At MPower Co our goal is to provide financial information you can trust. But with so much information out there, it can be easy to get confused about what’s true and what’s not with financial best practices.
We compiled a list of 7 money myths that many Americans believe to be inherently true, and in this post will explain why with respect to these seven things, not everything is always what it seems when it comes to personal finance.
1. All debt is bad debt.
While there is an argument to be made that having debt is not as ideal as being debt-free, there are a few times when debt is the only plausible option. Most experts agree that there are two types of debt: good debt and bad debt.
Good debt is debt that brings value when taken on, like buying a home. Paying for education and starting a small business are also types of good debt according to the principals of personal finance. If you take on debt for these reasons while being smart about why you are taking out the debt, it’s not considered bad debt.
Any other types of debt, like credit card debt and car debt, is likely to be considered bad debt and should be avoided if financially possible. However, it all depends on how you’re prioritizing your financial responsibilities. The truth is, there’s no answer that’s right for everyone. If you’re looking for advice on navigating your debt, try one of our coaching sessions.
2. I’ll start saving when I have more money.
When you’re young, all income likely feels like it is already spent —especially with student loans and expensive housing. These things make savings, especially for retirement, seem impossible. But the truth is, the earlier you start saving, the easier saving becomes.
Not only because saving will start to become a habit, but also because that money will compound over time and end up bringing in more value (at less of a risk to you) than if you waited until later in your life.
We like to think of saving for retirement or other big purchases as paying yourself first Whether you’re paying yourself $50 or $500, that is still a step in the right direction. And once you have started, it’s easy to incrementally make increases to savings in short order.
One strategy to increasing savings is every time you get a raise, cost of living adjustment, or other additional source of income, increase your savings amount first. The earlier and more frequently you increase your savings, the earlier you will reach your goal.
3. It’s too late to start saving money for retirement.
If you’re nearing retirement and feel like saving today won’t change tomorrow, you’re not alone. A vast majority of older adults are fearful of retirement and feel unprepared. In fact, 17% of baby boomers have less than $5,000 in retirement savings, according to CNBC.
But, that doesn’t mean you shouldn’t do anything about it. The only thing worse than not having started preparing for retirement previously, is not starting today to prepare for retirement and waiting until tomorrow, next month, or next year. Not sure where to start? We can help with that!
4. My partner manages our money, so I shouldn’t worry about it.
Unless you are 100% confident that your spouse or life partner is a sound financial decision maker, knows exactly what you want to do with your finances, and you are certain will honor your wishes, too, you should at the very least understand where your money is going and how it’s working for you and your family.
We’ve seen examples where one partner manages all the finances and then they become incapable of managing the finances or the person was financially dishonest in the relationship, which is just as bad, if not worse, than infidelity. These situations leave both individuals at a financial disadvantage if they do not have some comfort level with their shared finances.
While it’s completely fine for one half of the relationship to handle the day-to-day management, we think it is crucial that both partners are aware of the state of the family’s finances in order to make smarter decisions that benefit everyone in the long run.
Want to boost your finances as a couple? Learn more about our financial course for couples!
5. Carrying a balance on my credit card improves my credit score.
This is one of those personal finance myths that we have heard hundreds of times. It’s simply not true.
The best thing for your credit score in regards to your credit card is to pay it on time, every time. Paying your credit card off in full every month shows that you are credit worthy and pay your debts.
Plus, it’s a good habit to get into, because it means you will avoid paying high interest rates, reduces risk that you accidentally miss payments if you have and use multiple cards.
6. Buying a home is always better than renting.
Like many financial opportunities and goals, this is one of those money management myths that isn’t applicable to everyone.
Buying a home can be a better option than renting. But in some situations, renting makes much more sense.
Homeownership is not cheap, as you must maintain the property and pay taxes on the property on-top of the mortgage payments. Also, there are costs associated with buying and selling. So, a time where renting may make more sense is if you are young and need or want flexibility with respect to where you are located. If you don’t have emergency funds to pay for a new water heater, or a new roof, renting may make sense while you build up an emergency fund. There is also a lot to think about with respect to the market you live in that could also make renting vs. owning or owning vs. renting more important.
But for many individuals or couples, investing in a home is a smart financial investment. Within the principals of personal finance, there is a rule of thumb that your mortgage payment should not exceed approxiately 30% of your take-home-pay.
Ultimately, renting or owning is a personal decision, but there are a lot of factors to considered; therefore, condensing buying is always better than renting into one definitive statement is a myth to MPower Co.
7. I’ll be happy as soon as I save/have ___.
Hinging your personal happiness on anything related to finance is a myth. Money should not be the thing that makes you happy. Having a certain amount in your account or having a certain object should not be the thing that makes you happy.
Instead, shape your thoughts to be, I’m happy with what I am working towards; I am proud of what I have accomplished so far. If you are not these things currently, then perhaps setting some goals and rearranging financial priorities could be a focus for you.
That’s why we’ve created our Richer Retirement course based around positive psychology topics to help create a more well-rounded approach to finance and retirement planning.
When it comes to personal finance, most things are not definitively true or definitively false. That’s why it’s important to talk to someone with vast experience in the industry, who can help you navigate your specific situation. If you’re ready to tackle your personal financial situation and better your skills, we’d love to know how we can help.