By the time you were 10 years old, you had probably stopped believing in Santa Claus and the Easter Bunny. After all, we stop believing in most myths after a while. But I’d be willing to bet you’re still holding on to a few personal finance myths.
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 money myths. 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 it’s not the only way to pay down bad debt. And it might not be the best way for you.
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 might be 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. And that might help you reach your financial goals faster in the long run.
Myth 2: It’s okay to just make the credit card 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. Your minimum payment is 2% per month, or $200.
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 payments 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 credit card balance is good for my credit score.
Not. at. all. This is one of the most common personal finance myths, and is completely untrue. Carrying credit card balances won’t improve your credit score.
It only means that you’re paying extremely high interest rates on your purchases. And if you can afford to pay your balance every month, that’s the better choice.
Now, credit card utilization does have some impact on your score. Regardless of the amount of credit you have, lenders want to see that you can use it responsibly. And this might be where the myth comes from.
But even then, credit card utilization is not the most important factor in determining your credit score. Having a clean record of timely payments is. So 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. And don’t keep accepting credit card offers in the hopes of getting a high credit score.
Myth 4: I don’t earn enough to save.
I know the idea of savings might be far-fetched when you’re coming up short at the end of each month. But you don’t need a lot of money to open a savings account. Or to start saving.
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 willpower.
With enough time and focus, you’ll soon find yourself capable of saving enough money for a six month emergency fund. From there, you can start your retirement savings or contributing to your company’s retirement plan.
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
It’s not necessarily a bad thing to buy something you really want. Just know that if you receive a $25,000 raise and spend it on a $50,000 car, you aren’t building wealth. So before you buy that new car, you should see if there’s a better choice.
What’s the bottom line? No matter how much money 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 arguments over money are a leading cause of divorce. And many of those begin when one spouse doesn’t understand what the other is doing.
Even if your spouse takes the lead on financial matters, you should regularly review your bank account statements. And you should understand your family’s savings strategy.
Of course, you trust your spouse. But even the most trustworthy, financially savvy among us can benefit from working with a partner on the finances.
Some couples discuss their decisions and strategies with each other. Others might hire a financial planner to help them understand their financial decisions.
Being solely responsible for the family’s financial well-being can be very stressful. So knowing that you share your money management plans go along way towards lightening the load.
Myth 7: It’s too early to start saving for retirement.
This is one of the more common financial myths amongst recent college grads. After all, you just graduated, got a job, and are probably facing a mountain of student loan debt.
Starting a retirement fund is the last thing on your mind. But most financial advisers would agree that 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 retirement savings can have 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.
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 financial security is better than none.
No matter when you start, 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. And that’s extra cash that doesn’t go to work for you.
Myth 9: Only rich people need a will.
A lot of people don’t have one, because they think nothing bad will happen to them. Or they don’t think they have anything of value.
Virtually everyone should have a will. Even if you don’t think you own anything of value.
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 the probate process. And no one wins in that situation, except the lawyers.
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, 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.
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 10 times your income in life insurance
This myth about insurance coverage 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. Generally speaking, as you get closer to retirement, the less life insurance you need.
And when we talk about income replacement, we’re talking primarily about term life insurance.
Here are some important factors you might consider before talking to the insurance company or shopping around for insurance coverage:
- 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?
If you have a financial advisor, you might want to discuss this in advance. And a good advisor will help you shop around for insurance quotes. That way, you get the right coverage from the right insurance company.
Myth 14: Buying a home is smarter than renting
Just like the myth above, this one all depends on a lot of factors, like housing prices, rent rates in your area, and mortgage interest rates.
Renting is generally cheaper in the short term than buying and maintaining your own home. So, if you’re paying off student loans 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 might be 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 your timeframe, 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
There is some sense to this. But it appears that a lot of people use it as an excuse to blow off their long term financial planning. It’s important to strike a balance between saving for your financial future and enjoying life in the current moment.
And if you happen to be fortunate enough to have money left over when you pass away, you can always help other people out.
Depending on your individual situation, picking up random bits of advice as you need them can help you. But some of the most common myths can cost people a lot of money.
Each personal financial situation is different. However, it’s in each person’s best interest to take control of their financial situations by ignoring personal finance myths and seeking financial advice that suits their individual needs.
That’s called financial planning. And the best time to start the financial planning process is now.