May 10, 2024

Money Myths Debunked

On the surface, money myths might seem relatively harmless. However, money myths can cause significant financial damage if you follow through on the ideas. As you navigate your own financial situation, it’s helpful to understand which often-repeated money ideas are actually just myths.

We will debunk several money myths today and explore how you can avoid falling into the trap of money myths.

What Are Money Myths?

Money myths are commonly held beliefs about finances that are simply not true. Just because you’ve heard advice repeated by family and friends, that doesn’t make the information true.

At first glance, most money myths seem to make sense. But upon closer inspection, the core belief of a money myth will fall apart at the seams.

The sad truth is that many people operate with money myths in mind. In general, money myths can push people to make inefficient financial decisions.

Why Do Money Myths Spread?

Money myths might be repeated often. But regularly hearing these myths doesn’t make them true. So, why do money myths spread?

Many people spreading money myths genuinely believe in the myth. Usually, they share myths from a place of kindness, thinking the advice will help others. Unfortunately, acting on money myths is more likely to have negative financial consequences.

Money Myths Debunked

Let’s debunk some of the most common money myths below.

Myth: A Six-figure Salary Means You Are Rich

A six-figure income is often equated to wealth. But in reality, a six-figure income doesn’t necessarily equate to wealth. In general, financial experts associate a high net worth with wealth. With that, a six-figure income alone doesn’t mean you are rich. If you are spending more than you make or barely setting aside anything for savings, then having a six-figure salary doesn’t guarantee that you are rich.

If you want to turn your six-figure income into long-term wealth, you’ll need to spend less than you make and save and invest the difference.

Myth: You Must Pay Off All Debt Before Investing

Debt comes in many different forms, with some being more financially dangerous than others. But many are under the assumption that they must pay off all of their debt before investing for their future.

In reality, you don’t need to pay off all of your debt before investing. Of course, it’s a good idea to pay off all high-interest debt before investing. In general, high-interest debt includes credit cards and payday loans.

But if you have other kinds of debt, like a mortgage with a low interest rate, then it might make sense to start investing before you completely pay it off. For example, if you have a 3% mortgage rate, it might make sense to start investing before aggressively paying off your mortgage balance.

Before you decide to pay off all of your debt ahead of building an investment portfolio, take a close look at your finances and your goals. Many households will find that investing for the future is more financially prudent than paying off all of your debt.

Myth: Investing Is Only for Rich People

Many people believe that investing is out of reach because it’s only an option for rich people. While rich people might have access to a wider range of investments, you can start building an investment portfolio with any amount of money.

As a new investor, you can start small. Many index funds allow you to purchase a diverse stake in the stock market with a low starting amount. Some investment platforms even allow you to get started with as little as $1. You can also opt to have a small amount of each paycheck automatically deposited into an investment account.

Before you jump into investing, do your homework to determine which option is the right fit for your financial goals.

Myth: Saving a Little Bit Isn’t Worth It

If you are only able to save $10, should you do it? According to common wisdom, saving a little bit isn’t worth it. But the reality is that saving even a little bit of money can add up to a brighter financial future over time.

For example, saving only $10 per week will lead to saving $520 in a year. Or if you are able to save $20 per week, that would lead to over $1,000 in savings by the end of the year.

Everyone has to start their financial journey from somewhere. Don’t be afraid to start saving, even if you are only able to set aside a small amount right now.

Myth: Investing in the Stock Market Is Like Gambling

The stock market is inherently volatile. Although investors will see some ups and downs, the long-term trend is that the stock market will grow over time. But that’s only true if you have a well-diversified portfolio, which is possible through an index fund. Index funds are designed to replicate the returns of a certain market index, such as such as the S&P 500. Essentially, index funds are meant to follow the performance of the overall market, which tends toward growth in the long term.

If you are picking individual stocks instead, this is more similar to gambling. Even highly trained financial professionals have trouble beating the stock market using this method, which is known as active investing. According to a 2020 SPIVA report, 88% of actively managed funds underperformed their benchmark. On the other hand, investing in a reputable index fund provides far more reliable results.

Myth: You Can Save for Retirement Later

Saving money for retirement is a significant financial goal. For most, it can take decades to save for a comfortable retirement. Many people think they have plenty of time to save for retirement. But the reality is that saving money early is crucial for a brighter financial future. Thanks to the power of investing and compound interest, the length of time during which you invest can be even more important than the amount you invest.

For example, let’s say you want to retire at age 65 and get started at age 55, with $250 per month available to save for retirement. With 10 years to save and an average investment return of 7%, you’ll have $85,526 saved at retirement. Although you’ll contribute $60,000, you’ll only earn $25,526 in interest.

Now imagine you start investing at age 45, contributing $250 a month. While you’d still contribute the same amount of $60,000, your investments would earn $66,884 in interest over the 20 years until retirement, leaving you with $126,884 in total.

And if you started at 25? You could contribute just $125 per month and end up with over $300,000 at retirement, having earned nearly $250,000 in interest on your total contribution of $60,000.

If you give your investment portfolio enough time to grow, it can far outpace the amount you actually contribute. But the key is to start building your retirement savings sooner rather than later.

