7 big money myths
Just because the same personal financial advice shows up in headlines, on Facebook and is repeated at the dining room table doesn’t make it true. As it turns out, a lot of conventional wisdom is based on flawed logic — or no logic.
The bad news: Inaccurate information can have a serious impact on your bottom line. In fact, believing common money myths may lead you to spend too much, save too little and get stuck with a lackluster credit score.
But it’s not all doom and gloom.
To save you from making important decisions about saving, investing and paying off debt based on popular opinion, we turned to experts to help uncover the truth behind 7 common money myths.
Keep reading for accurate information that is sure to make you more financially savvy (and might even save you from a costly money mistake).
Owning a home does offer some financial advantages, including appreciation and tax deductions, but there are times when renting is the smarter financial decision.
"For a long time, owning a home was a marker of success, but people have started to question that," explains Michael Corbett, real estate expert for Trulia.com and author of Before You Buy. "There are a lot of financial advantages to renting."
Corbett cites the expenses associated with homeownership as one of the main reasons it might make more sense to rent: In addition to costs like taxes, maintenance and association fees, buyers without a 20% down payment will be hit with higher interest rates and additional fees for private mortgage insurance that push the cost of owning a home even higher.
Writing a rent check is a much smarter financial decision than purchasing a home you can’t afford and losing it to foreclosure.
Our Rent vs. Buy House Calculator can help you decide what's the best financial decision for you.
It’s tempting to prioritize paying off student loans and saving for a down payment on a house over contributing to a 401(k) — especially if retirement is decades away. But starting now gives you a huge financial advantage.
Consider this: Starting at age 35, an annual retirement savings contribution of $5,000 will result in a balance of $796,687 by age 70, assuming a 7% annual return, according to Fidelity Investments. If you made the same annual contribution starting at age 25, your account balance would top $1,641,122 in time for retirement.
"It’s the power of compound interest, and it’s an opportunity younger (investors) should take advantage of,” says Kevin O’Fee, vice president of defined contribution product management at Fidelity Investments.
While maxing out your 401(k) should be your long-term goal, O’Fee acknowledges that the 2013 contribution limits of $17,500 might be out of reach for younger investors.
"It’s OK to start small, just start," he advises.
Our 401(k) calculator can help get you started.
You might feel stretched to the financial max, but you probably can find room to make deposits to savings or investment accounts.
To figure out how much you can afford to invest, review your income and expenses. You might be surprised to discover that you’re spending a significant chunk of your paycheck on extras like takeout and taxis. The U.S. Department of Labor estimates that the average consumer spends $225 per month on entertainment and $225 per month on dining out.
Translation: There is almost always enough wiggle room to trim expenses and invest the extra cash.
"Once you recognize where your money is going, you can start making changes to your budget," Fidelity Investment's Kevin O’Fee says. "You might need to cut out your morning coffee or take lunch to work, but the short-term sacrifices will lead to long-term financial gain."
There is a nugget of truth here: You can’t go into credit card debt if you’re not charging purchases on plastic. But just because you’re not getting a monthly bill from Visa or MasterCard doesn’t mean you don’t have debt.
"It’s almost impossible to avoid debt," notes Beverly Harzog, consumer credit expert and author of the forthcoming book, Confessions of a Credit Junkie. "You can have a mortgage or car loan or student loans, all different forms of debt."
While it’s a good idea to avoid credit card debt, avoiding credit cards altogether isn’t a smart financial move. In addition to providing a buffer in case of emergencies, having a credit card can help build your credit score.
"Using your credit card and paying the balance off at the end of the month shows (the credit bureaus) that you can handle different kinds of debt," Harzog says.
Having a credit card with an available balance is essential in case of emergencies, but never using the card is problematic.
"You have to use the card to benefit from it," says credit expert Beverly Harzog. "You need to show the credit bureaus that you can manage credit responsibly (in order) to build new credit or re-establish credit."
There is another reason to keep all of your cards in regular rotation: Inactivity could cause the credit card issuer to cancel your card, leaving you without the extra credit you may need in an emergency.
You don’t need to go on a spending spree to build credit and avoid having the card canceled. According to Harzog, charging a few small purchases per month — think gas and groceries — is enough to satisfy the card issuer and the credit bureaus.
"Just be sure to pay off the balance within the grace period," she says.
The credit bureaus (Experian, TransUnion and Equifax) do consider account balances as part of your credit score, but it’s not the amount you owe that matters: The bureaus are concerned with utilization, or the ratio of what you owe to your available credit limits.
Keeping your utilization under 30% will help improve your credit score, according to Maxine Sweet, the vice president of public education for Experian.
"If your balance is too high (compared to your available credit), it can actually hurt your credit score," Sweet says. "The best way to build a positive credit score is to get a credit card and pay the balance off at the end of the month."
Even if your utilization rate is low enough that it doesn’t hurt your credit score, carrying a balance has financial consequences: "You pay finance charges, which can be quite steep, on unpaid balances," Sweet notes.
While a nest egg is nice, there are plenty of reasons to direct extra cash toward paying down debt before you pad your savings.
"If you’re paying 25% interest on thousands of dollars, the debt snowballs quickly," says credit expert Beverly Harzog. "Putting an extra $25 or $50 toward high-interest debt will have a much bigger impact (on your financial stability) than putting the same amount of money in a savings account."
Paying down debt may also give you more options in case of emergency: You may not have $2,000 in cash for an unexpected car repair, but paying down the balance on your cards can help ensure you have enough credit to get you back on the road.
There is another reason to focus on decreasing debt over stockpiling savings: Unlike, say, a mortgage, which is considered "good debt" and can help build your credit score, credit card balances could drag your score down, Harzog says.