A lot of the most well-known personal finance gurus out there like to deal with absolutes. 

“Do this, not that!”

“X is the worst mistake you’ll ever make!”

“This is the one trick that’ll get you to financial freedom!”

What they’re really saying is, “If you don’t listen to me, you’re wrong and your finances will suffer.”

But the reality is that in personal finance, like in so many other areas of life, nothing is ever truly so black and white. The advice that they give might not be wrong, but that doesn’t mean it’s always going to be the best advice for every single person. After all, we are all operating within our own financial reality as we work toward our unique goals. 

With this in mind, we’ve decided to refute some of the biggest savings myths out there so that you can feel a little bit better if you decide that your path should look a little different.

Myth #1: You can’t spend money on the things that bring you joy. 

One of the most common pieces of savings advice on the planet is that if you are spending money on things like takeout coffee, avocado toast, and other seemingly insignificant purchases, then you’re wasting your money. 

It doesn’t matter if those things bring you some joy as you go about your day hustling and working toward your goals; it doesn’t matter if they give you that little jolt of energy you need to do your best. Spending money—especially when you could just as easily not spend money—is a bad thing. 

Or so the advice typically goes.

We’re not going to sit here and tell you that you can go out and spend all of your money on coffee and avocados and new outfits and still easily reach your goals, because reaching financial freedom obviously requires some sacrifice. But “don’t spend money” isn’t real advice. At best, it’s out of touch; at worst, it’s lip-service designed to make the average person feel bad about those small joys that make life a little bit easier. 

So yes, it’s important to understand your spending habits so that you can find ways to cut back and save. But instead of depriving yourself of everything, cut back on the purchases that don’t actually improve your life in any meaningful way—and fully enjoy those purchases that do.

One way that you can do this is to make sure that these small joys and luxuries are directly accounted for in your budget. That way, you can keep your spending in check without depriving yourself. 

You might, for example, embrace the 50/30/20 rule of budgeting (discussed in greater detail in the following section). This budgeting framework allows you to dedicate up to 30% of your budget toward your “wants”—whatever they may be. You get to decide whether that 30% will go toward small, everyday luxuries like the ones discussed above, or toward more substantial purchases. The rest of your budget is split between your “needs” (50%) and your financial goals (20%). 

As long as you stay within the recommended allocation, there’s no reason to worry or feel guilty, because you know that you are a.) covering your other expenses and b.) working toward your financial goals. 

Myth #2: There’s only one right way to budget.

Every personal finance guru out there has their own favorite budgeting strategy, which they say is the best one to follow—either because it’s the one that they used to reach their goals, or because it’s one that they themselves developed. 

But just because it’s the strategy that works best for them doesn’t mean that it’s the only one with merit. In fact, there are dozens of different budgeting strategies, and millions of people who have had success with each of them. The best budgeting strategy for you will be the one that resonates with you, personally, and which you believe you can stick to for the long term.

Some popular budgeting strategies that you might want to consider trying out for yourself include:

• 50/30/20 Rule: As mentioned above, this budgeting method requires you to allocate no more than 50% of your income to your needs, 30% to your wants, and 20% to your financial goals, such as saving, investing, and paying down debt. This strategy can be especially helpful for someone who wants to reign in their discretionary spending without completely depriving themselves.

• Kakeibo: Kakeibo is a Japanese budgeting technique that encourages the user to set a savings goal each month. You then track your expenses, categorizing each into one of four categories: Needs, wants, cultural expenses, and unexpected expenses. At the end of the month, you reflect upon your performance, think about ways you can improve in the months ahead, and set yourself a new savings goal. Because of the way that Kakeibo lets users set a new savings goal each month, it can be especially helpful for those with an income that fluctuates from month to month. It is also a very human way of budgeting, as it allows for unexpected expenses and also encourages improvement.

• Zero-Based Budgeting: This budgeting strategy requires you to allocate every dollar in your budget to a specific job, whether that is paying for an expense or working toward a financial goal. The idea is that the “available” balance in your budget should always be $0. Zero-based budgeting can be especially helpful for individuals who struggle with “mindless” spending. By ensuring each dollar has a job to do, you reduce the likelihood that you will have extra money in your account to spend on unnecessary purchases. 

• Paisa Vasool: Paisa vasool is not so much a budgeting strategy, as it is a general rule of thumb that many people in India use to help guide their relationship with spending. A Hindi phrase, it roughly translates into “value for money,” and the idea is that before you make any purchase you should ask yourself whether or not it is really worth the money you are about to spend. As with zero-based budgeting, this can be a very helpful method for anyone who struggles with mindless spending, as it introduces a layer of friction before completing a purchase. 

• Starve & Stack: Starve and Stack is a budgeting strategy specifically designed for either couples or individuals with two income streams. It is also the most aggressive on this list. It works like this: You are encouraged to live off of just one of your income streams, while dedicating the other income stream toward achieving your financial goals, whether that be paying off debt or saving and investing for the future. Because it is so aggressive, Starve and Stack can lead to massive financial gains in a short period of time, and can serve to supercharge your efforts even if you moderate yourself in the future by taking a more lax approach. 

