Alex Thomas Sadler, Clark.com
Unless you live, well, under a tree, you’ve probably heard the phrase, “money doesn’t grow on trees.”
What you probably haven’t heard is that financial experts say expressions like this one — even when intended to motivate people to work hard — can actually have a negative impact on how people view money.
Here’s why: Money is, in fact, everywhere! There is so much money out there to be made, it’s just up to you to figure out how and where to find out.
“Money comes from a cotton bush, actually,” Grant Cardone, business consultant and author of ‘The 10X Rule,” told Bankrate. “But seriously, the concept that money is scarce is just not true. There is just a shortage of people going for money with courage and the right attitude.”
Money myths lead to bad advice and bad decisions
So many people are working hard to make the right decisions about their finances, and while they may believe they’re on the right track, that’s often not the case due to misinformation and common money myths they are led to believe.
In fact, a variety of things can cause someone to believe they’re more financially savvy than they really are — and that over-confidence can end up leading them down the wrong path.
This reality is often described like this: people don’t know what they just don’t know. And making decisions based on misconceptions can be pretty dangerous for your wallet.
So in order to form the right attitude about personal finance — and become more confident in the power of your own wealth and decision-making — it’s important to first understand the truth behind some of the most common money myths out there.
13 money myths debunked
1. Your money is safest in the bank
Well, it depends on how you look at it. Technically, yes, your money is safer in a savings account than it is in a shoebox under your bed.
But this concept is a little more complicated than many people realize — because when we talk about “in the bank,” that could mean a lot of different things.
When your money is not safest in the bank:
- In a checking account: Your money is absolutely not the safest (or really even safe at all) in a checking account. Here’s why: You typically have a debit card attached to your checking account, and if someone gets their hands on your card or even just the number, they can drain your account and you only have a very short window to report it and get your money back. Very often, that money is gone forever. So the best way to use a checking account is to just keep enough money in there to cover any bills that need payments to come from a bank account (vs. a credit card) — plus any extra cash you want to be able to access quickly from an ATM.
When your money is safe the bank:
In an online savings account
So the game is beginning to change pretty quickly with savings accounts, particularly for those at online banks. For a long time, consumers were earning practically nothing on savings. In fact, “Your parents would earn more in one month than you could earn the entire year (in interest),” Cardone says, referring to the low savings rates Americans have been experiencing for years.
BUT — there’s a new trend emerging among online banks that allows you to earn up to 100x what you would with a traditional bank. For example, online banks are offering rates of return of up to 1.25% to even 1.35%. To give you some context, the current rate of return on savings at Bank of America is 0.01%. That’s a big difference. The thing with online banks is that they have more flexibility to offer better rates and deals to consumers, since they don’t have the same overhead costs as brick-and-mortar financial institutions.
RELATED: Pros & cons of online banking
And when it comes to short-term savings — money you’ll need sometime within five years from now, maybe for a down payment on a house, a car purchase or whatever else — a savings account is the best place to stash that cash. The reason why is because you don’t want to put that money at risk, like you would by investing it. So it’s better to find an online bank with a high rate of return to keep those short term savings — that way you can access the money easily whenever it comes time that you need it.
This is money that needs to be easily accessible, in the case of an emergency or unexpected expense
Your main emergency savings fund should have at least enough cash in it to cover three to six months worth of expenses in case of an emergency (like a job loss or some other reason you couldn’t work for a period of time). You should also have a rainy day fund. This is a smaller amount of money, maybe around $1,000 depending on your situation, that you can tap into to pay for things like a car repair or medical bill.
These funds are crucial to your financial security, because the last thing you want to do is put these types of charges on a credit card. That’s when debt can start to easily spiral out of control.
Money that’s better off not in the bank:
Extra savings & money for the future
Investing is the best way to grow money that you most likely won’t need for at least five years.
Once you’ve built up your short-term savings and emergency funds, you’re better off investing any extra money and allowing it to grow, rather than just leaving it in a savings account to sit there. Although savings rates are going up, investing any extra cash you can will allow you to earn exponentially higher gains on that money over time.
If you aren’t contributing to your 401(k) at work, that’s a great place to start. The money comes out of your paycheck and into retirement savings before you even see it (or have a chance to spend it). Plus, if your employer offers a match, that’s free money toward your retirement!
2. A penny saved is a penny earned
Budgeting and saving can only get you so far. At some point, saving what you’re making won’t be enough — and you’ll need to figure out how to actually earn more money.
When you’re just starting to get a handle on your finances, budgeting and saving are crucial. This is how you train yourself to spend less on things you really don’t need to be spending on — and you can start to develop consistent and successful financial habits. Plus, as you save more money, you begin to understand the true power of financial freedom — a sense of security that only financial stability can provide.
