It’s easy to believe that oft-repeated pieces of advice are true. Keep reading to learn about five pieces of financial advice that can cost you big.
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Some financial advice has been repeated so often that it’s accepted as truth. But what if it’s wrong, and that advice costs you money? How can you tell fact from fiction? Here, we’re outlining five financial myths that may make sense at first glance but deserve a harder look.
1. It’s irresponsible to use credit cards
Discussing credit cards requires nuance. It’s irresponsible to say that cards should never be used and careless to encourage people to rack up more debt than they can handle. Unless you have compulsive spending habits and cannot have a credit card in your wallet without going on a shopping spree, there’s no reason to pretend credit cards don’t exist. There are at least two solid reasons for this, both of which impact your financial situation.
Credit card rewards
Credit cards can earn you great rewards. The trick is to use them judiciously. For example, my husband and I put most of our monthly expenses on one of two credit cards just for the reward points. Paying the cards off in full before the billing cycle ends means we pay no interest. Points on one of our cards recently covered airfare to Puerto Rico, and we’re saving the points on the other card for a bigger trip next year.
Boosting your credit score
Financial personality Dave Ramsey tells his followers they should stop using credit cards and allow their credit scores to go extinct. There are many problems with this advice, but here I’ll point out two:
Using credit cards responsibly is one way to boost your credit score, and a credit score is the primary way lenders, landlords, and employers can tell how well you’ve managed credit in the past.Allowing your credit score to go extinct only makes sense if you’re positive about the future. For example, are you sure that you’ll never have an emergency too expensive to pay for in cash, be single and need credit, and will always have a job? None of us knows the future, which makes maintaining a healthy credit score a more reasonable option.
2. You’ve only made it in America after you’ve purchased a home
As of 2022, roughly 66% of Americans were homeowners. Sounds great, right? The issue is, we don’t know how many of those homeowners would have been better off never buying. A report by Hippo found that 78% of people who managed to buy a home in 2022 had regrets. Nearly half said that homeownership was more expensive than they anticipated.
Julien Saunders, along with his wife Kiersten, is host of the investing podcast rich & REGULAR. They’re also the authors of the well-reviewed book Cashing Out: Win the Wealth Game by Walking Away. Regarding the myth that an American hasn’t “made it” until they’ve purchased a home, Saunders said, “Whenever this subject is brought up in a group setting we ask people three questions. First, how many people have heard that buying a home is the best investment you’ll ever make in your life? And everyone’s hands go up in the air. Secondly we ask, how many of you know a lot of people who are homeowners? Typically a few hands go down but several remain raised. Lastly we ask, how many people know just as many homeowners as they do rich people? And almost all of the hands go down. It tends to stop people in their tracks and force them to reconsider whether the belief is valid and what other outdated beliefs they may be holding onto.”
If there are other things you’d rather do, like travel the world, start a business, or invest the money you would have spent maintaining a home, there’s no rule saying that you have to buy. Before you visit a mortgage lender, be 100% honest with yourself about what you want from life. The American Dream is about achieving your goals, not someone else’s.
3. Investing is for other people
There’s no doubt that investing comes with a learning curve. But then, so do driving, ice skating, and romantic relationships. In other words, you don’t go into anything new in life with all the answers tucked away in your brain.
Julien Saunders says that they typically hear “investing is for other people” from those who are deeply insecure about their chosen field of study. “They are often holding onto the belief that being good at investing means you studied finance, were naturally or culturally inclined to be good at math, and as a result — are good at investing. In these moments, we try to reframe investing as a subject and series of habits that can be learned like anything else.”
One of the easiest ways to get started is by contributing to an employer-sponsored 401(k), a Solo 401(k) (if you’re self-employed), or an IRA. With each of these, your money is pooled with that of other investors, and the investments made are balanced enough to provide protection. And because professional money managers are handling them, you can follow along to learn what they’re doing.
4. You’ll find the lowest interest rates at a car dealership
If you’ve ever sat down in a car dealership to hammer out the details of a purchase, you’ve likely spoken with the dealership’s finance person. Chances are, this person told you they have a great arrangement with a bank or auto manufacturer. Due to that relationship, they can offer you the lowest possible interest rate.
They may be right. Those rates may be impressive enough to blow your hair back. But then again, they may just be blowing smoke. Before committing to a loan, check several other lenders to learn their rock-bottom rates. Then, compare two or more loans, looking for the offer with the lowest rate and fees.
You can save yourself a hassle by loan shopping before you go car shopping. That way, you’re in control of how much you borrow and already know what your offers look like before you sit down with the finance person.
5. Your credit cards can serve as your emergency fund
Some say that an emergency fund is less important than it’s made out to be and shouldn’t necessarily be a financial priority. The reasoning goes something like this: As long as you have a credit card, you’ll always have the money you need to cover an emergency.
This could not be further from the truth. They should say, “As long as you have a credit card, you’ll always be able to borrow money to cover an emergency situation.” Using a credit card is like taking out a short-term loan, and that loan has a ridiculously high interest rate.
Imagine that your tankless water heater dies, and no amount of tinkering will bring it back to life. You need $3,500 to cover the cost of a new unit and installation. If you had the money in emergency savings, it might pinch a little to pull it out to pay for the water heater, but it would only cost you $3,500.
Let’s say you use a credit card with an interest rate of 17% instead. You can’t pay it off before the first billing cycle ends, so you make monthly payments of $100. Here’s what you can expect:
It will take four years to pay the card off.You’ll pay an extra $1,369 in interest.You’ll have $100 less per month to use toward other things.
The good news is that you’ll build your credit score if you make timely payments. Thanks to interest, the not-so-good-news is that you’ll have $1,369 less in your checking account.
Hearing the same financial advice over and over again does not make it true. It’s your money, so make it a point to research any advice that seems questionable.
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