By the time you were 10 years old, you had probably stopped believing in Santa Claus. But I’d be willing to bet you’re still holding on to a few myths about personal finance.
Money myths can be particularly difficult to debunk because they are passed on in the form of advice by well-meaning parents, friends, and coworkers. Have a strong understanding of the foundations of personal finance will help you know what you should listen to and what you should ignore.
Let’s look at a few of the most common financial misconceptions. By sorting out the facts from the fiction, you can stop standing in the way of your own financial well-being.
Myth 1: It’s always smartest to pay off your high-interest debt first
If you just look at the numbers, this is true. Tackling high-interest debt first is the best approach…mathematically speaking.
But there’s a psychological element to paying off debt that you just can’t ignore. If you’re like me (and a lot of other folks out there), you’re more likely to keep pursuing a goal if you get a few “quick wins” under your belt. Paying off a few small debts can provide just the motivation you need to keep going until your debt is completely erased.
Myth 2: It’s okay to just make the minimum payments
Don’t fall into this trap. Sure, if you make the minimum payments on your credit cards each month, you’ll pay them off…eventually.
But it will take years longer and cost you much more in interest.
Let’s look at an example. Say you have $10,000 of credit card debt with a 15% APR and a minimum payment of 2%. Making your minimum payment of $200 each month, you’ll have it paid off in just…35 years! Oh, and you’ll have paid over $15,000 in interest. Ouch.
In that same scenario, if you had made payment of $250 per month, you’d have it paid off in just 6.5 years, and paid just over $5,700 in interest. That’s a big difference for just $50 more each month—imagine how quickly your debt could disappear if you really pushed yourself!
Check out Bankrate’s Credit Card Calculator to see how a bigger payment could impact your debt.
Myth 3: Carrying a balance is good for my credit score
No. Just…no. This is one of the most annoying myths about personal finance. Carrying a balance won’t improve your credit score—it just means that you’ll get charged interest on your purchases.
Now, credit card utilization does have some impact on your score because lenders want to see that you can use credit responsibly (perhaps that’s where this myth comes from). But you should get in the habit of making your payments on time and in full each month.
It’s super important to keep tabs on what’s in your credit report. Luckily there are a bunch of great credit monitoring tools that make this super easy.
Myth 4: I don’t earn enough to save
I know it feels that way when you’re coming up short at the end of each month. But if you’re able to pay overdraft fees or interest on credit card debt, it stands to reason that you could be saving—you just need to flip the script and start paying yourself first.
It all starts with a good, hard look at your spending habits. Don’t assume you know where your money’s going—actually take out your bank and credit card statements and go over them with a fine-tooth comb. You may find subscription services, dining choices, or even utility bills that could be eliminated or reduced with a little bit of will-power.
With enough time and focus, you’ll soon find yourself capable of saving enough money for a six month emergency fund.
Myth 5: More income means more wealth.
Not so fast. What you earn is only half of the equation—in order to accumulate wealth, you still have to make smart decisions about what you do with your money once you get it.
Too often, when folks come into extra income (a raise, inheritance, etc.), they see it as a chance to buy new things rather than as an opportunity to increase their savings or investments.
It’s not necessarily a bad thing to buy something you really want—just know that if you receive a $25,000 a year raise and put it towards a $50,000 car, you aren’t building wealth yet (but you do have a sweet ride).
What’s the bottom line? No matter how much you make, ask yourself if you’re using your money in a way that aligns with your values and goals.
Myth 6: My partner manages our money, so I don’t have to worry about it
Life gets busy, and most couples have to divide and conquer responsibilities to get everything done.
But even if your spouse takes the lead on financial matters, you should check in regularly to review your accounts and make sure you understand your family’s savings strategy.
I know, I know…you trust your spouse. But even the most trustworthy, financially savvy among us can benefit from having someone to discuss their decisions and strategies with, especially when that other person has as much to gain (or lose) as they do. Not to mention, being solely responsible for the family’s financial well-being can be a lot of stress, so knowing that you share your money management plans go along way towards lightening the load.
There’s nothing wrong with letting one person take the lead in this area—we all have different strengths and interests. Just make sure you stay in the loop to avoid any nasty surprises.
Myth 7: I don’t need to start saving for retirement until I’m 40
Sure, you can wait until 40 if you want…but why would you?
