agriculture. As Barnard history professor Herbert Sloan succinctly puts it, Jefferson “had the remarkable ability to always make the wrong decision.” To make matters worse, Jefferson’s major holdings were in land. Large estates had previously brought in considerable profits, but during his later years farmland became extremely difficult to sell. Jefferson was so destitute during one trip that he borrowed money from one of his slaves.

Yet, despite his dismal economic abilities, Jefferson also kept meticulous financial records. Year after year, he dutifully logged his earnings and expenditures. The problem? He never balanced them. When Jefferson died, his estate was essentially liquidated to pay his creditors.

 

MONEY Financial Planning

Two Founding Fathers Who Died Broke and One Who Retired Early

What can the men who adorn our currency teach us about our own finances?

In theory, the founding fathers should be the ultimate financial role models. After all, they’re literally on the money. Warren Buffett might be every investor’s hero, but even he can’t count his earnings without seeing the faces of Washington, Hamilton, Franklin, and Jefferson. Even John Adams, perhaps the most neglected of the founding fathers, has been commemorated on the dollar coin.

What can the men who adorn our currency teach us about our own finances? Quite a lot, actually, but not because they were all as good with money as they were at creating a nation. Jefferson, for example, amassed a great fortune but later squandered it and ended his life all but penniless (despite, of course, the economic advantages of being a slaveholder). But others, including Washington — a shrewd and even ruthless businessman — died very wealthy men.

Read the full text here.

MONEY Greece

How Investors Should React to the Greek Crisis

150701_INV_WhatGreeceMeans
Louisa Gouliamaki—AFP/Getty Images The Greek economic crisis isn't ending anytime soon.

Step one: Don't panic.

Even from afar, it’s hard for U.S. investors to ignore the Greek economic crisis, which continues to roil global markets.

After Greece saw its bailout funds expire Tuesday—and became the first developed country to fail to pay back a loan from the International Monetary Fund—Greek prime minister Alexis Tsipras sent a letter offering concessions to European creditors in hopes that a new agreement might help the country remain afloat.

The fate of the Greek economy depends in large part on whether its government can quickly make a deal with European leaders.

One point of tension: Leaders in Germany, Greece’s biggest creditor, are insisting that the country accept additional austerity measures like pension cuts before it can get more emergency funds. Though a compromise could be reached this week, the worst case scenario is that Greece would continue to miss debt payments and, eventually, be forced out of the euro currency. Doing so would allow Greece to pursue its own fiscal and monetary policies in pursuit of economic recovery.

But what would that mean for investors around the world? The short answer, assuming you have a fairly diversified portfolio of stocks and bonds, is that it probably wouldn’t have a dramatic long-term effect.

Here’s why: If you look at the kind of target-date mutual funds that are popular compenents of many American retirement accounts, like 401(k)s—the Vanguard Target Retirement 2035, for example—about a third of their holdings are in foreign stocks. And of those foreign stocks, only a small fraction tend to be Greek companies. The Vanguard Total International Stock (which the 2035 fund holds), for example, has only about 0.07% of assets in Greek companies. So not a lot of direct impact.

The indirect impact is also likely to be muted. More than 45% of the holdings in Vanguard Total International Stock are in European countries—and if Greece leaves the Eurozone, that could affect companies and markets throughout the Continent. But some analysts are arguing that the market has already reacted, and perhaps even over-reacted, to the possibility of a so-called Grexit. “You have to assume that a substantial amount of the correction is priced in,” Lawrence McDonald, head of U.S. macro strategy at Societe Generale, recently told MarketWatch.

That being said, a note of caution ought to be sounded about the dollar. If the Greek crisis isn’t resolved quickly, it could lead to a flight to safety away from the euro and toward the U.S. dollar. The dollar’s strength has already led to sluggish profit growth in the U.S. In the past few months, the euro has rebounded a bit. But the euro could weaken again if crisis persists in Greece, putting U.S. companies that sell their goods abroad in a tough spot.

Still, even if you believe things in Greece will get worse before they get better, history suggests you’d be unwise to pull much of your money from the market right now. Though we could be in for more bad news and some painful market gyrations in the near term, keeping your money invested and sticking to your long-term strategy will likely pay off in the end—no matter what happens in Greece. Plus, there’s potentially good news for bond investors: If fear of European instability drives investors to seek out safe assets like U.S. Treasuries, then many bond funds will do well.

MONEY consumer psychology

5 Foolish Money Myths You Can Stop Believing Right Now

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lina aidukaite—Getty Images

Drink your latte.

Whether you think of yourself as money-savvy or you’re acutely aware of where your personal-finance knowledge is lacking, it’s always good to make sure you aren’t managing your money on assumptions that are faulty to begin with.

Here are a few common money myths to kick to the curb.

Myth No. 1: Credit cards are evil

With the average credit card debt sitting at just over $15,000 per household, it’s easy to think that plastic is the irresponsible way to pay. Not so fast.

