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Don't Bank on It
Between personal finance blogs, money pundits on television, and input from family, friends, and even neighbors, there's no shortage of advice to be had about money — how to make it, how to manage it, and how to grow it. It can be hard to separate fact from fiction. To help sort through it all, Cheapism has reached out to personal finance experts and asked them to share some of the top money myths, covering everything from credit cardsand personal debtto real estate investing, car loans, and retirement funds. Here's what they had to say.
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Debt Is a Tool
How many times have you been told you can use debt as a tool? Dave Ramsey, author of "The Total Money Makeover," says debt has been sold to us so aggressively, it's often hard for most people to imagine having a car without a car payment or going to school without using a loan to pay for it. "Debt adds considerable risk, most often doesn't bring prosperity, and isn't used by wealthy people nearly as much as we are led to believe," Ramsey, who suggests it's better to instead live below your means and pay cash for the things you want.
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You Should Conquer Larger Debts First
Financial advisers far and wide preach the importance of paying off larger debts with higher interest rates first. While it is a good idea to pay down higher interest debt, there's also something to be said for paying small balances. Research by the Harvard Business Review found that it's motivating for people to see small balances disappear. Paying off several accounts with small balances can have a powerful impact on one's sense of progress.
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Stay-at-Home Spouses Don’t Need Life Insurance
In many families, one spouse or partner works outside the home, while the other focuses on child care or other responsibilities that don't necessarily involve bringing in income. But it would be foolish to think that such a scenario means you need life insurance only for the breadwinning partner. "If you're the sole earner in your family and your spouse passed away, how would you handle all the auxiliary expenses you would require for child care and other household management issues?" asks Marc Diana, CEO of the website MoneyTips.
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Stay Away From All Credit Cards
Credit cards are viewed as the gateway to debt, and rightfully so. Thus, the popular wisdom has become that it's often best to stay away from them altogether. If you make all your payments on time and pay in full each month to avoid interest, though,credit cards can have their perks. "Many credit cards have reward programs that allow you to earn points or money back simply by using them," says Jennifer McDermott, of the personal finance site Finder.com. What's more, making payments on time can increase your credit score, and a high credit score can make it easier to buy a home and get favorable interest rates.
Buy Because It’s a Bargain
Snatching something up because it's on sale or is a bargain is one of the biggest false economies out there. "In our eagerness to save money on expenses, believing you're getting a bargain can financially punish you in the long run," says Chelsea Hudson, former personal finance expert for TopCashback. "Often, you are still wasting money. False economies include bulk buying, inadequate insurance policies, and picking price over value."
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Working Harder Means More Money
This certainly isn't always the case. "Logging in extra hard-working hours doesn't always equate to more money. In fact, overworking can lead to exhaustion and less productivity," Hudson says. Work smarter, not harder.
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Leasing a Car Is What Sophisticated People Do
It's often said that it's better to lease things that will rapidly go down in value, rather than buy them. Automobilesare the main focus of this money myth. "Consumer advocates, noted experts, and a good calculator will confirm that the car lease is the most expensive way to operate a vehicle," Ramsey says.
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Used Cars Are a Better Value
If you're using a car loan, buying new may be a better value. An analysis by Finder.com revealed that consumers may end up saving as little as $500 in interest when buying used compared with new. "In the long run, the newer car will stretch your dollar further after taking into account additional costs such as insurance and maintenance," McDermott says.
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Budgets Are Only for the Financially Savvy
Detailed budgets can scare the average American away from creating one. While a line-by-line Excel spreadsheet may be a bit much, there are plenty of alternativesthat are less restrictive and less maintenance that can still be useful in keeping you on track, Hudson , says. The goal of a budget is to help you keep finances in order.
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You Can’t Get a Credit Card With Bad Credit
If you have bad credit, don't buy into the hype that you can't be approved for a credit card. "People with bad credit should still be able to get a 'secured card,' which requires a cash deposit upfront that then becomes the card's credit line," Diana says. "Many credit companies offer secured credit cards, and you can apply for them online. Paying them off on time can help rebuild your credit." The key, however, is to use credit responsibly and not rack up debt for things you can't pay for.
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The Higher the Price, the Better the Product
Paying more doesn't always mean getting a superior product, though it's a notion we've been sold over and over. It is possible to find less expensive, generic brands and get the same quality for less. "When you pay more for the same product, you're paying for the brand name, not the product itself," Hudson says.
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I Can Save for Retirement Later
Many young adults, especially those in their 20s, don't make retirement savings a financial priority, in large part because retirement seems like such a distant concept. But it's never too early to start saving for retirement. "Open a retirement account as early as you can and faithfully contribute toward it," Hudson says. "Even if it's only 5% of your salary; the longer you save for, the longer your investments have time to grow."
