Finances and managing them effectively and efficiently is tough. Getting the wrong advice can make it even more difficult.
With all the information on the web, experts in the field, and people you know giving their two cents, it’s challenging to differentiate between good and bad advice.
Without further delay, here are some common money myths, and what to do instead.
Banks are the best place for your money
There are two ways to look at this. If you are saving your money in a bank for emergencies, or something you’ll need in less than two years, then yes, the bank is the best place for it.
The bank, however, is a horrible place for your retirement savings. Your savings, or money market, account pays next to nothing in interest. That means over time, your savings will actually lose value because of inflation.
For example, you have $100,000 saved at the bank that collects .01% interest annually. Using the historic inflation rate of 3% (it’s actually 3.22% but we’ll use 3 for simplicity’s sake), that $100,000 will be about $55,000 in 20 years (please correct me if this number is wrong, thank you!).
Invest your retirement savings into the stock market using low-cost mutual funds or index funds.
Financial security is achieved through cutting expenses
Though cutting unnecessary spending is very important to your financial health, the other side to that is increasing your earnings. Bust your tail and work your way up the ladder. Get certifications and increase your knowledge to increase your worth.
A home is a good investment
That depends. Home prices can fluctuate dramatically, and if you buy at the wrong time, you could be in for a world of hurt.
Before the recession hit, home values were flying high and there are many real estate markets throughout the country that have not returned to pre-recession levels.
If you bought a house just before the crash, you might still be under water (this means that you are paying a mortgage higher than the value of the house).
The other popular myth about buying a home is that paying off your mortgage is a good thing. Usually, this is only appropriate if you plan on staying there for a long time. If you pinch pennies and cut costs just so you can make larger payments toward your mortgage, you could be making the wrong decision.
If you plan on moving in the short to medium term, that extra money is better off in the stock market. There two reasons for this.
One, in the first 12.5(or so) years of your mortgage, the majority (more than half) of your payment goes to interest, which means less going towards the principal amount.
Two, historically speaking the stock market returns about 7%. Since 2010, the average mortgage rate is 4.750%. Your money would go further being in the stock market than paying off your mortgage with a lower rate.
Paying with cash is best
If you aren’t particularly responsible with your spending or have low willpower, then yes, cash is better. On the other hand, if you are responsible with your money and mindful of your spending, then paying with credit cards is more beneficial.
Credit cards bring you rewards like cash back and airline miles. If you charge to your credit card and pay the balance in full every month, that’s better in the long run. You acquire rewards and should improve your credit.
Invest in what you know
Though this is generally true, it may negatively affect you. If what you know revolves around the same industry or sector, then this is bad advice.
The reason being is that now all of your eggs are in one basket. It’s important to diversify among different industries, regions, and asset classes.
Debt is a tool
Debt can be a tool in a couple of instances. First is if you are acquiring real estate properties as an investment. Debt can also be a tool in the case of using credit cards effectively (see above, under paying with cash is best).
In general, however, debt negatively affects your finances. Carrying credit card debt with stupid high-interest rates or taking out a mortgage for a house that’s more than you can afford are two classic examples of how debt can hurt you.
Eventually, you’ll earn enough to catch-up for retirement
Though it’s true, in the general sense, that earnings increase with age, it’s important to start saving for retirement right now. Time is your biggest asset when it comes to saving for retirement. Take advantage of that and start saving as soon as you can, no matter how much you make.
You already keep track of your money, so you don’t need a budget
This one makes my skin crawl. You may know where your money is going. I’m sure you have a bunch that goes to housing and utilities, you’ll have some that goes to groceries and transportation, and yeah, you’ll spend what’s left on nights out and other unnecessary items, but do you know how much you are spending.
A budget tells you where your money is going and tells you if you spent more than you made or not. It’s also important to have a budget so you can designate money for savings. You absolutely, 100% need a budget. Read these haunting budgeting statistics to see how blatantly necessary it is.
Previous Post: How to Create a Budget.
If you need more money in retirement, you can just get a job
This is an option for some people and given recent statistics (41% of Gen X and 42% of baby boomers have nothing saved for retirement), it’ll probably be necessary, but it’s not possible for everyone.
There’s a good chance (almost 40% of those 65 and older) that you will be disabled in retirement. This generally means no work and no ability to earn more. Save as much as you can, while you can!
Retirement means no stocks
False. Once you reach retirement, you do need to be a little more conservative with your investments. You are no longer earning, so you need to make what you have last you the next 30 years or more.
Bonds are, generally, safer than stocks and they can supplement some of your income, but stocks, generally, increase in value faster than bonds. This can help grow your principal to help your nest egg last. Having an appropriate balance of stocks and bonds is very important!
If you need money, just take a loan from your 401(k)
This is not possible for all retirement plans, it’s plan specific. If it is available, you usually have to pay the amount you borrowed back, plus interest, within 5 years.
If you get fired or are let go from the company where you have said 401(k), you may need to pay it back in as soon as 60 days. If unable to pay it back, it will count as a withdrawal, which is taxable and can be penalized at 10% if you are under 59 1/2.
As I said in the beginning, organizing your finances is a difficult task. Budgeting, saving, and investing are three huge parts to this, but there are various other factors that come into play.
Having the correct advice on it all is very important, so ignore the myths. It’s also not a bad idea to have a professional by your side. Read this article to learn how to find a good one.
So readers, what’s a money myth you’ve heard that sounded ridiculous?