It’s not the method of payment that’s the problem; in fact, having credit cards can actually help your credit score. A full 10% of your credit score depends upon having a mix of credit types — installment credit, like a car loan, and revolving credit, like credit cards.

In addition, credit cards offer more security than any other form of payment, allowing you to dispute fraudulent activity without footing the bill.

Myth No. 2: Skipping your morning coffee will make you rich

Cutting back on small expenses might offer some breathing room in your budget over the long term, but money not spent doesn’t necessarily equal money saved. To grow that money, it would need to be put into a place where growth can occur — like an investment account or, at the bare minimum, a savings account.

You may think cutting out a daily expenditure is putting you on a path to financial independence, but that’s only step one.

Myth No. 3: It’s too risky to invest your money

The truth opposing this myth is simple — it’s too risky to not invest your money.

If you’re already diligent about socking away money each month, that’s a great start. But with interest rates sitting so low, money put into a savings account will likely lose more to inflation than it can make up in growth. That’s where investing comes in.

Through the power of compounding, a single $500 investment made at the age of 20 earning a conservative 5% return would be $4,492.50 at the age of 65. Imagine that scenario with ongoing contributions and larger returns. It would put any savings account to shame.

Myth No. 4: All debt should be paid before saving

Unfortunately, emergencies and unexpected expenses occur at all stages of life — even when you’re working to pay off student loans or crawl out from underneath credit card debt.

A study recently released by Bankrate found that 60% of Americans wouldn’t have the funds available to cover even small hiccups — like a $500 medical bill or car repair. Think about how many of those expenses you’ve run into in the last six to 12 months; probably at least one.

If you want to avoid incurring more debt as a result of life’s curveballs, work to save while paying off debt. This will give you a better chance of smooth sailing to the finish line.

Myth No. 5: You should borrow the most money offered to you

Wondering how much house you can afford? Don’t let the loan amount offered by the bank be your guiding light.

Those in the business of making loans are incentivized to offer the biggest loan possible that you’ll be approved for. So while they may be checking out your debt-to-income ratio, this simple equation doesn’t always offer an accurate snapshot of what you can actually manage to pay each month.

The same goes for credit card limits — having a $20,000 limit doesn’t mean your finances can easily handle paying back $20,000 worth of purchases.

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MONEY consumer psychology

How Your Money Beliefs Are Hurting You

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Barbara Taeger Photography—Getty Images

We make things up about money and believe them.

What you believe about money drives your financial behavior. Finding out your beliefs is a key step to solving various problems, such as money conflicts in relationships.

Money doesn’t actually exist in reality. It isn’t gold or bank account balance or the pieces of paper in our wallet — it’s this conceptual thing, a promise, an agreement, delivered in measurable units, which we later exchange for something we want.

To grapple with this concept, we make things up about money and believe them. These beliefs act like a kind of programming language, which I call Money Operating Systems.

Your Money OS is a very basic belief about money that influences all your financial behavior. This system you install, unwittingly, controls how much you save and spend, whether you invest, how you invest, how you negotiate for a salary and how you feel about all of that.

Your past experiences with money, starting with your early memories of it, created your Money OS. It also came from your parents or the environment you were raised in.

Recognizing your belief helps you tackle your money woes, or those with your partner. Here are five of the Money Operating Systems I see most frequently:

  1. “There will always be enough money.” People with this belief can be high earners, but sometimes they’re average earners who just live a simple lifestyle. If you have this belief about money, you need to be careful. Make sure you understand how much money you need for your financial future. Over-optimism causes under-saving.
  2. “If I am good, the universe will give me what I need.” A positive world outlook doesn’t lead to productive financial behavior. Saving and investing rarely happen, because these folks believe that their financial health is a function of virtuousness.
  3. “Money makes me valuable.” They are often the people who drive the big flashy cars, and they work to have other people perceive them as successful. Money intertwines with their self-worth. Their ego grows with their bank account. But if they are unsuccessful, their confidence suffers.
  4. “There will never be enough money.” This one is pretty self-explanatory, and very common. People with this money belief will be either over-spenders or under-earners, and they keep creating the circumstances to prove this outlook true. They may justify holding on to poorly paid positions or overspending their high income.
  5. “Money is bad, the root of all evil.” These people believe that business and capitalism are responsible for social ills. They often righteously live without a lot of material possessions. Their negative opinion of money usually leads to destructive financial behavior.

These are only some of the beliefs that determine what is possible in your financial life. It took me some time to be analytical about my own money. I recognized my own system and how it kept me locked in cycles of overspending and feelings of worthlessness, and I’ve since transformed my experiences with money.

So where do you begin to see yourself here? What about your honey?

Hilary Hendershott, MBA, CFP, is founder and Chief Executive of Silicon Valley-based Hilary Hendershott Financial.

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