You can find financial advice almost everywhere you turn. Whether you are hearing advice from TikTok stars or friends and family, you’ve likely heard more than a few financial myths thrown into the mix.
On the surface, financial myths might make some sense. After all, if you’ve heard something enough times, you might start to believe it. But the reality is that believing financial myths can push you to make sub-optimal financial choices.
It’s critical to separate solid financial advice from myths. In this piece, you’ll find some of the top financial myths to ignore.
Why Do People Share Financial Myths?
In general, financial myths are spread with good intentions. But unfortunately, so many people are misinformed about personal finance best practices. For example, you might have family or friends pass on “financial wisdom” with the goal of helping you get ahead. But in too many cases, that “financial wisdom” turns out to be a myth.
12 Financial Myths To Ignore
Financial myths are easy to find. But it’s important to ignore financial myths to avoid a negative impact on your financial situation.
Below are the top financial myths to ignore.
When You Pay Off a Credit Card, Close the Account
It’s true that credit cards have notoriously high interest rates. As of June 2023, the average credit card interest rate is over 20%. With an interest rate like that, paying off credit card debt should be a high priority. However, you don’t have to close the account after you pay off the balance. In fact, closing the account after you pay off your credit card debt can actually hurt your credit score.
When it comes to your FICO score, your credit utilization is one of the most impactful factors. Closing an older account will lower your available credit, which will increase your overall credit utilization ratio, and this change could hurt your credit score.
Instead of closing credit cards, consider leaving them open after you pay off your credit card debt. Remember, you don’t have to spend more than you can afford. But if you don’t trust yourself with access to a high-limit credit card, closing it might be the best option.
Don’t Use Credit Cards
Opening a credit card only to lock it away won’t do too much to improve your credit score. If you want to build credit with a credit card, you’ll need to use the card regularly. Responsible usage involves paying off your balance in full each month by the payment due date.
If you aren’t ready to use a credit card regularly, that’s okay. Consider holding off on opening a credit card until you can use it responsibly.
A Credit Card Balance Will Improve Your Credit Score
You’ve likely heard this gem before: “Carrying a credit card balance will improve your credit score.” Unfortunately, that’s pretty far from the truth. In reality, carrying a credit card balance has a negative impact on your credit score. Plus, carrying a balance causes you to accrue interest charges that add to your balance and make it harder to pay off the debt down the road.
Don’t carry a credit card balance in pursuit of a better credit score. Instead, do your best to pay off your entire balance in full each month to avoid dealing with expensive interest charges.
All Debt Is Bad and Should Be Paid Down Immediately
Debt is often viewed as a very bad thing in the personal finance realm. Some debt is actually bad and you should consider paying it down quickly. But other debt isn’t necessarily too bad, and paying it down too fast could be an inefficient choice.
For example, with an average interest rate of over 20%, credit card debt is firmly in the bad category. Once you carry a credit card balance, it can be very difficult to pull yourself out of that debt because the high interest rates cause your balance to keep growing.
In contrast, carrying a mortgage balance with a relatively low interest rate might not call for paying it off as quickly as possible. For example, if you locked in a mortgage interest rate of 3%, many would consider it more financially beneficial to invest your funds rather than pay off the mortgage early.
When it comes to paying off debt, you should run the numbers for your unique situation. In some cases, particularly with high-interest debt, you might decide that the most prudent financial decision is to try to pay off your debt as soon as possible. But in other cases, especially if you are dealing with low-interest debt, you might decide to hold off on aggressively paying down your debt.
You Can Always Save for Retirement Later
Saving for retirement is a major financial goal. While you might feel like you have plenty of time to start saving, the reality is that saving for retirement early will have a big impact on your financial future.
If you wait to save for retirement, you’ll have to work exponentially harder to build the same-sized nest egg. For example, let’s say you start saving for retirement at age 25. By contributing $100 per month for 40 years, with an 8% interest rate, you’ll have $310,867 at retirement. In contrast, starting at age 35 gives you less time to save. With the same monthly contribution, you’d only have $135,939 in savings at retirement.
Time and compound interest can work with you to grow your investments. But if you don’t start investing early enough, time won’t help you grow your funds as much.
Everyone With a Credit Card Gets Into Credit Card Debt
If you’ve been avoiding credit cards because you think everyone who opens one falls into credit card debt, you are believing a myth.
The reality is that every cardholder has the opportunity to pay off their balance without paying interest on the charges at the end of every month. With that, it’s very possible to avoid carrying credit card debt, even if you regularly use your credit card to make purchases.
Personally, I have several credit cards in my wallet. I have yet to fall into credit card debt. But I do appreciate the rewards opportunities provided by my credit cards.
