
Saving Money Myths Debunked
Not all advice is created equal when it comes to budgeting and saving money. The financial landscape has changed over the past few decades, and some financial tips have become increasingly unreliable as time goes on. Financial myths get carried down from generation to generation, but it might be time to retire some of them for good. They include topics like renting vs. buying a home, the pros and cons of carrying around debt and other important matters related to your personal finances. If you’ve heard one of these personal finance myths, be sure to take them with a grain of salt.
- Certain financial advice can harm your financial situation in today’s economy.
- Instead of avoiding debt, you can use it to invest in assets that will appreciate in value.
- Start saving for retirement early and hold off on buying a home until you have plenty of money in savings.
LESSON CONTENTS
Financial myths to avoid:
You need a perfect credit score to get the best interest rates
The value of a perfect credit score has become the subject of debate in recent years. While it’s important to maintain a good credit score, the benefits are the same once your credit score is 740-850.
If you’re wondering what is a good credit score, it is considered a score of 740 to 799. A perfect score of 800-850 tends to be extremely rare and getting one can be nearly impossible if you have a bad mark on your credit report. But that doesn’t mean you can’t lock in a great interest rate. As long as you have a good credit score, you should qualify for a low-interest loan when buying a home or car.
A great credit score doesn’t guarantee you’ll get approved for a loan. Your lender will also check to see if you have a reliable source of income, plenty of cash reserves, and consider your debt-to-income ratio when assessing your qualification for the loan.
All debt is bad debt
Some people believe that no good can come from carrying around any amount of debt. Borrowing money costs money. You’ll need to pay interest on the debt you carry around but taking out a loan may benefit you financially if the asset you purchase with the loan will appreciate in value. Education, transportation and real estate are all investments that may improve your financial situation. You can use a car to go to work and earn a living. An education might help you make more money for your time. And the home you purchase may grow in value if you keep up with repairs. The appreciation rate or return on investment must exceed the borrowing costs for you to benefit financially.
Some types of debt are better than others. You should avoid high-interest debt to keep the cost of borrowing as low as possible. Carrying a balance on credit cards and other high-cost debt won’t help you in the long run. Use loans to invest in your future, so you can generate wealth in the years to come.
Savings accounts with low interest rates aren't worth it
Keeping your money in a low-interest-bearing account will benefit you financially over time if you allow the balance to grow. Many accounts come with annual percentage rates as low as 1% or less, which may not seem like much when you only have $100 in your account. But if you continue to deposit money into the account and let it sit for years, you will be left with a sizeable balance. The accrued interest will be added to the balance, which then collects compound interest. It’s important to calculate compound interest and the annual rate to see how much you stand to earn if you keep depositing money in the account. You can also try depositing your savings into a certificate of deposit account to collect more in interest, but these accounts have more limitations.
Renting a home is worse than buying a home
Many people dream of one day owning a home, but you shouldn’t take on the responsibility of a mortgage loan unless you are prepared to make the monthly payment and keep up with repairs. Some people make the mistake of rushing into homeownership too soon because they are anxious to start generating wealth, but you don’t want to get stuck with a minimum monthly payment you can’t afford, or you may have to refinance your mortgage, which will cost you more in fees and closing costs.
The decision between renting and buying isn't one-size-fits-all. Franke, Schulenburg, and Remer (1990) explain, “Depending on certain conditions, either buying a home or renting an apartment may be economically advantageous. Variables such as mortgage and inflation rates, movements in house and apartment prices, and income tax effects play a crucial role in this decision.”
Be sure to calculate the full cost of owning a home before you commit to a loan, including property taxes, maintenance fees, homeowners’ association fees and other expenses that can eat into your monthly budget. Use the Ent Mortgage Payment Calculator to estimate your full monthly payment.
Your living expenses shouldn’t consist of more than a third of your gross take-home pay. Compare the estimated cost of owning a home to your earnings to see if you can afford to buy.
Some believe renting a home or apartment is the equivalent of throwing your money down the drain. But renting can be less expensive compared to owning a home. You can use this time to save money for a down payment on a home to reduce the loan’s principal balance. Paying your rent on time can also help you improve your credit score if your landlord reports your payment history to one or more credit bureaus.
You can wait to save for retirement until you’re older
Retirement planning isn’t what it used to be. Inflation and uncertainty in the stock market are forcing many people to delay retirement. You can never underestimate the amount of money you may need in your golden years, so the sooner you start saving, the better. Starting early on retirement savings can make a significant difference. As Patel and Acharya (2017) point out, “It is never too early to start saving for retirement, as retirement savings is a long-term process,” emphasizing the impact of early savings on future financial stability.
Waiting to save for retirement is no longer realistic for most people. If you don’t save for retirement, you may miss out on tax deductions that can save you money every year. You will have less time to contribute to the account, and your investments won’t have as much time to appreciate in value.
These money myths will likely do you more harm than good. Start saving for retirement early, manage debt responsibly and purchase your home when you have enough money to make the monthly payment and sustain the upkeep.
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