The sooner you start saving, the sooner your money starts working for you. Thanks to the miracle of compound interest, just a few extra years of savings can make a huge impact on the amount of money you have for your retirement.
Even if you’re just starting your career, there’s no reason not to start preparing now. Trust me, it won’t get any easier to build self-discipline around saving in 5, 10, or 15 years.
Myth 8: I’m too old to start saving for retirement
You’re certainly not the first person who didn’t prioritize saving for retirement when you were young. Luckily, it’s never too late to start preparing for retirement.
Life expectancies are on the rise, so your golden years might last longer than you think. Even if you need to delay your retirement a few years or reset your expectations about having the retirement of your dreams, you’ll be better off if you get serious about saving now. After all, a little bit of something is better than a whole lot of nothing.
No matter when you start when it comes to the growth of your retirement account, you should know how your money is being allocated and what fees you are paying. If you aren’t paying attention, you are probably overpaying.
Myth 9: Only rich people need a will
If you have a family that is dependent on you, then you should have a will.
It doesn’t have to be complicated, and you don’t have to be rich to benefit from having one. The main benefit is that there is a clear set of instructions from you on how your family should be taken care of when you pass. Without a will, your family could end up fighting about who gets what, in which case the courts have to weigh in which can be a timely and expensive activity.
A basic will can also spell out your wishes for your funeral and burial. By making these decisions now, you’ll save your family the emotional task of having to guess what you’d want down the road.
Myth 10: Investing is only for rich people
Not anymore. Now that robo advisors are part of the financial landscape, it’s a lot more doable for average folks to dip their toes into investing.
Robo advisors automate the asset allocation process via a computer algorithm, using long-standing financial theories to optimize your portfolio.
And with low fees and low minimum investment requirements, robo advisors are a great choice even if you don’t have a lot to invest.
Myth 11: If it’s more expensive, it’s a better value
Not necessarily. No matter what you’re shopping for—a new home, car, cell phone, shoes, you name it—don’t assume that higher cost equals better value. A bigger price tag could mean better quality, or it could just mean that the item is trendier or has added features that you don’t need.
Always do your research to make sure that you’re getting the best deal possible on a product that will meet your needs. Don’t scrimp on a product that won’t get the job done, but don’t pay more than you need to, either.
Myth 12: Gold is always a smart investment
Don’t believe the hype. Gold and other precious metals are not always great places to invest your money. They can be very volatile, with prices swinging wildly based on market interest (or disinterest).
And keep in mind that people who hype gold as, well, the gold standard for investing often do so based on fear of paper currencies or distrust of the U.S. financial system.
And as far as I’m concerned, if we’re faced with a worldwide financial collapse of that magnitude, even gold isn’t going to help you.
Myth 13: You should have 10x your income in life insurance
This myth about personal finance may actually be true for some people, but it’s more a financial rule of thumb than a definitive fact. Every family’s circumstances are so unique, so a one-size-fits-all approach doesn’t always work.
Of course, it’s vitally important to make sure your loved ones are taken care of when you pass, but your coverage needs should be based on the specifics of your situation:
- How many kids do you have?
- What are our current expenses?
- Is your spouse gainfully and securely employed?
- How much debt have you accrued?
- What kind of lifestyle does your family lead?
Myth 14: Buying a home is smarter than renting
Just like the myth above, this one all depends on the specifics.
Renting is generally cheaper in the short term than buying and maintaining your own home. So, if you’re paying off debt or suspect you may not be living there for more than a couple of years, renting may actually be the smarter choice.
If you’re confident you’ll be in the home for at least 3-5 years, buying is generally more financially beneficial. But make sure to do your research on the real estate market in your area—there’s no guarantee that your home value will increase over time, so always exercise caution.
Homeownership is part of the American dream, and for good reasons. Just don’t let it become your personal nightmare.
Myth 15: You can’t take it with you
Sure, most versions of the afterlife don’t allow you to take your investment portfolio into the Great Beyond. And I agree that it’s important to strike a balance between saving for the future and enjoying your day-to-day life in the here and now.
But if taken too far, this philosophy can leave you ill-prepared for the future. You could die tomorrow—but chances are, you’ll live to a ripe old age. And when that happens, you’ll wish you had been a little more considerate of your future self all those years ago.
And imagine being able to leave behind enough for your children to start out their adult lives on secure financial footing. Personally, I love the idea of my legacy living on like that.
Heard any other myths about personal finance that need to be debunked?
Share them below!