Then once you develop consistent financial habits, it’s time to start earning more money — because eventually, there will come a point when you just can’t cut any more expenses.
“People need to stop always looking at the expenses portion of their budget… It is usually the shortage of income that gets people into trouble,” Cardone says. “The solution is not to cut back on the lattes you drink, but to get a higher-paying job. Or, the harsh reality may be a second job or putting your teenage or young adult children to work to get more money into the household’s coffers.”
The good news is there are several different ways to about earning more money. Here are just a few:
- 35 ways to earn an extra $1,000 or more
- Here’s a list of legitimate work-from-home opportunities
- How to increase your income by reducing expenses
3. If you don’t have a will, your spouse will get your assets
People automatically assume that all assets would go to their spouse upon death. But it doesn’t play that way. The reality is that the law varies by state. When you die without a will, the state decides who gets what.
While thinking about life after our own death isn’t pleasant, it’s important to plan for it if you want to decide for yourself where your assets will go when that day comes.
If you have a complicated financial life — maybe you own your own business and have built up a lot of assets or maybe you have a blended family — in more complex situations like these, you need to go see a lawyer who specializes in wills, estates, and trusts.
If you have a simple situation, check out the WillMaker software that you can get for around $50 through Nolo.com. They do a great job of asking interactive questions to guide you through the will completion process. If you don’t like WillMaker, LegalZoom.comwould be another way to get it done on the cheap.
If you get confused while doing your will with an online service, stop and see a lawyer! But if you want to just push through for peace of mind, it is much cheaper to have a lawyer review the will you’ve self-prepared than to actually prepare one for you from scratch.
4. A will guarantees how your money will be distributed
Not necessarily. And this is why for more complicated situations — like for people with several financial accounts, big assets etc. — it’s important to talk to a lawyer who specializes in wills and estates.
Here’s why: beneficiaries named on your financial accounts will actually override beneficiaries named in your will. So if person 1 is listed on your will and person 2 is listed on your IRA or other financial account, person 2 will get to claim that account (and the funds in it).
5. Eliminate all debt as quickly as possible, especially by retirement
It depends on what kind of debt it is. Of course it would be better to have no mortgage — and no debt at all — but life isn’t always perfect.
When it comes to high-interest credit card debt, you always want to pay that off as quickly as possible, in order to avoid paying extra in interest or getting into a situation in which you can’t pay it off, which could then damage your credit score and cause you financial trouble for years.
On the other hand, a mortgage is a different situation. Again, ideally you want it paid off, but if you’re still trying to save for your future, then that is more important. A mortgage is considered “good debt,” because the money is invested in something that’s likely to appreciate in value over time.
So if you’re setting priorities and have a low mortgage rate, that mortgage being paid off is not the highest priority. Unless you’ve saved like a maniac and have massive amounts of cash for your retirement years.
The same thing goes for student loans, which also don’t necessarily need to be paid off as soon as possible. You want to make sure you’re saving enough money for retirement throughout your working years — because your money will have more time to grow, giving you a larger sum of cash in the future. So you don’t want to throw all of your extra money at these debts at the expense of your retirement savings. These loans typically have lower interest rates and may be tax deductible.
If you have fully-funded emergency savings, no credit card debt, no car loan, are saving plenty for retirement — and still have a solid amount of cash to spare — then you should start paying off your student loans at a faster pace, followed by your mortgage.
6. Cash is king
Limiting yourself to only paying with cash or a debit card can actually keep you from reaching your bigger financial goals.
The concept is based on the idea that if you’re paying with cash, you can’t spend more than you have. And that’s an important habit to establish as you start to build your personal wealth. But as you set bigger goals, like a buying a house, there’s more to this story.
So let’s use that example, say you want to buy a home in a few years. You’ll need to build up your credit in order to qualify for a mortgage. One way to do this is by using credit cards — in a responsible way.
Here’s how to make credit cards work in your favor: Only use credit cards to pay for things you know you’ll be able to pay off at the end of the month (so you’re still really only spending what you have). Paying credit cards bill on time and in full before the due date (ideally even before the closing date) will help you build credit and increase your credit score, which is what will allow you to get better rates on things like a car loan or home loan.
Another side of this “cash is king” story is that there are a lot of risks involved with using debit cards. If someone steals your card number and empties your account, you only have a day or two to report the fraud — and the reality is you likely won’t get all of your money back, if any. But with credit cards, you are guaranteed more protections when it comes to theft and fraud.
The key is to stay disciplined. You have to use credit cards the right way in order to reap the benefits. And if you do, your finances will be better off moving forward.
7. Carrying credit card debt will improve your credit score
While cash isn’t always king, neither is credit card debt.
Using credit cards to make purchases that you pay off in full — down to a balance of $0.00 every single month — will help build your credit history and improve your credit score.
