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.