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The 4% Rule
Many retirees have been told they can plan to spend about 4% of their retirement nest egg each year during retirement and not run out of money. This may be outdated, says Robert Johnson, professor of finance at the Heider College of Business at Creighton University. "While historically that rule of thumb worked in the United States, the current environment of low bond returns increases the likelihood that retirees may well run out of money if that rule is applied going forward," he says. "Better safe than sorry, people would be better served to decrease their spending to perhaps 3% to make their money last."
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Don't Ever Take a Pay Cut
While there's plenty of truth to the idea you should never sell yourself short, taking a pay cut might be inevitable at some point during your professional life — "especially during a career or location change, including moving to an area with a lower cost of living or switching to a career that is less stressful," Hudson says. "To get where you want to be, you may need to take a few detours along the way, including a lower salary."
Buying Is Better Than Renting
Renting has always had a stigma based on the idea that those who rent are throwing away money or paying someone else's mortgage instead of building equity in a home. Untrue. "Changes in the housing market and taxes make it more difficult for owning a home to be the sure-fire way of accumulating wealth," Hudson says. Owning a home also means less flexibility and brings with it countless additional costs such as homeowners insurance, community fees, repairs, taxes, and more. In other words, buying isn't always better.
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Salaried Positions Pay Better Than Hourly Compensation
How many times have you heard that it's better to have a salaried position than hourly compensation? Steven Millstein, a certified financial planner and editor of CreditRepairExpert.org, says this is a myth. "Adjusted for hours worked, salaried positions can end up paying surprisingly little money for the time and effort they require," he said.
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You Should Get a Credit Card to Build Your Credit
Some experts believe credit cards lead you down a slippery slope, rejecting that it's necessary to focus on improving a credit score. Why? Because the point of having a good credit score is to get more credit. "This myth means we have to get more debt so we can get more debt because debt is how we get stuff," Ramsey says.
Moving for a Job That Pays More Is a Good Idea
While there may be some truth to this idea, research first. "Before this benefit is a certainty, make sure to adjust for cost of living in your new neighborhood,"Millstein says. "A job that pays twice as much sounds great until you realize that you must live in an area with prices three times as high."
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100 Minus Your Age in Stocks
A popular asset-allocation guideline suggests that the percentage of a portfolio that should be in stocks is 100 minus your age. (In other words, if you're 60, about 40% of your portfolio should be in stocks.) Ignore this. "According to data compiled by Ibbotson Associates, large-capitalization stocks such as those on the S&P 500 returned 10.2% compounded annually from 1926 through 2017," Johnson says. "Over that same time period, long-term government bonds returned 5.5% annually and T-bills returned 3.4% annually. The surest way to build wealth over long time horizons is to invest in a diversified portfolio of common stocks."
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You Should Have 5 to 7 Times Your Annual Salary in Life Insurance
Life insurance isn't for everyone. Those who've accumulated enough wealth and assets to care for their own needs and their loved one's needs in the event of their death can forgo paying for life insurance, especially if it's a term policy. "Life insurance is a terrific risk-management vehicle for some and an incredibly poor investment for many others," Johnson says.
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Your Expenses Will Be Lower After Retirement
"The idea that after you retire your basic expenses will be much lower is among the financial myths that are destroying people's chances for a secure retirement," says financial security expert and New York Times bestselling author Pamela Yellen. Items such as utility bills, the cost of groceries, and home or car insurance will all cost more as the years go by, not less. In addition, health care costs are also likely to increase.
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You Must Accumulate a Certain Number Times Your Salary to Retire
Instead of focusing on amassing a multiple of your annual salary as a goal for retirement savings, focus on saving enough to cover annual living expenses. "If you make $80,000 annually and only spend $25,000 of it, you have a very different endpoint than someone who spends $75,000 of theirs," says Joe Mecca of Coastal Credit Union in Raleigh, North Carolina. "Set your goal around 25 to 30 times your annual expenses instead of a factor of your salary."
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I Keep Track of My Money so I Don’t Need to Budget
Checking your bank account on a mobile app or online and knowing the balance isn't the same as budgeting. Don't fool yourself. "A budget looks forward. Write it down, each month. Pre-plan. So when a wedding shower or baby shower comes up, you've already got the money planned. If it's not written, it's not real," says Karen Ford, financial coach.
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I Don't Need Disability Insurance
Disability insurance is designed to protect you it you can't work for any reason, from an accident to an illness. But cancer, heart disease, and other illnesses are usually the reason people need disability insurance, not accidents. "It's easy to think you don't need disability insurance simply because you don't think you'll be disabled during your career. But the truth is, just over 1 in 4 people in their 20s will become disabled before they retire," says R. Tyler End, certified financial planner and insurance expert at the insurance website Policy Genius.