Budgets Are Restrictive
When you think about a budget, you might immediately think of cutting back on your spending. But that doesn’t have to be the case.
While setting a budget might encourage you to hold back on some purchases, it can also allow you to prioritize what you do want to spend money on. You can choose to slash your expenses where you don’t get any true value. After making those cuts, you might have more room to expand your spending in categories that you enjoy.
For example, you might move to cut back on your housing costs in order to spend more on travel. Or you might switch to a more affordable ride so you can spend more on your passion for fashion.
Consider using your budget as a tool to help you live the life you want to live.
A Higher Income Would Resolve Your Money Issues
If you find yourself thinking that more money in your paycheck would solve all of your financial problems, you might not be looking deep enough. Unfortunately, many money issues come from a lack of financial management instead of an income issue.
Of course, some households truly do have an income issue. If you aren’t earning enough to cover the basics, then a higher income might be what you need. But if you are earning more than enough to cover your baseline needs, extra income might not solve your problem.
Consider making the effort to build your financial literacy. With more financial know-how, you can make optimal choices with your money.
It’s Always Better to Buy a House Than to Rent
You’ve likely heard the phrase that “renting is just throwing your money away.” Let me dispel this myth once and for all: renting a place to live is not a waste of money. Everyone needs a roof over their head. If you meet this basic need through renting, that’s not wasting money.
If you are considering a home purchase, take a close look at the numbers before moving forward. Homeownership isn’t always the right move for your situation. And homeownership is often much more expensive than renting when you consider all of the hidden costs.
Additionally, renting in an area for a while can help you decide whether or not you want to purchase a home there and where in town you might want to buy a home.
Making The Minimum Payment Is Enough
When it comes to credit cards, you have the option to pay off your balance in full at the end of the month or make a minimum payment. The minimum payment is often a relatively small percentage of your credit card debt.
Of course, you should always make at least the minimum payment by the due date—on-time payments are essential for a good credit score. But making only the minimum payment isn’t enough if you want to stay out of credit card debt. Ideally, you should pay off your credit card balance in full every billing period.
If you stick with just the minimum payment, you’ll likely be stuck in credit card debt for a long time. The longer you carry a balance, the more you’ll pay in interest.
Financial Advice Is Always in Your Best Interest
When you hear financial advice, it’s natural to expect that advice to align with your best interests. But unfortunately, that’s not always the case. Anytime you hear financial advice, you should take it with a grain of salt.
Instead of simply accepting the advice you heard, do some of your own research. A little bit of research can save you thousands. For example, many financial advisors are not bound by a fiduciary duty, which means they don’t have to keep your financial interests in mind.
Giving Up a Small Purchase Will Transform Your Finances
You’ve likely been told that giving up your daily coffee purchase will turn you into a millionaire. While it’s a nice thought, it’s probably not true. Giving up a small daily purchase, like a cup of coffee, will lead to a small financial gain. However, it certainly won’t make you a millionaire anytime soon.
Instead of focusing on this relatively small financial choice, look at the big picture. Specifically, look at your biggest expenses. For most households, the top expenses include housing and transportation. Consider downsizing your dwelling and swapping out your ride to make lasting financial gains.
Increasing your income is another key way to transform your finances. The impact of small purchases is diminished when you have more cash flowing in. Getting a raise at work, finding a higher-paying job, or starting a side hustle might be one of the biggest ways to transform your finances.
Of course, it’s still a good idea to not go overboard with small splurges. It’s useful to practice self-discipline in your finances. But giving up lattes is fairly low on the list of things that will boost your net worth.
Frequently Asked Questions
You have questions about financial myths. We have answers.
What Is the Biggest Financial Problem?
One of the biggest financial problems is a lack of financial literacy. Without the appropriate knowledge, it’s often difficult for people to make the right financial decisions. Luckily, you can overcome this problem by educating yourself about personal finance.
What Is the Biggest Financial Mistake People Make?
One of the biggest financial mistakes people make is living beyond their means. Essentially, this boils down to spending more money than you earn. Do everything you can to live below your means.
What Is One Thing You Should Do With Your Money?
If possible, build your savings every month. If you are living paycheck to paycheck, you might start saving just $10 per month. As you move forward, try to grow the amount you can save every month. Building the habit of saving with any amount can help you build a brighter financial future.
The Bottom Line
If you make decisions based on financial myths, you might end up making a wrong turn. As you navigate your financial decisions, it’s critical to do what’s best for your situation, not to follow what everyone else is doing.
When you hear a random piece of financial advice, do some research on your own. With a little bit of digging, you can decide whether or not the advice is truly beneficial for your situation.