Instead of blindly following the advice of a single person (who may or may not be trying to sell you something) our advice is to try out a few different strategies for yourself until you land on the one that feels right for you.

Myth #3: You need to pay off your debt before you begin saving and investing.

According to the Federal Reserve Bank of New York, the average US household in 2021 carried just over $155,000 worth of debt, whether in the form of credit card debt, student loans, auto loans, mortgages, medical bills, or other debt. With such heavy debt loads, one of the most common questions asked by individuals when they start to get serious about their financial goals is: Should I focus on paying down my debt before I start saving or investing for the future, or can I do both at the same time?

Here, again, many finance personalities have strong opinions, often recommending that you pay down your debt before you start to save and invest in earnest. The thinking here is that debt is a liability, a monthly expense that you will be paying until you do finally pay it off.

But such blanket recommendations overlook the fact that not all debt is bad. Depending on the terms of the loans—your interest rate, repayment timeline, etc.—carrying some debts can even be a good thing because it frees up money in your budget that you can put to work achieving other financial goals, like investing for the future, which might come with a higher rate of return than the interest on your debt

To put this in context, let’s imagine that in 2021 you applied for, and received a $150,000 mortgage that you used to purchase a home. The loan carries a fixed interest rate of 2.96%, which you will be paying off over the course of 30 years. If you were to make only your minimum monthly payments, this mortgage would cost you $76,500 in interest payments over the life of the loan. 

Now imagine that you had an extra $500 a month to put to use. If you used that money each month as an extra payment on your mortgage, you’d pay off your loan in less than 17 years instead of the original 30—and you’d save more than $44,500 in interest payments. 

But what would have happened if you had invested that money each month instead, and earned an average annual return of 6%? Over the course of 13 years, you would have amassed just under $118,000. That’s $73,500 more than what you would have saved in interest payments. In this case, using the extra money to invest is by far the better option compared to paying down your debt. 

But the opposite could also be true. If your mortgage carried an interest rate of 8%, for example, it would make much more sense for you to use your extra funds to pay down that debt ahead of schedule (assuming the same rate of return, etc.).

This is why it’s so important to understand the role that debt plays in your personal financial situation. 

Myth #4: Simply saving your money is enough.

Many people believe that the simple act of saving money is enough to set themselves up for success. But the truth is, saving money is only half of the battle: It’s also crucial that you put your money to work where it can grow for you over time. Otherwise, you open yourself up to the threat of inflation, which can dramatically reduce your purchasing power over the years. 

As of April 2022, the average savings account in the United States paid an APR of just 0.06%. If you saved $500 each month from the time you were 25 to the time you were 65, this would translate into a nest egg worth $242,897. Only $2,897 of that would have come from growth; the rest would be made up of your contributions.

By comparison, if you had invested that same $500 each month in a diversified portfolio earning an average annual yield of 6%, your portfolio would be worth $995,745—even though your total contributions remain the same. That means that nearly $756,000 of that total would have come from growth. That’s thanks to the power of compounding.

While everyone needs to have a certain amount of liquid savings (such as an emergency fund to get through life’s unexpected surprises), a savings account is simply not a viable path toward accumulating wealth. 

Myth #5: You only need to save and invest in your retirement accounts.

Retirement accounts like 401(k)s, 403(b)s, and IRAs are tremendously powerful tools when it comes to saving and investing for the future. That’s because they’re tax-advantaged, and carry a number of benefits that ultimately help you keep more of your money in your pocket and out of government coffers. For this reason, many people think that you should only be saving and investing in your retirement accounts.

But again, this all comes down to the individual. If you have financial goals other than saving for retirement, then you should consider leveraging a variety of different types of investment accounts—not just retirement accounts. Exactly what types of accounts you should use will depend on a variety of factors, including what your specific goals are. 

If you’d like to save for emergencies, then you’d most likely want to keep your emergency fund in a highly liquid savings account. If you would like to save for your future child’s college expenses, for example, you would probably want to leverage an account like a 529 college savings fund, which carries certain tax benefits. Other goals, like saving and investing for a down payment on a home, a new car, or a dream trip around the world, on the other hand, would probably be better suited in an individual brokerage account. 

The key is understanding what your goals are, what your options are, and then choosing the best type of account for each of your goals.

Cutting Through the Myths

The world of finance is full of good advice. But when that advice is taken to the extreme and turned into a “rule” that applies to everyone, it often enters the world of myth: No longer fully true, but with a kernel of useful information somewhere deep inside. 

Allio is here to help you cut through the noise as you work toward your financial goals, whatever they may be. We provide our clients with a variety of tools—from round-ups that help you invest while you spend, to recurring investments that empower you to save on a schedule, and more.