Myth: Credit Cards Are a Trap

Credit cards are commonly viewed as a trap. It is true that credit card debt can be a drain on your financial situation. But when managed responsibly, you can use credit cards without getting into credit card debt. In fact, you can use credit cards to tap into helpful perks that stretch your budget a bit further and improve your financial outlook.

For example, credit cards offer an opportunity to build your credit score. When you consistently make on-time payments to your credit card, having one in your wallet should improve your credit score.

Another way that credit cards can help your bottom line is through rewards. Many credit cards offer travel rewards or cash-back opportunities. In either case, you can use the extra resources to get more out of your budget—as long as you don’t fall victim to overspending in pursuit of rewards.

Ultimately, credit cards are a financial tool. While credit cards do come with notoriously high interest rates, that doesn’t mean they are always a bad idea. If you stick to only spending what you can afford to pay off each month, a credit card could help you improve your financial situation.

Myth: Every Kind of Debt Is Bad

Not all debt is created equally. Although many people lump debt into a single category, some types of debt are worse than others. For example, credit card debt or payday loans are generally bad for your financial situation. The high interest rates on these types of debt can put you into a downward spiral of accumulating more debt.

But other kinds of debt can help you afford a major purchase. For example, most homeowners have a mortgage, which is a kind of debt. Although a home loan is still debt, it’s generally considered better than credit card debt for several reasons. Not only does a mortgage help you achieve the goal of homeownership, but it also has a much lower interest rate than “bad” debt and is less of a burden on your credit scores.

As you make financial decisions, consider the big picture. Don’t take on more debt than you can afford to repay and take care to avoid high-interest forms of debt as much as possible.

Myth: Giving Up Coffee Will Dramatically Transform Your Finances

Everyone seems to think that giving up your daily coffee purchase will make you a millionaire. Of course, giving up a $3 purchase every day will impact your finances. But skipping your morning coffee probably won’t turn you into a millionaire.

Instead of focusing on small purchases, it’s more important to take a look at the bigger picture. Choosing a more affordable place to call home or a cheaper car to get around will likely have a much bigger impact on your financial future.

For example, let’s say you give up your $3 coffee purchase every day for 10 years. Each month, this choice means you can invest about $90. If your investment earns a 7% return and compounds annually, you’ll have $15395 after 10 years.

In contrast, let’s say you decide to purchase a smaller home. Instead of maxing out your housing budget at $2,000, you find a place for $1,500 per month. Each month, this choice allows you to invest $500. If your investment earns a 7% return and compounds annually, you’ll have $85,526 after 10 years.

Growing your income can potentially make an even bigger difference to your finances than cost-cutting measures.

Overall, focusing on your biggest financial decisions tends to have a larger impact than depriving yourself of the small joys in life.

Myth: All Financial Advisors Have Your Best Interests in Mind

Fiduciary advisors are legally obligated to put your financial interests ahead of their own. But not all financial advisors are fiduciaries. Some may have incentives to put more money into their own pockets at your expense. If you want to work with a financial advisor, do your research and look for a fee-only financial advisor with a fiduciary responsibility.

How to Protect Yourself From Money Myths

Financial myths are common, but you can protect yourself from money myths. Here are some ways to protect yourself from financial misinformation.

Improve Your Financial Literacy

Financial literacy involves acquiring knowledge about how money management should work. If you want to protect yourself from dangerous financial myths, improving your financial literacy is key.

A few ways to boost your financial literacy include:

    Reading books: Many financial experts offer straightforward advice in books. It’s an affordable way to increase your knowledge, especially if you can borrow through your local library.
    Listen to podcasts: Financial podcasts can help you grow your baseline knowledge.
    Build a budget: Get familiar with your numbers. When you have a firm understanding of your numbers, you’ll have a better idea of what financial advice is right or wrong for your situation.
    Ask questions: If you know someone who manages their money well, consider asking questions. Many would be happy to share their knowledge.

Fact-check Anything Suspicious

When you hear something about money that doesn’t add up or sounds too good to be true, take a minute to fact-check the information. In many cases, a little bit of fact-checking can quickly debunk the latest financial tip on social media.

As you verify information, consider looking at government resources or trusted financial experts.

Be Aware of Your Underlying Beliefs

Underlying beliefs can have a significant impact on your financial management tendencies. The money ideas you were taught as a child might be sticking with you even though they don’t serve your current situation.

For example, you might have an underlying money belief that wanting more money is bad, which might push you to save less. But in reality, there is nothing inherently evil about wanting a financial safety net.

Try to probe your limiting beliefs about money. You might be surprised by what you find.

Frequently Asked Questions

Are Money Myths Bad?

Yes, money myths are harmful because they can result in negative financial consequences.

Why Do I Hear Money Myths From Family and Friends?

Your family and friends might have your best interests at heart, so they may spread money myths in a misguided effort to help you succeed. But if they believe in money myths, then you might be getting bad financial advice from them.

The Bottom Line

Money myths are regularly shared. If you hear a piece of financial advice, always do your own research before moving forward. Boosting your financial literacy can help you determine the ideal way to move forward with your financial situation.