Top 12 Personal Finance Myths

Should you pay off your mortgage? Are credit cards bad? Is debt normal? And is life insurance only for the rich? The personal finance space has its share of finance myths that linger around. Some of these myths are misguided, while others are completely untrue and can cost you $1,000s. We compiled our list of the top 12 personal finance myths so you can avoid the untruths and understand what personal finance really means.

The Top 12 Personal Finance Myths

These 12 myths have staying power. Find out the top 12 personal finance myths so you can avoid them and set yourself up for success. The top 12 personal finance myths are:

1. There is No Such Thing As Good Debt
2. Credit Cards Are Bad
3. Buying a Home is Better than Renting
4. Wait till Your 40 To Save For Retirement
5. You Shouldn’t Save Money if Yields Are Low
6. It Is OK To Have Lots of Debt
7. Investing Is Risky
8. You Need to be Rich Before You Start Investing
9. You Need To Pay For a Credit Report
10. You Need To Work With a Professional Advisor
11. Life Insurance Is Only for the Wealthy
12. It is Easy to Change Your Behavior

Finance Myth #1: There is No Such Thing As Good Debt

When you have debt, it means you had to borrow money and need to pay it back. There is definitely bad debt, like credit card balances with high APRs. And there is such a thing as too much debt, where it consumes a high proportion of your income. But many personal finance commentators take it too far and say all debt is bad debt.

However, a reasonable amount of debt can be beneficial to your finances. As long as the debt is:

• Manageable in size
• Has a relatively low APR, and
• Finances something that appreciates in value

For example, if you take out a small loan to help you get a college degree that allows you to get a high-paying job, that is beneficial debt. It is small, affordable, and added value to your life. You likely calculated the value of college when you made that decision.

Another example is mortgages, which most people need in order to purchase a home. If you get an affordable home at a good mortgage rate, that may allow you to save and invest while building home equity. (Paying off your mortgage early is another one of the top finance myths). It is often better to work on building up your emergency fund and contribute to your 401k (at least enough to get any employer match) than it is to pay off your mortgage.

Finance Myth #2 : Credit Cards Are Bad

Credit card debt is bad. Most credit cards have double-digit APRs that can reach as high as 30%. Letting a credit card balance accrue interest is terrible for your finances. But credit cards in general are great.

First, you can earn rewards on everyday purchases. Most fee-free credit cards come with 1-5% rewards on your purchases. This is free money back to you on items you would purchase anyway. And many cards come with promotional rewards to entice you to open an account, which mean you can earn $100s just for opening a new card.

Second, you get fraud protection and isolate any hackers from accessing other accounts. Most credit cards come with fraud protection standard so if you get a charge that is fraudulent, the company will remove it from your account. If you have a credit card lost, stolen, or hacked this means you don’t have to pay for fraudulent charges.

Debit cards withdraw from your account, and banks are generally more difficult to work with to remove charges. Additionally, if your debit card gets hacked, the hacker may have access to your linked bank account. And if you carry around a lot of cash for purchases, you have no recourse if it gets stolen.

Third, having credit cards you pay off every month helps your credit score. Your credit score is highly dependent on having a lot of available credit, a long payment history, and an older credit age. By opening and keeping a credit card open, you get all the benefits. (Learn more about how to read and understand your credit score here).

This is one of the top personal finance myths because some people are tempted to be irresponsible with their cards and carry balances. If you pay off your credit cards every month, they are a great tool to have at your disposable. (And if you are having trouble with credit card debt, check out the don’t do a balance transfer till you check out the ‘purchase to transfer’ method of handling credit card debt.)

Finance Myth #3 : Buying a Home is Better than Renting

This myth is partially true, but highly dependent on your personal situation.

Buying a home and paying off a mortgage has been a path to wealth accumulation for many people. However, rushing to buy a home before you are settled down can be a financial disaster. This is due to how mortgage amortization works. When you pay your mortgage, the majority of the payment goes just to covering the interest for the first decade of the loan.

