7 Personal Finance Myths – DEBUNKED!
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Personal finance is a hot topic and you’ll hear many statements about money – some true and some false. It seems as if everyone has an opinion about money management. And while much of the advice is solid, you have to take other advice with a grain of salt.
Here’s a look at a few common misconceptions and myths about money and personal finances.
1. Carry a credit card balance to boost your score
You need credit to build credit, and using credit can help improve your score. So I understand why people think you must carry a credit card balance to boost your rating. But this isn’t entirely true.
Some people associate using credit with having a balance, but the two are completely different.
Yes, you’ll need to charge something to a credit card and make payments so that your creditor can report positive activity to the credit bureaus. But you don’t have to carry a balance from month-to-month to have positive activity reported. Your creditor reports your activity regardless of the balance.
And the truth is, carrying a balance on your credit card could potentially hurt your score – especially if you keep a high balance or max out the card.
So while it’s okay to keep your credit accounts active, always pay off your balance in full every single month. This is a win-win because your credit score improves – and you avoid interest.
2. Stay at home parents “don’t” need life insurance
I also understand why some people believe this. If one parent doesn’t contribute to the household’s income, it might appear as if they don’t need coverage. The other parent will likely continue working and caring for the family.
But what a lot of people fail to realize is that life insurance doesn’t only replace a working person’s income. It can also cover a deceased person’s burial and funeral costs.
In addition, if you’re the working parent, wouldn’t it be nice to take time off from work to grieve and adjust, instead of jumping back into work?
This is possible with a life insurance policy. Plus, if you have younger children you’ll probably need help around the house while you’re working. This is an added cost, which a life insurance policy can cover.
Fortunately, the younger you are, the cheaper it is to buy a policy.
For example, a 30-year old healthy female (non-smoker) might get a 20-year $250,000 term policy for $20 month. You can get a policy later in life, but it’s usually more expensive.
3. Credit scores only matter when borrowing money
Understand that credit scores don’t only matter when applying for a loan. Good credit saves you money in other areas, too.
For example, when you apply for an insurance policy—such as car insurance or home insurance—the provider will check your credit history. And if you have bad credit or no credit, you’ll likely pay a higher premium.
Similarly, renting an apartment with no credit or bad credit means you’ll pay a higher security deposit. You’ll also pay a higher deposit when setting up utility services.
4. All debt is bad
Whether there’s a such thing as “good debt” and “bad debt” is a topic of debate. Some people believe there’s no such thing as good debt, so they feel it’s unnecessary to have student loans, mortgages, car payments, etc.
But this thinking isn’t necessarily true either – it’s really based on opinion and subjective.
My personal stance leans on the side of, “not all debt is bad,” – with my personal definition of bad debt being any debt that isn’t making you money. For the majority of people, getting a mortgage is the only way to buy a home. Plus, some occupations require a degree.
Now, I’m not saying that too much debt can’t turn into bad debt, because it can. Therefore, you have to manage it responsibly.
Also, just because something is considered “good debt” doesn’t mean it’s a smart investment – so count the cost either way.
5. You should always buy a used car
I know you’ve probably heard this. Admittedly, I used to feel this way 100%.
New cars depreciate a lot in the first couple of years, so there’s the risk of negative equity. This involves owing more than a car’s worth.
But, of course, everything isn’t black or white. With that being said, if you keep your cars until the wheels fall off (or a very long time), buying new isn’t the worst move – especially if it doesn’t complicate your finances.
6. You need a lot of money to invest
Thinking back to my younger days, I used to think it took thousands to get started with investing. I don’t know why I felt this way. Not once did somebody say to me, “you need X amount of dollars to invest.” It was a misconception I had.
But if I knew then what I know now, I would have definitely started investing sooner. In a short amount of time I’ve discovered many ways to get the most out of my money – ways that don’t involve a lot of upfront costs.
For example, you can buy shares of individuals stocks for under $10 or $20. You can also invest in mutual funds, index funds, or ETFs. Some require a minimum deposit up to $500 or $3,000, but others require far less – under $100.
Plus, you can take advantage of micro-investing apps like Acorns. Set up recurring investments as low as $5, or opt into the roundup feature. The app will round up your purchases to the nearest dollar and invest the difference.
Bottom line: If you have an extra $5 a week, you can afford to start investing.
7. Coupons are always a good deal
I’m going to keep this point short: YES, coupons are great. I love them and they’ve helped me save a lot of money.
But coupons are “only a good deal” when you’re using them to buy something that you were planning to purchase. If you buy an item only because you have a coupon, it’s probably not the best way to save money.
Retailers are clever. So if they have a coupon for $5 off a $20 purchase, they know a lot of people will jump at the offer. But the retailer isn’t losing $5 – they’re gaining $15. They’re getting money that you wouldn’t have otherwise spent.