10 Popular Financial Myths - Busted
There are a lot of “rules” out there when it comes to personal finance. Financial advice is not one-size-fits-all and varies depending on your personal financial situation. Keeping that in mind, here are 10 common financial myths:
1. Carrying a revolving credit card balance boosts your credit score
You should be paying off your credit card balance in full each month to avoid high interest and hurting your credit score. Remember to keep an eye on your card’s annual fees and make sure you have a card that provides rewards that align with your goals, such as cashback, travel points, etc. Check your credit score at least annually to understand your current position and detect inaccurate transitions.
2. Everyone should have 3-6 months of living expenses saved in their emergency fund
This is a good rule of thumb to get started, but doesn’t apply to everyone. If you have variable income, are self-employed, and/or are a one-income family, you may need to save one year or more of living expenses in your emergency fund. If saving that much is overwhelming, start small and establish automatic contributions from each paycheck. Set a goal to save one month of living expenses at a time in a high-yield savings account.
3. It is better to receive a large tax refund each year?
Although it may be nice to receive a large check from the IRS each spring, this means you are allowing the IRS to hold your money for you during the year without receiving any interest. Your goal should be to come as close to not owing any taxes or receiving a refund as possible. You can review your withholdings using the IRS Tax Withholding Estimator throughout the year to make sure you are on track.
4. You cannot lose money in a checking or savings account
FDIC-insured banks protect your money in the event of a bank failure up to $250,000; however, money in traditional bank accounts is earning almost no interest, which actually means you are losing money over the long-term. Because of inflation, a dollar today is worth more than a dollar in 10 years without compounding interest.
5. It is more economically beneficial to buy a home instead of renting
There are many benefits to buying a home, including building equity, avoiding high rent prices, customization, and the opportunity to write off mortgage interest (only if you itemize your deductions), but many factors should be evaluated when deciding to buy versus rent, including how long you plan to live in an area, the current housing market, and your financial situation. Advantages of renting include no maintenance costs, flexibility, amenities offered, and no large down payment required. It may be in your best interest to rent for the time being to build your savings and determine your intentions.
6. You need to have a lot of money to start investing
You can contribute to your workplace retirement plan with just a few dollars each paycheck, and many brokerage firms allow you to open an account with as little as $25. The earlier you start investing, the better off you will be in the long-run. Make sure you are getting your full employer match, and increase your contributions each year. Set up monthly contributions if you are investing outside of your workplace plan to automate the process.
7. The stock market is too complex for young people to invest
Choose the right type of account for you (retirement vs. taxable brokerage), set up monthly contributions, and select an index fund or exchange-traded fund (ETF) that covers the total stock market. That’s it! Obviously, you can get fancier with your investments over time with research, but this is a great way to start and be diversified. If this intimidates you, there are many managed account options that design your portfolio for you (watch out for expense ratios and fees) or reach out to a financial planner.
8. You must pay off all debt before you begin investing
For most individuals, the best time to start investing is now. You want to pay off any high-interest debt first, such as credit cards, however, you should invest while paying off student loans and other low-interest debt. Make sure you have a plan for your debt payments and allocate an amount you can afford to invest each month, even if you need to start small. Always make sure you are getting your full employer match in your workplace retirement plan first!
9. All debt is bad
Credit cards and car loans are prime examples of “bad debt” due to high-interest rates and depreciating assets, however, not all debt is bad. Mortgages allow you to buy your dream home and build equity with a low interest rate. Student loans, when managed properly, can help you achieve your career goals and have many repayment options. The key is to understand the different types of debt and have a plan in place for repayment.
10. Insurance is only for those older and wealthier than me
There are many instances where insurance is extremely important. Renters insurance covers your belongings. Life insurance protects your loved ones if something were to happen to you. Disability insurance supports you if you no longer can perform your job functions due to a disability (it happens more than you think). It is crucial to ensure you have the right insurance policies in place before it’s too late.
In a world of abundant information, there are many great financial resources available; however, there is also a lot of harmful advice. Be sure to fact-check your sources, keep your personal situation in-mind, and reach out to a CERTIFIED FINANCIAL PLANNER™ if you need guidance with your finances.
Posted on TheStreet.com on April 1, 2021