A field of study called “behavioral finance” now integrates psychology into economics and finance to come up with some reasons for our money mistakes. Researchers say belief in “money myths” explains many of the fumbles we make with our finances.Flickr | https://flic.kr/p/b35ukk
They are also a force behind one of the biggest threats to your financial future — yourself. Here are some personal finance myths that could be costing you money and endangering your future security.
Myth #1: Two incomes are better than one.
Truth: Today’s families often have two incomes out of necessity. They make more money than a one-income family did a generation ago. But, by the time they pay for the basics — an average home, a second car to get the second spouse to work, child care, health insurance, taxes, and other essentials — that family actually has less money left over at the end of the month to show for it.
The assumption in the myth is that with two incomes you’re doubly secure. But if you’re counting on both of those incomes, then you’re in serious trouble if either income goes away. And, if you have two people in the workforce, you have double the chance that someone will get laid off, or that someone could get too sick to work. When that happens, two-income families are in financial danger and a lot of them go bankrupt.
Housing prices are rising twice as fast for families with kids and a big reason is dwindling confidence in public schools. People are bidding up the prices on homes situated in school districts with good reputations. The only way for a typical family to afford one of those homes is for both spouses to work. Average mortgage expenses have risen 70 times faster than the average family’s primary income, so, families are required to keep two incomes.
So, when two incomes are a necessity, the question of whether two may be better than one is moot. Busting this particular myth means understanding the true financial stakes involved in deciding to have children and raising a family.
Myth #2: Owning is always better than renting.
Truth: The money you pay for rent is a necessity like your other living expenses. Do you consider the money you spend on food to be wasted? What about the money you spend on gas? Both of these expenses are for items you purchase regularly that get used up and appear to have no lasting value, but are necessary to carry out daily activities.
If you own a home, unless you paid cash for it, you pay mortgage interest (and it’s likely as much as you’d be spending on rent), plus other expenses like property taxes, insurance, maintenance, etc.
As a matter of fact, for the first five years, you are basically paying all interest on your mortgage. For example, on a 30-year, $250,000 mortgage at 7 percent interest, your first 60 payments would total about $100,000. Of that you “throw away” about $85,000 on interest payments. Because of that, the home mortgage interest tax deduction is not really the advantage. The money you do save is just a reduction in the costs that you pay. Tax deductions are welcome when filing your taxes and calculating whether you can afford a mortgage, but they’re not a reason to buy a home.
So, the choice between owning and renting is often a financial toss up. Busting this myth means understanding the most important reason to buy a home. Decide how badly you want to settle down for the long -term and invest in a permanent residence.
Myth #3: a near-perfect credit score will get you the best loan rate.
Truth: Every expert, credit bureau, and loan officer has a different opinion as to where the threshold for excellent credit lies. In addition, “near-perfect” can be a relative term. Do we mean “near-perfect” as in “excellent,” or as in “perfect,” which doesn’t exist? Different loans and lenders have different standards.
Generally, any credit score in the mid 700 range and up is considered excellent credit, and will get you easy credit approvals and the best interest rates. But at this high end of credit scoring, extra points don’t improve your loan terms much. Most lenders count a credit score of 760, just as good as a score over 800. Sure, the higher your score, the better. But even an extra 50 points in this range doesn’t help you get a better interest rate on your next loan.
Those extra points can serve as a buffer if a negative item shows up on your credit report. For example, if you max out a credit card, you can get dinged 30-50 points. An extra 50 points would absorb the hit and minimize the possible damage.
So, there is no “magic number” when it comes to credit scores. Busting this myth means understanding that lenders take more than scores into consideration. To get the loan you want, you may need a high credit score, no negatives in your credit file, and adequate income to afford it. Or, decide if you’re willing to pay more for the credit,
Myth #4: You need to earn more to save more.
Truth: Your ability to save is defined by your discipline to sacrifice and set aside a percentage of your spending. Your income level is not really a factor. And no matter the amount, the younger you start saving and earning interest, the more years you’ll have for compound interest to work its magic.
Nowadays, it’s easy to start saving with very little money thanks to online savings accounts. While traditional bank savings accounts generally offer interest rates so low that you’ll barely notice the interest you accrue, an online savings account will offer a more competitive rate based on how the market is currently doing.
Once you’re in a position to start investing in stocks and mutual funds, you can transfer funds from your online savings account and into a brokerage account. It is true that some brokerage firms require you to have a minimum amount of money to invest in certain funds or even to open an account. But you can also get an account with minimal funds through one of the online trading companies that have cropped up. They do charge fees.
So, savings is not some arbitrary amount but a discipline. Busting this myth means understanding that you need to sacrifice some of your spending now for financial security later. You simply have to decide how important that security is to you.
Consider how these personal finance myths and others like them could be contributing to money problems you’re experiencing now, and pose more serious trouble for your future.
“Busting” these myths offers the answers you need to take action and change your behavior with money — and assure your financial security.