This post is by our regular contributor, Erin.
How many of you want to scream “Nooo!” when you overhear someone stating a popular financial myth as fact?
I know I do.
In fact, I was a victim of believing one of the more popular ones, thanks to my parents (oops!).
Most people have good intentions when it comes to spreading financial myths; they simply don’t know any better.
Unfortunately, that’s why it’s so important to speak out against them, especially as some myths can be rather disastrous for your finances.
Here’s a list of 7 common financial myths.
1) Carry a Balance on Your Credit Card
Contrary to popular belief, this does not help your credit in any way. You should never carry a balance (of any amount) on your credit card.
If you do, then you have to pay interest, and that means credit card companies are making money off of you. In no way do you benefit from this arrangement!
To show credit utilization, you just need to have a balance on your card at the time it’s reported to the credit bureaus. Figure out when that is (check your credit report), and then pay the balance off in full after that. If you have automatic payments set to pay the balance in full, you should be safe.
Unfortunately, I fell victim to this one as my parents informed me it was a good idea. I only kept around a $30 balance month-to-month, but it was still interest I didn’t need to pay.
2) Applying for a Loan or Credit Card Doesn’t Hurt Your Credit
This can be true in certain cases, but in general, if you’re applying for a loan or a credit card, your credit score may decrease.
Any time you apply to borrow money, your credit is run. This is called a hard or soft inquiry. Hard inquiries can cause your score to drop by a few points, whereas soft inquiries won’t harm your score.
For example, applying for a credit card might drop your score by a few points, but checking your own score won’t.
However, if you apply for a loan and you’re shopping around, credit bureaus will cut you a break as long as you do your shopping within a 45 day period. They understand you’re trying to get the best deal, so they count all inquiries in that timeframe as one single inquiry.
3) The Stock Market Isn’t a Safe Place For Your Money
Well, neither is your mattress, because your money is losing value by being there! The only way your money has any hope of keeping pace with inflation is if it’s earning more. That can only happen when it’s generating interest, and the best returns are in the stock market.
I know it can be scary, but it’s foolish to keep your money outside the market out of fear. As a young adult, you have a lot of time to ride the ups and downs the stock market will inevitably have. That’s a good thing, because you have more time to earn back any money you may lose.
4) Credit Cards Are Horrible
Sure, they can be … but lots of things in life are horrible ideas for some people, and work well for others.
There are some people out there who can’t trust themselves with credit, and it’s good they know their limits. For others, credit cards could be a decent way of building credit, getting rewards, or getting free travel.
You shouldn’t buy into this myth based on the experience of others – you need to figure it out yourself. As long as you know how to use credit responsibly, and can follow those steps, you’ll be fine. Credit cards don’t necessarily kill your finances – bad financial habits do.
5) Having a Bunch of Stuff = Wealth
The amount of material possessions you own doesn’t equate to the amount of money you have. In a lot of cases, it’s probably indicative of how much debt you’re in.
For the most part, I don’t think people should concern themselves with what other people are doing with their money (it takes your focus away from what matters most – your money!).
However, if you find yourself assuming how well-off people are based on what they have, you’re probably wrong. The typical millionaire next door isn’t going to have a bunch of toys in their garage or own a McMansion.
6) Money Buys Happiness
Yes…and no. More often than not, money doesn’t buy true happiness (though it can buy some worthwhile things that contribute to happiness and security). In fact, it has been proven earning past a certain amount doesn’t increase your everyday happiness level.
This study by economist Angus Deaton and psychologist Daniel Kahneman has been cited often: earning $75,000 a year was found to be the sweet spot for happiness. That’s good news for most people (depending on where you live) – you don’t need to be earning six figures to be happy!
In any case, unless you’re living in poverty, life is largely what you make of it. If I didn’t have student loan debt, my salary (which is definitely not near $75k) would leave me pretty darn content. The relationship between money and happiness is relative.
7) You Save Money When You Get a Deal
This is a pretty common false financial belief. You’re not actually saving money when you buy something. Spending money is still spending money. I know it kind of boils down to semantics, but it’s worth thinking about.
Truly saving money only happens when you don’t spend it. If you get a deal, you’re simply not paying full price for something. It’s not the same thing.
Likewise, when you’re at the store and the cashier announces how much you “saved” on your shopping trip, you didn’t really save that money. It’s just a number, unless you take action on it and actually move the amount “saved” from your checking to your savings account.
________________
There are a lot more financial myths out there, some more controversial than others, but hopefully these open your eyes or get you thinking differently about money. Don’t take conventional financial wisdom at face value – always dive a little deeper!
What are some other common financial myths you run into? Which ones have you believed at some point?
