Believing in poorly researched ideas about money keeps millions from attaining their financial goals. People put their money into the wrong kinds of investments, make financial decisions that hurt their credit and keep them in debt. Check out these common money myths to find out if some of your beliefs are landing you in trouble.
1. Debt is good if you are careful
In his book The Total Money Makeover, personal finance expert Dave Ramsey argues that debt is nearly always harmful. When you take on debt of any kind, you blindly bet that your career, marriage and health will never suffer a setback.
Should any one of these things happen, most kinds of debt can become unmanageable. Other than limited use of a credit card to build and maintain a good credit history, debt always comes with the risk of serious consequences.
2. Carrying a balance helps your credit score
The myth that carrying a balance can help your credit comes from getting credit card companies mixed up with credit scoring bureaus. Credit card companies like it if you carry a low balance (typically under 25% of your credit limit). This way, they get to earn interest off you.
If you never carry a balance and never pay interest, they may at times even cut off your credit card. Credit scoring bureaus, on the other hand, reward those who do not carry a balance. If it is a good credit score you have in mind, you need to be careful to quickly pay off your balance each month.
3. You should always pay off debt first
Many kinds of debt come with interest rates as high as 25%. No saving opportunity, on the other hand, offers anywhere near as much interest. If you try to build your savings before you pay your debts off, then, you end up wasting lots of money on avoidable interest payments to your creditors.
This calculation, though, does not make sense when it comes to retirement savings. If your employer matches your 401(k) contributions, you make 100% on them – a number that is definitely much higher than anything that credit cards charge. To the extent that you can contribute to your retirement fund and obtain a matching contribution, saving should come before paying off debt.
4. Invest in bonds when you retire
The idea that you need low-risk, low-growth stocks when you retire used to make sense when corporate pensions existed and life expectancies were not as long as they are today.
Now, at a time when people expect to live well into their 80s, opting for mere safety in retirement is not enough. You can end up in debt if you don’t have investments that keep up with inflation. In retirement, you need to invest in high-growth stocks.
5. Buying a home is always better than renting
Many people believe that it is wasteful to pay rent on a home when the money could pay for a mortgage. When you pay rent, you walk away with nothing in the end; when you use your money to pay a mortgage, you pay towards owning a home.
These calculations are not as simple as they appear. In many cases, paying rent is far cheaper than mortgage. Mortgages involve high interest payments. You also need to pay property taxes on a home you own and pay for its upkeep.
Only in some cases do property values reliably rise enough to net you a profit. In many cases, home owners walk away with nothing to show for their efforts other than debt.
6. When the stock market falls, you should sell
When your stocks fall, often, the problem may not be specific to just the companies involved. It may be a problem that affects the entire economy.
Typically, it is a good idea to hold on to your stocks and ride out the decline. Seasoned investors use market declines to pick up new stocks cheaply and to profit when the market rises.
7. You can always get a job after retirement
Many people do not worry about not having put by for their retirement because they believe that when they run out, they can always get a job. In truth, though, getting a job in retirement is exceedingly difficult. Skills tend to go obsolete over time.
8. Your credit card limit reflects what you can afford
Credit card companies often grant people spending limits that they can’t possibly afford to repay. They hope that their customers will borrow more than they can easily pay back and end up paying them lots of interest. Assuming is that you can afford the credit limit on your cards is dangerous and risky.
9. A home remodel is a good investment
A home remodel can be a good investment if it is done shortly before a sale. All other times, though, home remodels, like most other purchases, tend to lose value over time.
10. The idea that you have a pension to depend on
While corporate pension schemes are more secure now than they used to be, they still are not completely guaranteed. Pension funds do go bust.
Financial mismanagement, inflation, and other factors tend to destroy pension fund, too. It is important to have a retirement fund that is completely independent of your pension.
Many of the myths on this list are widely believed in. They are myths, nonetheless. Putting faith in a financial myth can be hugely risky. It can keep you in debt longer than you need to be.