8 Money Myths Debunked
- July 18, 2018
- Diana Urban
- 0 Comment
There are many myths about money. While many of them have a basis in fact, none of them are going to solve your financial woes by themselves. Sometimes following them can make things worse. When taking money advice, be careful to take what works for you and leave the rest. Only you can decide what fits with your financial plan. Here are eight ‘rules’ that are not always right:
A Strict Budget Is Necessary
Myth: A strict budget is necessary to get control spending and be responsible with your money.
Truth: A budget helps understand income versus expenses. It can provide a roadmap to get spending control. It can also be like a strict diet, restricting what you can do until the pressure of following it is too much. A good budget offers guidance, allowing for the occasional interesting side trip. While you DO need a budget, keeping it too strict can cause you to give up the altogether…the worst possible outcome.
It Takes Thousands to Invest in Stocks
Myth: if you do not have thousands of dollars, you cannot invest in stocks.
Truth: Whether it is through an employer’s 401(k) program, a service like Betterment or a discount broker you can invest for $25 a month or less. Good planning will avoid paying excessive fees to discount brokerages.
Credit Cards Are Bad
Myth: credit cards damage your credit and cause you to overspend.
Truth: Used wisely, credit cards build credit and have the convenience of cash with more security. Reward credit cards offer the added bonus of cash, travel, and other rewards for using them. The trick is paying the balance off every month so you do not build debt.
Your Emergency Fund Should Cover Six Months Expenses
Myth: Emergency saving need to cover at least six months of household expenses to be worthwhile.
Truth: Situations vary. Keeping six months of worth of expenses in reserve is a good idea, but it might be better to pay off a high-interest debt and let the reserve fall under the six-month limit for a while. Find the level that is right for you, that saves you the most in interest. Sometimes, paying off debt first is wiser.
The Bigger the Mortgage, the Better the Tax Savings
Myth: The mortgage interest deduction saves you money.
Truth: You are not saving on taxes; you are getting a partial rebate on your interest. That is better than no rebate on the interest, but not as good as no interest at all. Do not take out loans because of ‘tax savings.’ Instead, choose home ownership if it is a good fit for you. Many times, renting is better. Then take advantage of any tax savings home ownership offers.
0% Car Loans Are Free
Myth: You can get an auto loan free if you opt for a 0 percent interest loan.
Truth: The choice between 0% interest and cash back is a choice on when to pay the interest. The 0% loan has the interest calculated and added to the principle at the beginning of the loan. Cashback deals use standard loans. Calculate actual savings to know if ‘0% interest’ is the best deal.
Pay Off High-Interest Bills First
Myth: Get rid of the highest interest debt first to realize the largest savings.
Truth: Paying off high-interest cards will save money, but paying off low-interest cards with low balances can build a sense of accomplishment and inspire you to pay off the remaining cards. Psychology plays a strong role in your ability to succeed financially. If paying off the high-interest card takes you a year, you may not have the stamina to see it through. If you feel like the hill is too big to climb, pay off smaller low-interest cards first, then add the money that was for the low-interest payments to the high-interest payments to pay them off quicker. Paying it off is paying it off, no matter how you look at it.
Pay Off Credit Cards First, Save Money Later
Myth: Pay off credit cards before worrying about savings.
Truth: Savings is the buffer against disaster. If you do not have any, emergencies could require more debt. Pay a little less on debt and build savings until there is a reasonable buffer against the unexpected. Remember that paying off debt is important, but how will you continue to pay those debts if disaster strikes?