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You Need a Lot of Money to Invest
With technology today, it's no longer necessary to have thousands (or even hundreds) of dollars to start investing. "Spare change apps, like Acorns, allow you to invest pennies at a time by rounding up purchases and investing that money," says Dustyn Ferguson, creator of the site Dime Will Tell. "You no longer need to incur high fees for every transaction either, which makes investing small amounts of money actually viable."
The Stock Market Is Too Complex for Average Investors
Don't buy into the notion that you have to be an expert to succeed as an investor. It's simply not true, says Timothy Wiedman, a retired Doane University professor who taught personal finance for years. Those 40 and under should have most of their investments in the stock market — but should do so intelligently, says Wiedman, who recommends low-cost stock index mutual funds that mirror the market as a whole. Investing in such funds does not require any particular investing savvy and provides a better return than nearly any fixed-income investment portfolio.
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You Should Have 3 to 6 Months’ Income in an Emergency Reserve
This rule has been around for years. Since most people dip into such funds when suddenly jobless, the reality is that you need enough money in an emergency fund to pay expenses for the entire time it takes to find a job. Depending on your occupation, it can much longer than three to six months to find work, and an emergency reserve may need to be far larger.
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Going to College Requires Going Into Debt
While the skyrocketing cost of college in the United States is no myth, the first approach to funding education shouldn't always be loans. "There are [many] scholarships out there, and many of them go unclaimed," says Jennifer Hayes, creator of the site Smarty Pants Finance. "Billions, yes, billions with a B, of dollars in scholarships and grants are left on the table each year." Fastweb, Big Future, and Scholarships.comare some places to start when looking to fund an education.
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Your Income Comes From One Job
The days of getting a "one good job" are long gone, at least for some. "It is a myth," says Adrian Huether, head of finance for the software company Evisions. "The new norm is having two to five streams of income. The future of work is multiple streams of income via the world of freelancing and the booming gig economy."
You Should Insure Your Kids’ Lives Because It’s So Inexpensive
When contemplating insurance coverage options, adding insurance coverage for children's lives might be inexpensive, but it isn't necessarily the most beneficial approach. "It might be cheap, but so is an additional $100,000 in term insurance on one of the parents, which is a far better choice," said Scott Johnson, owner of the site Whole vs. Term Life Insurance.
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More Income Equals More Wealth
When people start earning more, they often spend more, buying things they've always wanted or felt they needed. In the end, they're not any better off financially. One of the best ways to ensure that higher earnings translate into a higher net worth is to remain focused on whether all of the spending is moving you in the direction you need to go.
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Coupons Are a Great Way to Save Money
Coupon clippers are 22% more likely than those who don't use coupons to report spending more than they planned, according to a proprietary study by Elevate's Center for the New Middle Class. "The most effective way to control spending is to set strict spending limits," says Jonathan Walker, Elevate's executive director. "Those who set limits were able to maintain their spending." Those who failed to plan at all spent 125% more than strict planners.
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Personal Finances Have Little to Do With the Macro-Economy
One outdated money truth, according to some experts: that it's okay to ignore day-to-day financial news and ups and downs when it comes to your investments. "Times really are changing," says James Pollard of The Advisor Coach. "Retail stores are shutting down, people are cutting their cable subscriptions … All of these macro societal changes affect your personal finances and investments if you happen to have invested in old 'safe' companies that do business in these areas."
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A Debit Card Is the Safest Payment Choice
The notion that using a debit card is far safer than many other payment options has become antiquated. "At one point there was some truth to this," Chargebacks911 co-founder Monica Eaton-Cardone says. "Debit cards are protected by the FDIC, to an extent, and are more easily recovered than lost cash." The internet has altered the landscape, though. Cash doesn't work online. And most credit cards offer zero liability for fraudulent purchases, making them the safest bet.
Money Doesn’t Buy Happiness
We've all heard that money doesn't buy happiness. As it turns out, it does, especially for low- and middle-income people. One study from Princeton University finds that as the income of test subjects rose, their outlook on life improved. In addition, income increases were found to bolster emotional well-being, improving the quality of day-to-day existence.
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It's Too Late to Reach Financial Goals
If you remember nothing else, remember this: It is never too late to have an impact on your finances. It's true that if you don't start saving until later in life, you're unlikely to be able to retire at 55. There are always actions to take to improve your financial outlook and goals. Even small steps, such as increasing the amount you set aside right now, will help in the long run.
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