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I think that’s the highest I’ve heard yet for the sweet spot. First I heard $40K, then a few years later it was $50K. $75K is quite a bit higher. Maybe it’s weighted up by some of the higher cost of living areas.
“Student loans are a good idea” –> wrong! In my experience, the more you know about debt before getting into it, the better. Unfortunately, that’s usually not how it works!!
I think another one is the idea that if you’re doing “well” or want to get anywhere in life you HAVE to buy a house. We gave into that, to the point we bought with nothing put down. Owning a house can be a very good thing, but only if it’s right for you and your needs.
I am sometimes still guilty of feeling like I’ve saved money when I get a deal. I find this especially when I shop for clothes. Even though I don’t need any clothes, I feel great when I get a bargain on something I love. Of course, the alternative would be buying nothing, so even if the item is a great deal it is still costing me money.
FrugalRules John, we hear that one all the time. Actually, people in our circles and neighborhood seem to think you should be upgrading your house every 3-5 years or with every raise or promotion
FrugalRules I’ll further add the whole myth that mortgage debt is “good debt”. It can be in the right situation, but borrowing too much or for the wrong reasons is always bad debt, even for a house.
I know about a lot student loans specifically the public service loan forgiveness program and I hear a ton of misinformation out there about this.
I’ve heard people talk about the magical $75k number. While it may be true, it’s very dependent on where you live. For instance, $75k doesn’t go very far in NYC. Salaries are higher but so is the cost of living.
Spending money is still spending money. That’s my favorite. I have a couponing friend who “saves” so much money with her deals. She has an entire food room with 2 full sized freezers in the basement! That’s not free! Or the clearance shopping? Did you KNOW you needed 3 new flower pots, outside decorations, and pool accessories before you went to the store and found a deal on clearance? LOL
I hear #3 all the time. In general, people are very apprehensive about the market. But to take advantage of compounding, it’s the best vehicle to generate returns on your money.
Argh, the ‘having a bunch of stuff’ one. Having a whole load of crap doesn’t mean you’re wealthy, or good with money!!
I’ve grown up in an environment that supports this belief, and it breaks me just a little bit. I’m more of a ‘spend money on experiences’ kind of person, so I don’t have much stuff.
The funny part is, those with ‘things’ think I’m crazy for wanting to spend money on flights instead. Each to their own. My travel is not an investment (except in myself), and their things aren’t an investment either- generally.
Rant over!
It’s kind of outlandish that any of these exist as financial advice, but they do, so thanks for debunking them. I’ve had a lot of college students ask me how to establish credit. They are being pressured to get credit cards for the purpose of establishing a credit score, when they are nowhere near needing a credit score for anything. It irks me that companies take advantage of really young students who do not need consumer debt added to their student loans.
Good points. Very timely with the one about the stock market. I know many people who are probably shaking their head at that one, but if you’re in it for the long term…don’t worry about all the noise the media is making about the stock market. And the buying stuff meaning wealth or buying happiness…once I realized that it wasn’t the case, I think it has made the most impact on my life. I don’t need all that stuff or to keep up with the Joneses.
I used to think that credit cards were nothing but bad news because that’s what everyone led me to believe. I’m so glad I educated myself and changed my perspective on that. A few weeks ago, I was at a first time home buyers seminar and toward the end, guests were able to ask questions to the mortgage loan company and I was shocked when one woman kept complaining about how bad her credit score was and said that she used most of her limit and never paid the balance off in full each month. She said she thought she was supposed to carry a balance and when her CC company tried to raise her limit, she rejected the idea because she believed that would hurt her score. These myths are alive and real!
Mark@BareBudgetGuy That could be. I know plenty of people who were struggling on that amount (or more) when we lived in NY. Housing was always the biggest issue!
Financegirl Yes, definitely agree! So many parents and students go into it blindly, just believing it’s “the thing to do” once you graduate high school. Not anymore.
FrugalRules holly@clubthrifty.com Eyesonthedollar Love all of these, though it’s a bit scary to hear people think upgrading their home is a good idea…yikes! It’s awful how rigid some people’s definition of “success” is when it comes to doing “well.”
Ali_AnythingYouWant Exactly. It’s a trap a lot of people fall into, and I definitely have before. I do my best to only shop for what I need and to always have a plan before setting foot into the store.
mrandmrsbudgets That’s a good one. I think there are some people out there who think if they don’t pay their loans back, they’ll magically disappear. That’s not how it works at all!
SavvyWithSaving That’s why I included the part about depending on where you live – I’m not sure if the study took cost of living averages into account. I know it doesn’t go very far on Long Island, either!
Mrs Crackin the Whip Oh boy. I know people like to go crazy with coupons and essentially get things for free, but it’s still costing you time!