If you don’t stay in the same home for at least 7 years, you likely are not building up much home equity. But you are taking on the risk of the real estate market softening and your home price declining. You can lose $100,000s in your house’s market value during a real estate market crash.

Additionally, there are closing costs, fees, and frictional costs associated with selling & buying a home. Sellers typically pay 8-10% of the home value in closing costs while buyers pay 2-5%. Therefore, selling a home and purchasing another can cost 10-15%, easily adding $10,000s of expenses. And this ignores the cost of moving, renovations, repairs, and other frictional costs.

In summary, renting a home before you are ready to settle into one location for a long period of time, typically makes better financial sense.

Finance Myth #4: Wait till Your 40 To Save For Retirement

We don’t know where this myth got started or why it continues to hang around, but this has it completely backwards. By starting to save younger, you let compounding returns work in your favor.

For example, if you invested $1,000 a year for 10 years starting at age 25, and earned an 8% return, you would have ~$158,000 by time you retire. This is with only contributing $10,000 of your own money. If you wait till you are 40 and started invest $2,000 a year every year till you retire, you would have contributed $52,000 and at retirement you would have practically the same portfolio amount.

Therefore, by waiting till you were 40 to start investing, you would need to put in over 5 times as much money to get the same ending portfolio amount. The earlier you invest, the better off you are expected to be. Don’t wait to start saving for retirement, and every little bit counts. Better yet, set a target net worth now so that you have a plan and way to track your financial progress.

Finance Myth #5: You Shouldn’t Save Money if Yields Are Low

We just witnessed historically low interest rates and the yield on savings accounts were miniscule. Many people didn’t want to save money because of the low returns on cash.

However, you still want to keep an emergency fund in liquid cash even if returns are low. Your emergency fund is there as a safe source of funds to help pay for unexpected expenses. It may not be fun earning 0.50% on a high-yield savings account (HYSA), but the benefit of money in a HYSA is that the principal is there if you need it.

Some of the most important financial metrics to know are your liquidity and emergency fund ratios. These are some of the 20 key personal finance ratios to know andare the ones that help you avoid bankruptcy.

Your savings account is the safest source of funds as other investments can go down in value. Bonds and US Treasuries will go down in price if market interest rates go up. Stocks can go down. Even CDs typically have a penalty for early withdrawals. Your emergency fund is there as a safety net and it is better to have a low return than to put $100 into an investment then only get $80 back when you need it.

When yields are low, you may opt to keep 3-months of expenses in your savings account and ladder short-term CDs or US Treasuries that mature in 3-12 months. This way you still have money for the immediate unexpected needs while getting a little more yield on some of your funds. But you have an emergency fund for protection first.

Finance Myth #6: It Is OK To Have Lots of Debt

Even though it may seem normal as total consumer debt in the USA is nearly $17 Trillion, it is not normal to have a lot of debt. The average American household has around $75,000 in total debt and a large portion of it is bad debt; like an average of over $4,000 in credit card debt.

Having a high debt load is hindering your ability to save and invest. This is especially true for high-interest debt like credit cards. When you take out a loan, you need to pay that money back with interest. Overtime, this adds a significantly higher cost for you than what you originally borrowed.

And most debt payments are fixed monthly expenses. This eats up your monthly cashflow and makes it harder to budget and makes you more fragile when something unexpected happens.

Finance Myth #7: Investing Is Risky

Investing in stocks may be volatile due to prices going up and down over time. But historically the stock market has trended higher with an average annualized return of ~8%. It has been one of the best ways to grow your wealth.

You can diversify your investments across many asset classes to lower the volatility (stocks, bonds, CDs, Treasuries, commodities, and personal real estate). But investing in assets is one of the only ways to maintain and grow your wealth.

Money in bank accounts may not go down in price, but the return on a bank account tends to be below inflation. This means every year you don’t invest and keep your money in the bank is a year that you likely lost purchasing power. The cost of the goods and services you buy increased more than your money returned so you can afford less. Therefore, NOT investing is risky.

Investments might be more volatile than bank accounts, but arguably it is more of a risk to keep all your money in the bank as you are guaranteeing you lose wealth due to inflation. In fact, investing is one of the 8 core personal finance foundations to follow.

