In a perfect world, everyone would have the necessary knowledge needed to make smart financial decisions. Unfortunately, we live in far from a perfect world, and personal finance mistakes often come far easier than smart decisions.
Hiding among the numerous money mistakes you can make are 10 particularly bad personal finance myths that continue to sucker people into making poor decisions. These are myths that are genuinely believable on the surface, but when you dig a bit deeper their semblance of truth melts away. Our goal is to put these myths to rest for good.
In no particular order, here are the 10 most egregious personal finance myths.
1. I don't earn enough to save money
On the surface, it can be very difficult for lower-income individuals and families to save money. Wage growth in the U.S. isn't great, and the cost to pay for college and medical care is soaring relative to wage growth.
However, a deeper examination based on a Gallup poll from 2013 shows that just a third of American households maintain detailed monthly budgets. Without a budget it can be nearly impossible to understand your cash flow and maximize your ability to save. If all Americans were working with budgets, chances are the vast majority would be able to save money, regardless of their income.
2. A penny saved is a penny earned
The idiom "A penny saved is a penny earned" has been deceiving investors since 1732 when it was first published in Benjamin Franklin's Poor Richard's Almanack. That's right folks, a myth that's lasted nearly 300 years. The phrase suggests that saving money is just as beneficial as earning it through work.
In reality, saving money is great, but it's what you do with the money you save that really matters. Saving money and putting it in the bank won't earn you very much at all for the time being. Bank CDs and savings accounts are yielding 1% or less, meaning you'd lose real money once inflation is factored in. A penny saved and not invested in the right assets simply means you'll have less than a penny in purchasing power when you need it.
3. Assets should be allocated based on a set formula
Though it's impossible to narrow down its precise origin, an old rule of thumb when it comes to investing is to subtract your age from 100 or 120, with the leftover being the percentage that should be invested in the stock market.
Truth be told, there is no concrete formula that adequately encompasses everyone's financial situation or what percentage of their nest egg should be invested in stocks. Factors such as personal health, affinity for risk, and retirement goals could affect your desired allocation toward stocks. The aforementioned simplistic formula simply doesn't take these influences into account.
4. Cash is king
Cash can be great for a number of things. Having cash in the bank provides a feeling of security for Americans, and purchasing goods and services with cash can sometimes lead to discounts. But cash is far from king.
In actuality, cash can come with disadvantages. For instance, having cash on hand means you are probably losing purchasing power as long as the inflation rate is positive. Also, goods and services can be paid for using a credit card that provides rewards and allows you to review a detailed report of your previous month's spending.
5. I have to be rich to invest in the stock market
If this were the 1980s there might be some semblance of truth to the idea that the stock market is only for the well-to-do. Access to information wasn't as easy prior to the internet, and the cost to execute trades, along with minimum deposits for a brokerage account, were considerably higher.
Today, though, the idea that the stock market is a playground solely for the rich is pure fiction. Access to information can be had with the click of a mouse; commission costs are just a fraction of what they used to be; and minimum deposits are far lower than they used to be. As icing on the cake, services like Capital One Investing (formerly ShareBuilder) exist that allow for automatic contributions on a weekly, biweekly, or monthly basis for a low commission ($3.95 if it's automatic). Capital One also has no minimum deposit requirement.
Make no mistake, the stock market is open to everybody.
6. A home is a good investment
Another pervasive myth is that buying a home is a good investment. It's hard to argue with homebuyers between 1997 and 2007, who saw the value of their homes double, if not grow more, over a decade. Yet over the long-term, a primary residence is typically a poor investment.
According to data from Robert Shiller via Irrational Exuberance, home prices between 1890 and 1990 only outperformed inflation by an average of 0.21 percentage points per year. Between 1950 and 1997, the inflation-adjusted return was even more anemic at 0.08% per year. What this demonstrates is that home prices tend to tread water with the rate of inflation rather than build real wealth for homeowners over time.
7. Credit cards are bad news
According to a popular personal finance myth, credit cards are bad news for consumers. There's a little bit of truth to this one in that persons with poor money management skills could indeed get themselves into a lot of trouble by running up their credit cards with debt.
But credit cards also serve a great purpose. Having credit, and keeping your creditors happy, is the key to establishing and growing your credit score. You're probably well aware that your credit score can influence your ability to get a mortgage or a loan. However, your credit score can also influence your ability to get a job or rent an apartment.
8. Carrying a balance helps your credit score
Sticking with the theme of credit, another popular myth involves an accountholder carrying a balance on their credit card in order to improve their credit score.
In reality, your credit score is completely unaffected by whether or not you carry a balance on your credit card(s). Per CreditCards.com, the five factors that influence your credit score are payment history (35%), credit utilization (30%), length of credit history (15%), new credit accounts (10%), and credit mix (10%). Nowhere in there does it say you have to carry a balance. But you do have to make your payments on time, and be mindful of how much of your credit you use in order to appease the credit rating agencies.
9. Social Security won't be around when I retire
When it comes to arguably the most important social program in the U.S., the idea that Social Security is going bankrupt and/or won't be around when millennials retire has been around for a long time. Make no mistake -- Social Security is in trouble, with the Board of Trustees predicting that it'll burn through its current cash reserves of more than $2.8 trillion by the year 2034.
However, the fact of the matter is that the program is far from bankrupt. In a worst-case scenario, the Trustees have forecast that an across-the-board cut in benefits of up to 21% would sustain the program through the year 2090. Though future Social Security benefits may not be on par with today's benefits when factoring in inflation, Social Security will be there for millennials when they retire.
10. Wills are only for rich people
A final personal finance myth that's been circulating for some time is the idea that only wealthy people should worry about having a last will and testament. Around half of all Americans between the ages of 55 and 65, per Kiplinger, don't have wills. Unfortunately, if you pass away without a will, the state you live in can decide how your estate gets divvied up. If you have no spouse or children, your property will wind up going to the state.
The truth is that a will is relatively cheap to set up (perhaps less than $70 if you use a do-it-yourself website), and should be a necessity for everyone, even if you're just spelling out your final wishes.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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