You may have heard that sticking to good financial rules of thumb can help you achieve financial security. But, you may also want to be aware of money myths that can have major negative implications.
To help you stay informed and make smart money moves, you may want to read up on these 5 money myths.
1. Checking your credit hurts your credit score
With credit reports, there are two types of inquiries: a hard inquiry and a soft inquiry. A hard inquiry happens when a lender checks your credit report — at your request — to make a lending decision. Hard inquiries can knock a few points off your credit score and stay on your credit report for two years.
A soft inquiry happens when a company or person checks your credit report to pre-qualify you for a loan or credit card or perform a background check. It also happens when you check your credit score. Soft inquiries don’t affect your credit score in any way.
If you believe this myth and don’t check your credit score often, potential errors or fraud could go undetected long enough that it would be hard to clear up quickly. And, a ruined credit report can also make it hard to get approved for credit when you need it.
2. A home is a good investment
There’s no guarantee that your home will appreciate in value at a reasonable rate. We only need to look to the Great Recession to see how quickly home prices can plummet.
Even some homeowners who could afford their monthly payment were “underwater” as the value of their home descended below their loan balance.
There are also extra costs involved with owning a home that should be considered in calculating your return. For example, homeowners insurance, private mortgage insurance, and property taxes are all mainstays with many mortgages. Maintenance and unexpected repairs can also get pricey.
That’s not to say a home can’t be a good investment for someone who is willing to take on the risks. But, it’s important that you don’t make such a long-term financial commitment thinking you’ll automatically make money – especially if the housing market suffers another crash.
3. All debt is bad
Focusing all your efforts on paying off debt can leave you without adequate emergency fund and retirement savings. When creating a plan to tackle your debt, keep all of your financial goals in mind.
Mathematically, low-interest debt can be good if you’re using it as leverage to work toward your other goals. For example, say you have $10,000 left on your auto loan with a 2.49% interest rate. You can put an extra $200 a month toward the debt, or you can put that money into your retirement account, where you could realistically get a 5% to 7% return over the years.
4. Carrying a balance on your credit card boosts your credit score
If you’re paying off your credit card every month, that means there’s no balance to report to the credit bureaus, right? Not necessarily. Credit card companies typically report your card balance to the credit bureaus once a month, and the reporting date is rarely the same as the due date.
So, unless you don’t use your card at all, it’s likely that the company will always report a balance. What’s more, credit card companies don’t report whether or not you’ve paid in full, just whether you’ve paid on time.
As a result, carrying a balance doesn’t have any effect on your credit at all. Instead, it could lead you to paying interest unnecessarily for years – and that’s money that you could use for other things.
5. Buy high, sell low
It’s a common emotional response to buy into the stock market when things are going well and to sell as the market tanks. The problem with this is that you’re losing money by buying your stocks at a premium and selling them at a discount.
Instead, think of stocks as groceries. Focus on what can provide you the most value for your money and avoid overpriced items until they go on sale.
If you invest in mutual funds, use the dollar-cost averaging method, investing a fixed amount every month regardless of how the market is doing. This strategy can mitigate the risks that come with a volatile market.
Don’t believe everything you hear
Not every money tip you hear is in your best interest, no matter how good it sounds. If something sounds even a little off, spend time researching it to make sure it holds water. This is especially important when it comes to debt and investing, as these often involve a lot of money over time.
The more you know, the more control you’ll have over where your money goes. This, in turn, makes it easier to reach your financial goals.