10 Financial Myths: Busted
There’s an abundance of financial information available at our fingertips. But not all of it is reliable. Credit cards are evil. Investing is for the rich.
Financial myths like these are prevalent.
Don’t be deceived. Holding this information as fact may lead you down the wrong financial path.
Here’s the truth behind 10 commonly held financial misconceptions.
No. 1: Credit cards are evil
Scared of racking up debt? Ruining your credit score? Don’t blame credit cards — they aren’t necessarily bad for your finances.
Credit cards are simply a financial tool. They offer convenience, security, and a variety of rewards. Credit card debt is the problem.
According to a 2019 TransUnion report, the average cardholder is about $6,000 in credit card debt. And mismanaged credit cards can negatively impact your finances. So take precautions and use them responsibly.
No. 2: Student loans are good debt
Good debt is borrowed money that is invested in something increasing in value. For example, a mortgage is considered good debt, because it has a high return on investment (ROI).
Student loan debt is also considered good debt. But that’s not always true.
Different degrees have different ROIs — like a Bachelor of Arts versus a Bachelor or Science. Further, the reputation of the college or university plays a large role. Before taking on student loan debt, determine if the expensive college degree is worth the price tag.
No. 3: An emergency fund must have six months of expenses
Financial advisors often suggest that an emergency fund should equal six months of expenses. There’s nothing inherently wrong with this suggestion. But it’s also not a hard and fast rule.
Every financial situation is unique. For example, workers with an unstable income might want to save more than six months of expenses. Alternatively, a large emergency fund might be better spent paying off debt.
Use six months as a baseline, then determine the best amount to keep in an emergency fund based on your finances.
No. 4: Budgets are a headache
Budgets are always complicated, confusing, and headache-inducing. Not true. You likely haven’t found the right fit for your lifestyle.
Tired of counting pennies? Only track the expense categories that bust your budget. Hate spreadsheets? An online budgeting tool will automate the process for you.
No. 5: You need to be debt-free to invest
The popular Dave Ramsey approach is to become debt-free before investing. This opinion is controversial, as many financial advisors warn people not to miss out on prime investing years.
One example is a 401(k) with an employer match. Why miss out on retirement dollars to prioritize debt?
The right choice is highly dependent on your personal financial situation. So determine if you’re ready to start investing. The answer might surprise you.
No. 6: You need to be rich to invest
You don’t need to be wealthy to invest. Anyone can invest with a few dollars.
A 401(k) is a great example. You’re likely already taking advantage of an employer retirement fund to invest for the future. In fact, investing is one of the most effective ways to build wealth and security. Thank you, compound interest.
So what are you waiting for? You are fully capable of investing — no matter your budget.
No. 7: A perfect credit score is important
Reaching a perfect 850 credit score is an achievement. But does it really matter?
An 850 credit score is considered by some as little more than a vanity number. A score over 800 is an excellent credit score. An 850 is top tier, but those extra 50 points might not make a huge difference.
Even with a high credit score, you can fail to qualify for the best rates. Why? A credit score isn’t the only factor to consider when applying for financial products.
Ultimately, a lending decision is determined by an individual lender. And your credit score is only one piece of the financial picture.
No. 8: Insurance is a waste of money
I’m healthy. I’m young. I don’t need insurance. Right? Wrong.
Insurance puts money away now to pay for unexpected expenses in the future. Common types of insurance include health insurance, car insurance, pet insurance, renters or homeowners insurance, and life insurance.
Insurance can be expensive, but forgoing it can be costlier. In fact, insurance coverage is one of the best ways to avoid debt. Before you waive coverage, remember that short-term savings can have long-term repercussions.
No. 9: Always buy used or secondhand
Why buy new when you can save money on secondhand? Thrifty shoppers say it’s sound advice, but when taken to the extreme you might lose money.
Buying secondhand is a great practice to reduce costs and upcycle for the environment. But it’s not the best choice in every situation.
New versus used shouldn’t be the only purchasing consideration. Keep in mind the quality, longevity, and return on investment. That’s why it’s important to comparison shop.
Remember: Bad quality means buying twice. So instead buy right, buy once.
No. 10: You’ll never be able to retire
Let’s face it, there is a lot of confusion and pessimism surrounding retirement — especially from younger generations. But with the right financial plan, you can make it happen.
The earlier you start planning for retirement, the more likely you will achieve it. In fact, time is on your side when you start young. For instance, if you have a high risk tolerance, you can save and invest more aggressively over a longer period of time.
Don’t forget to take advantage of a job’s retirement plan — as many offer a 401(k) match, which allows you to increase your savings at no extra cost.
Separate fact from fiction — before financial misconceptions lead you down the wrong path to financial ruin.