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10 Personal Finance Myths – Busted


With all the personal finance advice on TV and strewn across all corners of the Internet, it can be hard to know what’s fact and what’s fiction. So we’re here to help. Below are 10 popular personal finance myths that people like to spread, as well as why you shouldn’t buy into them.

1. There’s No Reason to Save For Retirement Before You’re 40

It’s never too early to start saving for retirement. In fact, the earlier you start, the harder your money can work for you (instead of the other way around). The difference of just 10 years can be significant: for example, if you invest $500 in a money market account that earns 8% and add just $50 a month, you’ll have $186,687.08 at age 65. If you wait until you’re 35, however, and do the same thing, you’ll have less than half as much, or $79,985.84.

2. Buying a Home is Always Better Than Renting

Everyone’s situation is different but some factors that should go into your decision of whether to buy vs rent include your ability to cover up-front costs (closing costs, down payment, etc.), how long you plan to live there and your credit score. Sometimes renting can be the better choice.

3. Carrying Credit Card Balances Will Boost Your Credit Score

The opposite is closer to the truth, since credit scores are calculated using a credit utilization ratio, which means the less debt you have relative to how much lenders are willing to lend you, the better off you are. This is the relationship between your balance and your credit limit. The trick to using credit cards to boost your score is to use them and pay them off in full each month rather than carry a balance.

4. Precious Metals Are Always a Good Investment

Contrary to late night cable ads, precious metals (including gold) are not usually the best place to invest your money. Precious metal prices can be extremely volatile and subject to wild price swings. For example, if you purchased gold at its peak of $1,980 an ounce, in February 1980, and sold it today, you would lose $700. In fact, the price of gold has never passed its 1980 high, so no matter when you sold it you would have lost money.

5. You Only Have One Credit Score

There are three major credit reporting agencies–TransUnion, Equifax and Experian–along with thousands of banks, all of which may be using different formulas to calculate your credit score. While each may come up with numbers that are close, there is no guarantee they will, and even a small difference can dramatically affect your mortgage or loan interest rate.

6. You Can Be Too Old to Invest in Stocks

There is no age limit to investing in stocks. Just ask 84-year-old mega-investor Warren Buffett. However, as a retiree investor, you may want to scale back your investments in the stock market based on your need for liquidity.

7. It’s Too Late to Save for Retirement

A mistaken belief among some is that once you pass 50, it’s too late to start saving for retirement. That couldn’t be further from the truth, though, thanks to our ever-increasing life expectancy. No matter your age, it’s a good idea to be saving some of your income for retirement. While you may have to push back your retirement date or alter the style of retirement you were dreaming of, having something is certainly better than having nothing.

8. I Don’t Earn Enough to Save

A common variation of this is, “the amount I can put aside is just too small to make a difference.” But the two most important things to know when it comes to savings are that any amount you save is better than saving none at all, and saving is a habit. And the sooner you develop that habit, the better. A good tactic can be to start with whatever you can save now and then add 1% each year (or 5% or 10% if you see significant income boosts).

9. Minimum Payments Are Fine

Minimum monthly credit card payments are a trap that can prove quite difficult to climb out of. Credit card companies love customers who only make the minimum payment because they earn lots of interest for doing nothing. You essentially end up paying much more for whatever you bought.

10. If It’s More Expensive, It’s Better

Bigger is not always better, and neither is more expensive always an indication of superior quality. Generic drugs are a fraction of the price of their brand-name cousins yet often just as effective. Comparison shopping for quality and price will lead to all sorts of places where you can find the same or better goods and services for less.

Photo credit: flickr