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Most Common Misconceptions About Money

The Most Common Misconceptions About Money

As someone who works in finance, my friends and family members see me as some sort of financial “expert.” I’ve worked hard to increase my knowledge and fill up the gaps, so I’m confident when it comes to teaching others about money. When people ask for my opinion in this matter, chances are I can assist them in some manner.

However, the more I knowledge I gain, the more I realize how uneducated I am. Money is such a vast and ever-changing topic that knowing everything is difficult, and even the most fundamental beliefs can be in need of reevaluating over time. You can only do your best to remain open-minded and frequently examine your own preconceptions.

When it comes to money, we all make mistakes. Here are some of the most common misconceptions about money that people really should reconsider holding on to.

“Make sure to keep a 30% balance on your credit cards.”

Many financial experts in the media have been preaching for years that you should never carry a balance on your credit card. This is because of the horrendously high fees most credit card companies charge. Nevertheless, some people still believe the myth that you should always carry a little debt on your credit card in order to develop credit.

True, you should have a balance on your card when the statement period ends, as that debt will then be reported to credit card bureaus. However, once the statement is closed you may pay off the whole amount without affecting your credit negatively. If you pay off your amount before the statement ends, your balance will be shown as $0.

A simple approach to accomplish this is to set up automatic payments that will take effect after the statement closes but before the due date. Navigate to your credit card account and select the payments tab. Then go ahead and set up automatic payments for the whole bill balance and select a withdrawal date that is on or before your due date. That way you should never have to deal with the exorbitant credit card fees again while still adding valuable positions to your credit history.

“Investing is just like gambling.”

In March of 2000 the dot-com bubble burst and a lot of people lost a lot of money. A year and a half later 9/11 happened and the market crashed once again. While the market did recover over next few years, in 2008 the housing market imploded and the Great Recession began, taking with it the global stock markets.

All of these events are likely to scare off many people from investing, but the reality is that a market correction does not necessarily indicate that stock investments are bad in general. If you adopt a long-term view, your retirement savings may struggle through some tough times before recovering and growing to a sizeable amount.

Some individuals compare investing to gambling, believing that it is all just a matter of chance or hidden insider information. Fortunately, if you adhere to tried-and-true strategies, investing may be straightforward – and successful. Index funds are one of the best methods to invest and save for retirement. Warren Buffett, the famously successful investor, won a 10-year wager against a hedge fund manager in 2017, betting that money placed in an index fund would outperform the manager’s selections. During that decade, he made 7.1 percent, while the hedge fund manager earned just 2.2 percent.

“You need a lot of money before you can start investing.”

A lot of young people prefer to put off investing for retirement until they are older and earning a lot of money. Unfortunately, in many cases this can turn out to be one of the most expensive financial misconceptions. The longer you wait to start investing, the more you miss out on the unbelievable effects of compound interest.

If a 22-year-old begins investing immediately after graduation, he or she will have $3,591.60 after five years if they save $50 each month. If they decide to increase their savings rate to $150 per month at the age of 27, they will have $456,081.29 after 40 years.

Consider someone who did not begin investing until the age of 27. They will only have $397,034.55 when they retire if they invest $150 every month for 40 years. That’s over $50,000 less.

Compound interest’s strength is based on time rather than the amount of money, so don’t be concerned about how much you can afford to contribute. Simply begin as soon as possible.

“It’s always good to get a tax refund.”

Every spring, millions of individuals file their taxes and are overjoyed when they learn they will get a tax refund. Last year the average tax refund was more than $3,500.

Tax refunds may appear to be free money, but they can come from a variety of sources:

  • Tax credits that are refundable, such as the Child Tax Credit-(CTC), Earned Income Tax Credit-(EITC), or American Opportunity Tax Credit-(AOTC)
  • Tax deductions such as student loan interest, the standard deduction, and itemized deductions that reduce your taxable income
  • Excess Tax withholdings from employees’ paychecks

If your tax refund is due to the third reason mentioned, it indicates the government withheld too much from your salary. In other words, you’ve just made an interest-free loan to the federal government.

If you have an excessive amount deducted from your paycheck, you may miss out on having that money in your pocket to improve your financial condition. Most Americans use their tax refund to pay off debt, but receiving a large lump payment around tax time may result in them paying more in interest throughout the year while they wait for the tax refund to pay off debt.

This is how it works: Assume you have a $2,000 credit card bill with a 24 percent interest rate. You can only afford to pay the bare minimum. When you receive a $2,000 tax refund, you apply the entire amount to your balance. This entirely eliminates your debt, so you no longer have credit card debt. Isn’t it fantastic?

Wrong. If your withheld taxes from your income had been lower throughout the year, you would have had more money in your pocket during the year and would have gradually paid off your credit card debt. Rather than waiting for a tax refund, this would save you more money in interest.

It is up to you whether you increase your withholding allowances to receive a higher salary or a greater tax refund. Some people may like to have more money in their paycheck, but they end up spending it on lattes and shopping, whereas taxpayers who desire a tax refund to pay off debt utilize excess withholding as a forced savings mechanism.

One crucial factor to consider is how new tax laws have affected your tax status and overall tax situation. Therefore, whether you desire a larger salary or a larger tax refund, it is critical to fine-tune your withholding every year. A handy tool to help you calculate these adjustments is TurboTax’s W-4 withholding calculator. It allows you to simply calculate your personal withholding allowances and submit your W-4 form to your employer.

Hopefully you won’t fall for any of the described most common misconceptions about money ever again and be sure to help others ditch these widely held financial myths. The sooner we can overcome these costly beliefs, the sooner we’ll all be better off.