Everyone holds their own perspective when it comes to handling finances. While friends and family may offer well-intentioned guidance, not everything you hear is necessarily accurate or beneficial. Much of it can be misleading or misguided - causing you to overlook opportunities or make poor financial decisions.
To help right the ship on managing your money and steer clear of financial pitfalls, we put together a list of seven common money myths. You’ll learn why this guidance is mistaken and the steps you can take to strengthen your financial position.
Myth #1 – You must carry a balance on your credit card to improve your credit score.
Credit cards have among the highest interest rates when it comes to loans. Ideally, you only want to carry a balance on a credit card when necessary. Instead, aim to pay off your entire balance monthly to avoid paying interest.
This myth would be better stated: Keep your credit card active and manage it responsibly to improve your credit score. To keep your credit card active, simply use it once per month. Make a small purchase you can easily repay, such as putting gas in your car. Then, pay off the balance before the due date.
Making on-time payments and maintaining a low or $0 balance will improve your score and credit utilization ratio (see Myth #7).
Myth #2 – You should buy a home because renting is like throwing away money.
It’s true that homeowners can build equity in their property, the value can increase over time, and they can eventually own the property outright. However, homeownership isn’t right for everyone, nor should it be something you rush to achieve.
There are many advantages to renting that might better suit your current lifestyle or financial goals.
- Flexibility: If a new job opens across town or cross country, renters will find it much easier to pack up and chase their dreams. Or, if their lifestyle changes, such as they become married or their family is growing, they can easily upgrade to a larger living space without serious financial commitment.
- Lower Costs: While homeowners can build wealth in their property, they also incur additional expenses over renters. For example, homeowners must pay property taxes, homeowner’s insurance, possible homeowner’s association dues, and ongoing maintenance and repairs.
- Investment Opportunities: A lower monthly housing expense can leave renters with more funds to invest in other areas like the stock market or in starting a business.
Myth #3 – Don’t worry about saving for retirement until you start your career.
This myth is based on the notion that when you land a good job in your desired field, you’ll earn more, and it will be easier to put money aside for retirement. The one problem with this advice is that it leaves out the most valuable part of retirement planning – time.
The longer you can let your money grow, the better. The best time to start saving for retirement is in your early to mid-twenties. Allowing those funds to compound for 40+ years will significantly benefit your retirement savings.
Plus, many tax-advantaged accounts, such as a Roth IRA, limit how much you can contribute annually. The sooner you begin putting aside money in these accounts, the more your future self will have to enjoy in your golden years.
Myth #4 – Become debt-free before investing your money.
While it has good intentions, this myth can be misleading. It should state to eliminate excessive credit card debt before investing your money. The reason is that credit cards can have extremely high-interest rates, especially store-sponsored rewards cards (often reaching up to 29% APR). It is exceptionally rare that the money you invest in the markets will earn more than you’re paying in credit card interest.
Being completely debt-free can be challenging today. You’ll likely have a mortgage, a car payment, and possibly student loans. If you wait until all these lower-rate loans are repaid, you’ll rob your future self of significant retirement savings.
Myth #5 – It’s normal to have high amounts of debt.
Society today runs on credit, and that’s not necessarily bad. Buying cars, purchasing homes, or earning a college degree would be much more challenging without credit or loans. However, excessive amounts of debt have no place in your financial life.
You should only seek credit or loans when it’s necessary. And you should strive to repay your entire credit card balance each month. Otherwise, interest payments will eat away at your budget and prevent you from achieving your financial goals.
Myth #6 – Only rich people need a financial advisor.
The role played by a financial advisor is often misconstrued. They are often depicted as costly Wall Street gurus that only cater to the rich. However, this is far from the truth. Regardless of your savings or income levels, you could benefit from the guidance of a financial advisor.
These individuals are well-versed in various financial topics, including retirement planning, tax strategies, and investing. Whether you’re planning to get married and start a family, send your child to college, or want to secure your retirement, they can help. And while financial advisors do charge fees for their services, their suggestions could lead to earnings that greatly outweigh their costs.
Myth #7 – Once you pay off a credit card, you should immediately close the account.
This myth is another one that is grounded in good intentions. If you struggle with credit card debt and a $0 balance card is too tempting, close the account. However, if you can avoid using your recently paid-off credit card, keeping it open will help your credit score.
Your credit utilization ratio (CUR) is a figure that creditors use to determine your creditworthiness or risk level. You can calculate your CUR by dividing your total outstanding revolving credit lines by your total credit limits. Then, multiply that figure by 100 to get a percentage. Revolving credit can include credit cards, home equity lines of credit, and some types of personal loans. In this example, we’ll limit it to credit cards.
Assume you have the following two credit cards:
Credit Card #1
Credit Card #2
Your total outstanding balance is $1,150, and your total credit limit is $4,000. Your CUR will be 28.75% ($1,150 / $4,000 x 100). Creditors like to see CURs below 30% - it demonstrates you can manage credit responsibly.
Now, assume you pay off Credit Card #2 and close the account. Your outstanding balance will be $1,000, and your total credit limit is $2,500. As a result, your CUR now becomes 40% - well above the desired 30% threshold. In this instance, closing Credit Card #2 increases your CUR and could cause your credit score to decline.
Remember, you only want to keep paid-off credit cards active if you can refrain from accumulating a balance on them again.
We’re Here to Help!
Between friends, family, social media, and the internet, knowing what financial advice is beneficial can be challenging. As your financial partner, we’re here to help you navigate the complexities of money management.
If you have questions about saving or investing money, budgeting, loans, credit scores, or any other topic, please give us a call. A team member will happily address your questions and provide one-on-one guidance to help you achieve your financial goals.