Top 7 Myths About Personal Finance Management
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Top 7 Myths About Personal Finance Management
Whether the market is humming along or dropping like a rock, you still have to make personal financial decisions about saving, investing, borrowing and your everyday living expenses. With all the misinformation, self-proclaimed financial gurus and myths in the marketplace, no one can blame you for being confused about how to manage your money. We'll help you cut through the mythology and make sound financial decisions.
Myth #1: I Don't Earn Enough to Save
There are plenty of myths that are akin to this one, such as "I'm too young to start saving" or "The amount I have to save is too small to make a difference." The truth is, saving is one of the pillars on which financial security is built. "The magic of compound interest means the sooner you start saving, regardless of the amount, the more money you'll have to work with by the time you hit retirement," says Certified Public Accountant, Mark Noel. Assume that when you turned 25 you dropped $3,000 into a tax-deferred retirement account that earned an 8 percent return, and you made that same investment for 10 years, then stopped saving. By the time you retired at age 65 your retirement account would be worth around $472,000. If you waited until you were 35 to start making that annual $3,000 investment, and continued investing each year until you hit 65, you would have invested three times as much money, but you'd only have around $367,000 in your account.
Myth #2: I'm Okay as Long as I Make the Minimum Payment
Minimum monthly payments are a trap. Making the minimum monthly payment will extend the time required for you to get out of debt, and increase the amount of interest you eventually must pay. For example, if you run your 14.5 percent credit card up to $1,424 then stop charging and decide to pay it off by making minimum monthly payments of $28, you'll still be paying on that account 12 years from now. If you can increase your monthly payment to $49, you'll be out from under that debt in only three years.
Myth #3: The Amount of the Monthly Payment Is All That Matters
The decision to go into debt for anything is serious enough to warrant significant consideration, even when the purpose for going into debt is worthy. For example, few of us can afford to pay cash for a home. But there are plenty of things to consider other than just the amount of the monthly payment. You should also consider such factors as the interest rate and how those rates are calculated, the length of the loan term, the added cost of late payments and the potential benefits of early payments to determine total costs.
Myth #4: It's Always Better to Buy a Home Than to Rent
Home ownership might be the American dream, but that dream can turn into a nightmare if you're not careful. "Buying a home is the largest single investment most people will ever make, and in many cases you're committing yourself to a 30-year mortgage," says real estate agent Anita Cordell. "While you'll get the tax benefits of being able to write off your mortgage interest and real estate taxes, you have the added burden of upkeep, maintenance and repairs." Your mortgage payments don't stop if you have to move for your job, and there is no guarantee that the value of your home will increase. "Sometimes renting is a better choice, particularly if you don't expect to stay in the area for at least a couple of years," Cordell adds.
Myth #5: I'll Improve My Credit Score If I Carry a Balance
"The primary thing that credit scoring agencies look for is on-time payments, not the balance of your account," says Jana Castanon, community outreach coordinator at a credit counseling organization in Columbus, Ohio. Paying less than the minimum payment, paying late or missing a payment altogether can hurt your score. Paying off your balance each month won't hurt your credit score, and carrying a balance won't help it.
Myth #6: You Get What You Pay For
Sometimes a high price tag means quality. Sometimes a high price tag means prestige. Sometimes a high price tag just means you overpaid for the item. Just because you pay a lot for something doesn't necessarily mean it's a superior product or will make your life better. This can be especially true when it comes to credit cards and consumer loans, where comparison shopping can save you a bundle on interest rates, grace periods, annual fees and more.
Myth #7: It's Always Better to Pay Off High Interest Debt First
It's a good idea to pay off your debt, and paying off your higher interest loans will get you out of debt faster. But your circumstances, financial goals and temperament are unique. Trying to tackle a high-interest debt with a huge balance might be too daunting a task for you.Pay off your smaller balances first to build momentum, even if those debts carry a lower interest rate, and then attack your larger balances.