Financial Tour Guide Yep. It saddens me how much I hear that, especially from my friends. We’re young and they’re just not taking advantage of out of fear.
AdventuresReece Haha, rant away! I get it. When I moved out of my parent’s house, my mom had all these ideas of what I “needed” to get in my new apartment. I shrugged it all off. Not having a coffee table isn’t going to kill me. I’d rather have experiences than stuff, too.
Pretend to Be Poor I totally agree it’s mind-boggling that these exist. I’ve heard the stories of credit card companies offering free stuff to students on campus. I never ran into that at my college, but it makes my shake my head. The possibility of credit card debt isn’t worth a free shirt.
Andrew LivingRichCheaply Yeah, the stock market volatility is getting a lot of people panicked, including younger individuals who haven’t even invested a cent yet. It’s only deterring them more. But if they actually looked into it and educated themselves on it, they’d realize it’s not as huge of a deal as the media is making it out to be.
Chonce Oh gosh. That’s painful to hear. I mean, even if you thought you should carry a balance, who said to max out your cards?! I think what this all boils down to, yet again, is a lack of financial literacy. It’s so disheartening.
I’ve definitely heard all these myths before, Erin. #3, for obvious reasons, is one that I have to deal with regularly and especially right now. :) I’m also glad you mentioned #4. I have no problem if someone makes a mindful choice based on personal experience to not carry a credit card because it is just too much temptation for them to live beyond their means. That’s a smart, thoughtful decision. I am however irritated when people says credit cards are evil. They are not. They are tool and one that can easily be abused, by the cardholder. Yes, credit card companies make it easy to overspend and encourage their card holders to carry a balance. They don’t force you to do those things either. We must never forget that they are for-profit company offering us a tool and it is up to us to use it responsibly.
ShannonRyan Completely agree, Shannon – couldn’t have said it better. Credit card companies aren’t exactly virtuous, but it’s up to the individual to educate themselves on the various financial tools out there. There’s no shortage of helpful material on the internet, either.
“You Save Money When You Get a Deal”
I suppose technically you could save if you got a deal on something you absolutely needed. However, there is such a fine line between needs and wants and, most likely, what you think you need is actually, truly a want.
I have personally always been a fan of credit cards because I see the value but I can understand why people don’t like them. I have personally seen a number of people get into big messes because of credit cards, but I’ve equally seen people save lots of money and even make money by using them.
PFUtopia My general point was you’re not saving as long as you’re spending your money. Saving is only achieved when the money actually goes to say, retirement or your bank account. But yes, you’re right that in most cases, needs are usually wants. We have so many luxuries we’ve gotten used to that people 50+ years ago wouldn’t have dreamed of as necessities!
blonde_finance Exactly! It’s about knowing what works for you. I don’t mind using them at all, but my parents have sworn off credit cards since getting serious about paying back their debt. They’re just not interested in using them, and I can understand why.
A YouTuber that I like stated that her mom, a real estate agent, told her (and customers) that carrying a balance improved your credit. Ugh.
As for saving money with a deal… It can work — but only if you tuck those savings away in an account. Our Saved Savings account can get a pretty good balance doing that.
AbigailP I hate hearing that. I wish there were some way to broadcast the truth to people so that rumor can get laid to rest.
That’s the smart way to do it, but a lot of people don’t have the discipline for it. I personally think it can make for a fun game!
AbigailP I love that idea of having a separate “saved savings account.” That’s a great way to actually put your “savings” from a deal to good use.
I’ve heard a few of these before. Money technically doesn’t buy happiness but it damn sure helps at times.
Jason @ The Butler Journal There’s definitely no doubt about that!
My father always told me: we’re too poor to buy cheap stuff! Is that a myth, too!?
The concept of saving money when you get a deal has always confused me. If I get a deal on something I don’t need or use how am I saving money?
Arthur Lamber
That’s absolutely right! Buy wisely! Do not buy things because they are cheap.
The text below comes from my article that will be published in two weeks:
”
There
are 3 items A, B, and C. A is the cheapest ($25) and it doesn’t meet all of your
expectations. B is more expensive ($35) and it is exactly what you are looking
for. C is top-notch and costs $50. First, you buy A as your choice is driven by
a price. Using it drives you crazy as it’s not user friendly at all. You throw
it away after two months of using it. You come back to the shop and this time
you buy C because the experience tells you it’s better to get a thing with more
features as you might use them someday. You spent $75 in total while you could
have spent $35 and be happy with the purchase. It is because we are ready to
spend extra cash if we have bad experiences with some type of product.
The price shouldn’t be the only factor that drives your decisions.”
I would also add: “I earn too little to make any savings”