5 Common Money Myths and Why They’re Not True

Published on: Apr 30, 2021fb-roundtwitter-roundemail-round
Crystal ball with money in it Daniele Simonelli

The Story

April was Financial Literacy Month. And we celebrated by busting five common money myths – one in each Skimm Money newsletter this month. Because part of making smarter decisions when it comes to your wallet is knowing what’s fact and what’s not.

So what's what? 

Here are a few common money myths you should know and why they’re not true. 

Myth #1: When it comes to financial health, your income is the most important number to know. 

Meet your net worth. Net worth = your assets (the value of everything you own, like your home, car, jewelry, plus what's in your bank and investment accounts) minus your liabilities (aka what you owe, like a mortgage, car loan, and any other debts). Spoiler: yours might be negative. That's okay. Understanding where you are today – and making a plan to grow your number – is what's important.

Myth #2: Carrying a balance on your credit card is key to building good credit. 

Not quite. Actually, carrying a balance on your credit card can lower your credit score. So getting this wrong could cost you money and hurt your reputation. The point of building credit is to show future lenders (that could approve you for a mortgage or car or biz loan) that you can be trusted with their money. You can do that by charging something on your card, and paying it off before the bill's due. No debt balance required. We Skimm’d a few more pointers on keeping your score up here.

Myth #3: You need a lot of money to invest. 

False. You don’t need to be rich to invest, but you need to invest to be rich. So start now. Many investing apps and services let you buy fractional shares (aka small pieces of stocks and funds). Meaning you can invest just a few dollars at a time. Investing a little now could be smarter than waiting to invest more later.

Example: if you invest $100/month, and earn an average annual return of 7%, you'll have a portfolio worth about $240K in 40 years. But if you hold off for 10 years, then invest twice as much – so, $200/month for 30 years – you end up with less overall. About $230K. Read: time in the market matters. Get in the habit now, then invest more as your paycheck grows.

Myth #4: Renting is a waste of money. 

It's not that clear cut. Renting doesn't help you build equity, but there are a lot of homeownership costs (think: interest, taxes, insurance) that don't either. Avoiding those expenses could leave more room to pay off debt and invest – two ways to grow your net worth. Renting also gives you the flexibility to move when you need to. If you sell your home too soon after buying, you could end up spending money you've built in equity on closing costs and capital gains taxes.

Myth #5: You need six months' worth of expenses in your emergency fund.

Know there’s no magic number. Experts often recommend saving up to six months' worth of living expenses. But everyone’s needs are different. Example: you might need more savings if you support other people (like kids or a partner), are self-employed or work in a vulnerable industry. To figure out your target number, imagine a financial emergency (a year-long pandemic comes to mind). If you lost income, what expenses have to be covered? How quickly could you get a new job? Basically, the more uncertain you are about your future, the more you should add to your emergency savings.

theSkimm 

It's a wrap on Financial Literacy Month, but keeping up with your financial education is smart all year round. Today's lesson: before buying into any so-called money rule, check to see how much truth there is to it. Because no matter what popular opinion says, the best money moves have to make sense for your personal situation in the long run. No lie.

Want more Skimm Money?

Say ‘hi’ to our weekly newsletter. Every Friday, we break down the news and info you need to make smarter money decisions.

I'm in


Skimm'd by: Ivana Pino, Casey Bond, Stacy Rapacon, and Elyse Steinhaus