My husband and I have gotten quite a bit of “side eye” for selling our house and moving to an apartment. Downsizing before the age of 40 and moving back into the city from the ‘burbs? In many people’s minds, instead of investing in a home, we’re now just throwing money away on rent. Guess again! That idea is actually a common financial myth.
Frankly, a lot of the “common knowledge” about finance is more false than it is true. This week, I’m debunking some of the financial myths you may have heard, so you can make smart financial decisions that are right for you:
1. Getting a (or Another) Credit Card will Boost My Credit Score: Getting a credit card on its own cannot improve your credit score. In fact, by applying for a new card you’ll actually temporarily ding your score. A credit card can help boost your credit score if you use a variety of forms of credit, such as installment payments like a mortgage or car payment, complemented by revolving payments like a department store card. But this can only work if you use the card consistently (at least once every few months), keep your credit utilization (what you use vs. your limit) to about 30 percent, and pay it off every month. Carrying a balance does not improve your score; in fact, over time it may lower it.
Tip: Thinking about taking advantage of a deal on a new credit card? Think twice. Creditors appreciate loyalty; that’s why it’s important to keep your longest running accounts open. Adding new cards, especially if you plan to let go of old ones, will likely lower your score.
2. Eliminating Student Loan Debt should be Your #1 Priority: It’s easy to get “student loan tunnel vision” because of the emotional weight of this debt. Don’t give into it. Instead, consider where your debt falls in the list of priorities. Do you have a realistic budget? Do you have some money set aside for emergencies? What’s the interest rate on your student loan debt? Have you started saving for retirement? There may be some other goals you need to tackle first (or concurrently with your debt repayment plan) to make sure you’re on the right path for long-term financial success.
Tip: If you have federal student loans, explore your options. There may be repayment programs available to help you ditch your loans faster. Use the Repayment Estimator to see which programs may be available to you, and then talk to your loan servicer.
3. I Don’t Earn Enough to Save for Retirement: Even putting away 1% of a small salary can still add up big time over the course of your career, especially if you commit to growing that contribution percentage over time. Think of it this way: If you’re not making very much, 1% won’t make much of a dent in your income. And if you’re waiting for the day when you have enough leftover money to invest, that day will likely never come. There will always be needs and wants available to eat up your paycheck before you can consider saving. Starting now — even if you’re starting small — can make a difference.
Tip: Starting a new job? Begin saving a percentage of your income right off the bat — you’ll never know how much money you’re missing. Wondering how much to contribute? If you can, meet your employer match. If that’s out of your range (or you don’t have an employer match), do what you can and grow your contribution by 1% per year.
4. My Partner Manages Our Money, so I Don’t Need to Worry About It: Money is an important tool in helping you craft a fulfilling life together. By taking yourself out of the equation, you’ve left your partner in the driver’s seat to decide on your destination (your family’s financial goals) and to navigate there in whatever way he or she chooses. It’s a big job to do alone! Invite yourself into the big and small decisions of your joint life with money. Even if you aren’t quite ready to drive, help your partner to navigate by asking questions like: Where do we see ourselves in 10 years? How will we get there?
Tip: This money myth can be especially problematic when the more financially-minded partner dies. Often the partner who has stayed out of their money life is left not knowing where the money’s kept, how to get into the accounts, what the day-to-day management tasks are, or what goals they were working toward. If for no other reason than this, make sure both partners are financially aware.
5. Buying a Home is Always Better Than Renting: Just because you’re not building equity when you rent doesn’t mean you are throwing your money away. Instead, you’re trading a rental payment for the ability to off-load maintenance costs (not to mention the investment of time and effort) to someone else. You’re also gaining the flexibility to move when you want to, not when the housing market deems it the right time. Home ownership also often comes with hidden costs beyond just the mortgage, and the value of the investment depends just as much (if not more) on the volatility of the housing market as it does on how much you’ve put into the house. Buying a home is not a guaranteed good investment — as we all saw in 2008.
Tip: Instead of looking for “the best investment,” take a step back and consider what’s right for you right now. Are you eager to invest in a property and make it your own? Do you have enough money saved to put down on your home to make it a viable investment? Or, are you looking for flexibility? Check out this post to help with your decision making.
6. You Need 3-6 Months of Income Saved to Have an Emergency Fund: I deprioritized emergency savings for the longest time because it felt like a goal I could never reach. But the truth is, every bit helps. Think of your emergency fund in terms of short-term (about $1,000 to help with little everyday emergencies that might crop up) and long-term (between 3-6 months of expenses to hedge against a sudden and significant loss of income). Make it a priority to get your short-term fund in place quickly, then slowly work toward building up your long-term fund.
Tip: Check out this blog post to learn all about emergency funds, including where to invest those savings so you can get to them if you need them.
7. I’m too Young to Need an Estate Plan: Hate to break it to you, but it doesn’t matter if you’re single or married, with kids or without, or even if you don’t have any valuable possessions. Without an estate plan, you won’t get to direct who will inherit your assets, who will get guardianship of your children, your wishes for medical care should you be unable to make decisions yourself, and more.
Tip: Wondering what next steps to take and what documents you need? Check out this blog post.
What other financial myths do you think need to be busted? Share below!
This Thursday, Oct. 31, I’ll be going live on Facebook at 8pm Central. In honor of Halloween, I’ll share five scary financial facts and how to address them if they apply to you. Haven’t liked my Facebook page yet? Now is a great time to do it. Only have Instagram? Don’t worry — I’ll be posting the recording to IGTV later.