5 of the Scariest Personal Finance Myths You’ll Ever Hear
Every Halloween, we roam the neighborhoods in search of candy while trying not to get spooked by creepy lawn decor or, worse yet, eerily realistic costumes. But whether you’re the type to scare easily or not, one thing that should frighten you is the amount of bad personal finance advice on the internet.
Not all of that advice is malicious. Some folks who dish out financial advice mean well but are too clueless themselves to realize they’re leading people astray.
The problem is that buying into the wrong myths could drain your wealth or prevent you from building wealth in the first place. So without further ado, let’s unmask five of the scariest personal finance myths you’ll ever hear.
Read: Halloween Spending Hits a Frightening New High. Here’s How to Save
Discover: What Your Halloween Candy Says About You (And Why Kids Are Judging)
1. A raise that pushes you into a higher tax bracket isn’t worth it
You’ll often hear that the more money you earn, the more you’ll have to pay Uncle Sam. That may be true to some degree. But it doesn’t mean you should shy away from chasing raises or promotions because you’re worried about being pushed into a higher tax bracket.
Part of the reason you’ll often hear that a raise doesn’t pay is that many folks don’t understand how the U.S. tax code works. And hey, that’s understandable, since it’s pretty complex.
In a nutshell, our tax system is progressive. When your income moves into a higher tax bracket, only the money earned above that threshold is taxed at a higher rate. Your previous earnings are still taxed at the lower rates you’ve been paying all along.
Earning more money could not only give you the opportunity to spend more on the things you love, but it could be instrumental in helping you meet your long-term financial goals. So don’t avoid higher pay because you’re worried about the tax implications. Work with a tax professional to mitigate your IRS burden while enjoying the higher wages you’ve earned.
2. Credit card balances are good for your credit
You’ll often hear that carrying a balance on a credit card is a great way to build credit. Well, not exactly.
Using a credit card regularly and paying your balance in full every month could be a fantastic way to boost your credit score. Carrying high credit card balances only means losing money to interest and potentially damaging your credit score by using too much of your available credit at once. If you’re trying to build up your credit and want to lean on credit cards to make that happen, find a small recurring charge you can put on a card and pay that bill in full every month. But also, know that you can build credit in other ways, whether it’s paying a mortgage on time or making your car payments on schedule.
3. A savings account is the safest place for All your money
If you have money that’s earmarked as an emergency fund, a savings account is the absolute safest and best place for it. But that doesn’t mean all of your money should sit in a savings account.
If you’re building wealth for retirement, stashing money in a savings account could lead to stagnant growth. That’s because the interest you get from a savings account might pale in comparison to the returns you get from a stock portfolio over an extended period of time.
And if you’re worried about losing money in the stock market, consider this. A bank account may keep your principal dollars safe, but it subjects your money to an insidious monster – inflation. If inflation outpaces the rate you earn on your savings, over time, your money will lose purchasing power. That could leave you with a serious retirement shortfall.
So while your emergency fund can and should sit in cash, your retirement nest egg should not. If you want to protect that money while growing it, invest in a wide range of stocks so you’re not too concentrated in a single company or sector. An S&P 500 index fund may be a good option if you don’t like the idea of having to choose individual stocks.
4. All debt is bad debt, so avoid it like the boogeyman
We just talked about credit card balances as a drain on your finances. But that doesn’t mean all borrowing is bad. While it’s generally best to avoid high-interest credit card debt, low-interest, fixed debt like a mortgage could help you grow your net worth.
Imagine you take out a mortgage to finance a $500,000 home. You then sell that home 15 years later for $900,000, pocketing a nice profit. That’s a win, not a problem. So don’t assume all debt is bad, and all debt is equal. Some debt is worth carrying if it lends to a bigger goal.
5. You’ll never get rich if you rent
While there’s nothing wrong with taking out a mortgage to finance a home purchase, you also don’t want to buy into the myth that you’ll never get anywhere financially if you rent a home instead of owning one. When you rent, you lock in your costs for the duration of a lease. It means you don’t have to deal with surprise repairs or a property tax hike.
Do you get to build equity in a home by renting? Nope. But building equity isn’t the only way to grow your net worth. If you take the money you aren’t spending on maintenance and repairs by renting (since, as a tenant, neither is your problem) and invest it instead, you may find that you’re sitting on a substantial net worth over time, even if you don’t own more than a couple of old futons and a battered coffee table by the time retirement arrives.
It’s time to unmask the truth
Personal finance myths like these survive because they sound simple, logical, or comfortably cautious. But when you dig deeper, you’ll realize the so-called advice above may be holding you back from reaching your goals.
This Halloween, banish these finance phantoms for good. Understand how the tax system works, invest and take on debt strategically, and don’t let fear dictate your money-related decisions.
