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3 Dangerous Money Lies You May Be Telling Yourself

Katie Brockman, The Motley Fool

Strong money habits are the foundations of a healthy bank account. No matter how much money you're making and saving, one could still have major financial problems. Case in point: Roughly a quarter of U.S. households earning more than $150,000 per year say they're living paycheck to paycheck, according to a Nielsen Global Consumer Insights survey.

If you're earning a lot of money or think you have a good grasp on your finances, you may think you don't need to worry about the future. However, there are a few dangerous mistakes that could throw a wrench into your plans. By letting yourself believe these money lies, you could be inadvertently setting yourself up for financial disaster.

A man in a business suit's hands, with coins falling through his fingers.

Image source: Getty Images.

Lie No. 1: It's OK to put off saving for retirement

If you're not planning on retiring until your 60s, you may think you have plenty of time to save. It's tempting to focus more on short-term needs -- like saving for that dream vacation next year -- thinking there's no rush on retirement preparation when you have decades to save.

Or you may realize the importance of saving for retirement but don't have much cash to spare. So instead of saving now, you put it off until you earn a raise, accept a new job with a higher salary, or pick up a side hustle to earn more money.

The problem with that thought process is retirement planning takes decades. It's possible you could need at least $1 million to ensure your savings will last through retirement, and it's nearly impossible to come up with that kind of money in just a few years. If you were to start saving at age 40 with a goal of having $1 million stashed away by age 65, for example, you'd need to save around $1,400 every month for 25 years, assuming you're earning a 7% annual rate of return on your investments. That's why it's important to start saving as early as possible.

If you're living paycheck to paycheck and simply don't have much to save for retirement, comb through your budget to see if there are areas where you can make cuts. Chances are you're spending more than you realize, and by mapping out all your expenses, it's easier to see exactly where your money is going. Decide which costs are truly necessary and which can be eliminated. Then, reallocate the savings toward your retirement fund. 

Lie No. 2: You'll be able to rely primarily on Social Security in retirement

There's no harm in depending on Social Security benefits to some degree in retirement, but if you're expecting your benefits to make up a majority of your income, you're not alone. Forty-two percent of not-yet-retired workers say they expect Social Security to be their main source of retirement income, according to a survey from Nationwide and Harris Poll Online, compared to just 28% who expect most of their income to come from their personal savings.

The average Social Security check, however, comes out to around $1,400 per month -- or roughly $16,800 per year. For most people, that's not nearly enough to pay the bills. On top of that, there could be cuts in benefits in the relatively near future.

Soon, there'll be more money flowing out of the system in benefits than is being collected annually. That means the trust fund reserves are expected to be depleted by 2035, according to the Social Security Administration's 2019 trustees report, and the money coming in from taxes will only be enough to cover about three-quarters of scheduled benefits. In other words, benefits could be cut by up to 25% if Congress doesn't come up with a solution by 2035.

The best way to avoid putting your financial future in the hands of Social Security is to strengthen your own savings. Then, if you don't receive as much as you expected in benefits, you'll still have a nest egg you can fall back on.

Lie No. 3: You don't need an emergency fund

With so many competing financial priorities, an emergency fund may seem low on the list. If saving for retirement is so important, shouldn't that take priority over an emergency fund? In reality, establishing an emergency fund can actually make it easier to save for retirement, as well as reach your other financial goals.

Only 61% of people would be able to cover a $400 unexpected expense without borrowing money or selling their belongings, according to a recent report from the Federal Reserve Bank. Without enough savings to cover inevitable unexpected costs, you could be forced into debt or tempted to pull money from your retirement fund. Becoming saddled with loan repayments or high-interest credit card debt means there's less money that can go toward your retirement savings, and dipping into your retirement fund to pay for unexpected costs will only undo the hard work you've put into saving for the future.

While it's still important to save for retirement, try to also build a healthy emergency fund with enough cash to cover three-to-six months' worth of expenses. Keep in mind that unlike saving for retirement, which can take decades, creating an emergency fund is a relatively short-term goal that you may be able to achieve within a year or two, depending on how much you can save each month. Once you have those emergency savings in place, it will be easier to save for retirement without worrying that one unexpected expense could destroy all your hard work, and you won't feel obligated to pull from your retirement savings to help cover the costs.

No matter how prepared you think you are for retirement, just one or two seemingly minor misunderstandings could throw your plans out the window. By arming yourself with as much knowledge as possible about your finances, you can ensure you're setting yourself up for long-term financial success.

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