But carrying credit card debt month-to-month is NOT good. It damages your credit, you’re charged interest fees and you’re setting yourself up for a potentially dangerous situation in which the debt continues to pile up and then you can’t pay it off.
Also, credit bureaus will ding your score if your credit utilization is too high — meaning you’re carrying high balances on your credit cards compared to the cards’ limits. You only want to use at the most 30% of your available credit at any time. So if you have one credit card with a limit of $1,000, you only want to put as much as $300 on it at time, and then pay that off before charging anything else.
When determining your creditworthiness, credit bureaus and lenders don’t want to see maxed out credit cards or debts that carry over from month to month.
If you’re looking for a general rule of thumb: use credit cards to make small purchases that you can pay off at the end of each month.
8. Invest only in what you know
One big mistake many people make is investing too much money only in what they’re familiar with. And there are two big parts to this.
First, workers will often invest their 401(k) in their employer’s stock, but that’s a bad idea. You don’t want to put all of your eggs in one basket, and when you make this move that’s essentially what you’re doing — relying on your employer to pay your paycheck and build your retirement wealth. But what this does is ignore the fact that companies have a lifecycle just like people. For more on this, click here.
Similarly, people often think it’s a good idea to invest all their money in the industry they work in, especially if the industry is booming. Things are great and you know the industry inside and out, so what could go wrong? Well, a lot.
‘These clients end up with a portfolio with greater risk level than having a diversified portfolio of stocks and bonds from a variety of different sectors and countries,” Brian Antenucci, an investment adviser, told Bankrate.
If you invest everything in one sector, you aren’t giving your money the chance to ride out any downturns in the industry. If you’re invested in several different industries, your investments will have a much better chance of benefiting from ups — and surviving any downs.
9. If you run out of money in retirement, you can just get another job
Many soon-to-be retirees often assume that if they need more money in retirement, they can just get a job. But unfortunately, it’s not as easy as it sounds.
First of all, as you plan for retirement, it can be easy to underestimate the type of lifestyle you’ll want to lead. And if you don’t plan accordingly, when it comes time to retire, you may realize that you don’t have enough money saved to maintain your desired lifestyle. Or you may run out of money much quicker than you planned.
And it’s a much safer bet to save more now than to just assume you’ll be able to get a job in retirement.
Many retirees plan to work part-time in retirement, and if you know that’s the case ahead of time, you’re better off setting up that part-time job before your actual retirement date. If you just assume that since you’ve had a job most of your life, you’ll be able to get another one in the future, you might face a harsh reality at a time when your finances won’t be able to handle it.
As technology continues to change every day, and continues to change how various industries operate, it can be difficult for retirees to adapt, especially if they’ve been out of work for a longer period of time. So don’t just bank on the idea that you’ll be able to pick up work again if you run out of money.
RELATED: 9 great part-time jobs for retirees
10. All adults need life insurance
Life insurance is a way to guarantee that people who depend on you will be financially provided for if you were no longer around. But for people who have no spouse, children or business depending on them, life insurance is unnecessary.
RELATED: Long-term care insurance guide
On the other hand, there’s one situation involving life insurance that’s often overlooked.
Stay-at-home spouses have a special need for life insurance. A 2015 survey from Salary.com found that the “salary” such parents earn by dealing with laundry, kids, cooking, etc. is more than $121,000! That’s more of an attention-grabbing number than anything else, because stay-at-home parents don’t actually “earn” that, but it shows why having life insurance is so important.
Should a stay-at-home spouse pass away, the remaining parent would have to suddenly pay for childcare and everything else a stay-at-home parent does on a day-to-day basis. That’s why it’s essential the parent at home have a policy.
RELATED: How to shop for life insurance
11. You should take Social Security benefits at age 62
You can start receiving Social Security benefits when you turn 62, but that doesn’t mean you necessarily should.
Every year you wait to take Social Security after age 62, up until age 70, your benefits increase dramatically. So the longer you wait, the bigger your checks will be.
12. If you’re over a certain age, it’s too late to save for retirement
So of course it’s a lot easier to build up savings throughout the course of your working years, because it gives you time to save more money and gives your money more time to grow. But unfortunately, financial setbacks and other things in life sometimes get in the way. And if that’s the case, it doesn’t mean you’re out of luck.
It’ll require more discipline and other lifestyle adjustments, including potentially taking on extra work, but there are ways to prepare for retirement later in life. The first thing you need to do is figure out how much money you’ll need to cover your expenses in retirement, as well as how much guaranteed income you’ll have — from Social Security, pensions and other retirement accounts.
That will help you determine how much you’ll need to save before you can comfortably retire.
Here’s more on how to start saving for retirement later in life.
13. You have to be rich to invest
You can start investing with just a couple hundred dollars. And these days, you can do it right from your smartphone.