By Haley Tolitsky, CFP
There are many “rules” when it comes to personal finance. Financial advice is not universal and varies depending on your personal financial situation. With that in mind, here are 10 common financial myths:
1. Having a revolving credit card balance increases your credit score
You should pay off your credit card balance in full each month to avoid high interest and hurt your credit score. Remember to keep an eye on your annual card fees and make sure you have a card that offers rewards that match your goals, such as cash backs, travel points, and more. Check your credit score at least once a year to understand your current location and detect inaccurate transitions.
2. Everyone should have 3-6 months of living expenses saved in their emergency fund.
This is a good rule of thumb to start with, but doesn’t apply to everyone. If you have a variable income, are self-employed, and / or are a one-income family, you may need to save a year or more of living expenses in your emergency fund. If saving so much is overwhelming, start small and make automatic contributions from every paycheque. Set a goal to save one month of living expenses at a time in a high yield savings account.
3. Is it better to receive a large tax refund each year?
While it can be nice to receive a big check from the IRS each spring, it means that you allow the IRS to withhold your money for you for the year without receiving interest. Your goal should be to get as close as possible to not owing taxes or receiving a refund. You can view your deductions using the IRS withholding tax estimator throughout the year to make sure you’re on the right track.
4. You cannot lose money in a checking or savings account
FDIC-insured banks protect your money in the event of bank failure up to $ 250,000; However, money in traditional bank accounts earns almost no interest, which actually means you are losing money in the long run. Due to inflation, a dollar today is worth more than a dollar in 10 years without compound interest.
5. It is more economically advantageous to buy a house than to rent.
There are many benefits to buying a home, including building equity, avoiding high rents, customization, and the ability to write off mortgage interest (only if you itemize your deductions), but there are many factors should be assessed when deciding to buy versus rent, including how long you plan to live in an area, the current housing market and your financial situation. The advantages of renting include the absence of maintenance costs, flexibility, the amenities offered and no large down payment required. It may be in your best interest to rent now to build up your savings and determine your intentions.
6. You must have a lot of money to start investing
You can contribute to your workplace pension plan with just a few dollars per paycheck, and many brokerage firms allow you to open an account with as little as $ 25. The earlier you start investing, the better off you’ll be in the long run. Make sure you get your full employer and increase your contributions every year. Set up monthly contributions if you invest outside of your work plan to automate the process.
7. The stock market is too complex for young people to invest
Pick the right type of account for you (retirement vs. taxable brokerage), set monthly contributions, and select an index fund or exchange-traded fund (ETF) that covers the entire stock market. That’s it! Obviously, you can get more sophisticated with your investments over time with research, but it’s a great way to start and branch out. If that intimidates you, there are plenty of managed account options that design your portfolio for you (watch out for expense ratios and fees) or contact a financial planner.
8. You must repay all your debts before you start investing
For most individuals, the best time to start investing is now. You want to pay off any high-interest debt, like credit cards first, however, you must invest while paying off student loans and other low-interest debt. Make sure you have a plan for your debt repayments and allocate an amount that you can afford to invest each month, even if you have to start small. Always make sure that you get your full employer in your workplace pension plan first!
9. All debts are bad
Credit cards and auto loans are prime examples of “bad debt” due to high interest rates and depreciating assets. However, not all debt is bad. Mortgages allow you to buy your dream home and build equity at a low interest rate. Student loans, when properly managed, can help you reach your career goals and provide you with many repayment options. The key is to understand the different types of debt and to have a repayment plan in place.
10. Insurance is reserved for people older and richer than me.
There are many instances where insurance is extremely important. Tenant insurance covers your belongings. Life insurance protects your loved ones if something happens to you. Disability insurance supports you if you can no longer perform your professional duties due to a disability (this happens more than you think). It is crucial to make sure that you have the right insurance policies in place before it is too late.
In a world of abundant information, many important financial resources are available; however, there is also a lot of harmful advice. Be sure to check your sources, keep your personal situation in mind, and contact a CERTIFIED FINANCIAL PLANNER ™ if you need advice with your finances.
About the Author: Haley Tolitsky, CFP®
Haley Tolitsky, CFP® is CERTIFIED FINANCIAL PLANNER ™ with Capital Cooke in Wilmington, North Carolina, offering highly personalized financial planning and investment management services. She is passionate about financial empowerment, especially for women and the next generation, and enjoys the opportunity to motivate and guide others to take charge of their financial lives. Haley can be contacted at [email protected]
Financial advisory services offered by Acorn Financial Services, Inc. (AFAS), a registered investment adviser. Securities offered through The Strategic Financial Alliance, Inc. (SFA), a registered broker / dealer. Haley Tolitsky is a Registered Representative of SFA and Representative of Investment Advisors to AFAS. Cooke Capital is also not affiliated with AFAS and SFA. Surveillance office (703) 293-3100.