Finance Myth #8: You Need to be Rich Before You Start Investing

This may have been the case decades ago when trades came with a $50 commission and minimum purchase sizes. But nowadays most trades are free and many brokers allow for purchasing fractional shares. This means you can start investing with very little money.

It may seem daunting to save for retirement when you have a tight budget, but you need to prioritize your saving and investing. Over the long-term, even small amounts invested today can grow to be material.

Finance Myth #9: You Need To Pay For a Credit Report

Monitoring your credit score is important to make sure you catch any incorrect or fraudulent information. Knowing this, many companies try to get people to pay for credit reports. However, you shouldn’t pay for your credit report.

Under Federal law, you get one free, full credit report every year from Annual Credit Report. Your full credit report will have a massive amount of information on all your debts and everything impacting your credit score. You should consider getting one every year.

Then in-between your annual reports, you should take advantage of the free credit score reporting services offered by most credit cards or third party sites like credit karma. These services will provide an easy and free way to quickly check up on your score over time. And if you have a bad credit score, don’t despair, as there are many steps you can take to fix a poor credit score.

Finance Myth #10: You Need To Work With a Professional Advisor

When you start your financial journey, it can be overwhelming. Many people turn to professional advisors to help with their investing and portfolio management. For some people this may work, but for many the large fees that typically come with professional advice often more than offsets the benefits.

Many advisors charge high flat fees for tasks or high percent of assets under management (AUM) fees for managing money. Over a 30-year period, a 1% fee can result in losing around 20% of your ending portfolio value.

Many people would be better served by consistently investing in low-cost, broad-based, passive ETFs. These funds will closely match the overall stock market returns without paying high fees.

Finance Myth #11: Life Insurance Is Only for the Wealthy

This is a hugely damaging myth as life insurance is for everyone, but is particularly important for those without lots of wealth. The wealthiest have the option to self-insure, where they set up large investment accounts in various trusts to cover their dependent’s living expenses.

Life insurance seems complicated, but it is worth reading a beginners guide to life insurance to understand the basics. There are numerous reasons to purchase life insurance and it is a crucial protection assets in the 5 pillars of personal finance.

For everyone else, life insurance is one of the only ways to ensure your loved ones are protected if you pass unexpectedly. Luckily, there is affordable coverage options to get all the life insurance coverage you need. One of the better choices is to buy term & invest the difference (BTID). Under this strategy you purchase affordable term coverage and use the money you save from forgoing permanent insurance to purchase low-cost ETFs.

You can combine a BTID strategy with a term life insurance ladder, where you buy different coverage periods to line up with specific needs. This allows you to have the right amount of coverage as your life insurance needs change. There are even niche products like mortgage protection term life insurance made specifically to cover certain liabilities.

Another option is the group life insurance coverage offered through employers and membership groups. There are some major differences between group life insurance vs. individual life insurance, but both options will provide some protection.

Lastly, if you have poor health, are older, or have minimal funds but want some coverage to help with funeral costs, final expense life insurance is an option. It is relatively expensive for the small face amount coverage you get, but it will at least prevent your loved ones from trying to pay for your funeral.

If none of these options work, there are alternatives to traditional life insurance. Coverage options like accidental death insurance can be a cheap way to provide protection from accidents.

Finance Myth #12: It is Easy to Change Your Behavior

People who have never had financial struggles don’t understand how hard it can be to fix your relationship with your finances. Financial Trauma is very real and it affects many people. What makes financial trauma hard to identify is how it impacts everyone slightly different. Some people it makes overspend, others become extremely frugal, and still others just avoid their finances.

If you struggle with your finances, don’t let anyone guilt you into feeling bad by implying making major changes is easy. It is easy to get demotivated that way. Keep making progress in the right direction and take a long-term view as you address your behaviors.

The Final Word

The personal finance space is littered with finance myths that can hinder your success. In this post we identified the top 12 finance myths and explained why each was untrue. Personal finance success if dependent upon your behavior, so knowing what is true can help you make good decisions.

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