//The Biggest Things People Get Wrong About Money

The Biggest Things People Get Wrong About Money

I’ve gotten to a point in my career where I’m commonly referred to as a financial “expert”. I’ve worked hard to broaden my knowledge and fill in the gaps, so I feel pretty comfortable in that role. When a friend or colleague asks me for advice, chances are I can help them in some way. 

But the more I learn, the more I realize how ignorant I actually am. Money is such a diverse and dynamic topic that it’s impossible to know everything, and even the most basic fundamentals can change over time. The best you can do is keep an open mind and actively challenge your assumptions. 

We all get things wrong about money. Here are some of the most common – and most dangerous – misconceptions. 

“Keep 30% balance on your credit cards.

I’ll never forget this argument I had with my friend Chelsea. We were talking about credit card rewards programs and how awesome they are. “Of course, you should never hold a balance on them, no matter what kind of cash-back you’re getting,” I told her. She disagreed, saying that you should always carry a small balance on your card or you won’t build any credit. 

In my opinion, this is probably the most persistent credit myth still making the rounds in 2019. It’s true that you need to have a balance on a card when the statement closes. That balance will then be reported to the credit card bureaus, but once the statement closes, you can pay off the entire amount without hurting your credit. If you pay off the balance before the statement closes then the card provider will report your balance as $0.  

An easy way to set this up is to create automatic payments that will go in effect after the statement closes, but before your due date. Go to your credit card account and click on the payments section. Then, create automatic payments for the full statement balance and choose a withdrawal date on or before your due date.  

“Investing is the same thing as gambling.”

When I was in middle school, the dot-com crash happened. I don’t remember much about it, except for the fact that a lot of people lost a lot of money. A year later, 9/11 happened and the market tanked again. When I was a freshman in college, the housing market crashed and the Great Recession began. 

All these experiences probably would have scared me away from investing, but my parents explained that a market crash doesn’t mean investing is bad. They told me about all the times their retirement accounts had faltered, only to recover and grow over time.  

Some people equate investing to gambling, that it’s all a matter of luck or secret insider knowledge. Fortunately, investing can be simple – and profitable – if you stick to tried-and-true methods.  

One of the best ways to invest and save for retirement is with index funds. In 2017, legendary investor Warren Buffett won a 10-year bet against a hedge fund manager, wagering that money invested in an index fund would outearn the manager’s picks. He earned 7.1% during that decade, while the hedge fund manager earned 2.2%. 

“You need a lot of money to invest.”

Many young people decide to wait until they’re older and earning a lot of money before they worry about investing for retirement. Unfortunately, this is one of the costliest financial myths. The longer you wait to start investing, the more you miss out on the magic of compound interest. 

A 22year-old who starts investing right after college will have $3,591.60 after five years if they save $50 a month. If they decide to ramp up their savings to $150 a month at age 27, they’ll have $456,081.29 in 40 years. 

Let’s compare that to someone who didn’t start investing until age 27. If they invest $150 a month for 40 years, they’ll only have $397,034.55 when they retire. That’s more than $50,000 less. 

The power of compound interest is about time more than money, so don’t worry that much about how much you can afford to contribute. Just get started as soon as possible. 

“A tax refund is always good.”

Every spring, millions of people file their taxes and get ecstatic when they discover a tax refund is coming their way. The average direct deposit tax refund last tax season was over $3,000.

Tax refunds may sound like bonus money, but refunds can stem from a couple of sources:

  • Refundable Tax Credits (Such as, Child Tax Credit-(CTC), Earned Income tax Credit –(EITC) or American Opportunity Tax Credit-(AOTC)
  • Tax deductions like student loan interest, the standard deduction, and itemized deduction that lower your taxable income
  • Excess Tax withholding from Paycheck

If your tax refund is because of the third reason pointed out then, it means you had the government withhold too much from your paycheck. In essence, you’ve just given the federal government an interest-free loan.

If you have too much withheld from your paycheck, you may miss out on having that money in your pocket to help your financial situation. Most Americans use a tax refund to pay off debt, but getting a huge lump sum at tax time can actually mean they end up paying more in interest during the year when waiting for your tax refund to pay down debt.

Here’s how it works: Let’s say you have a $2,000 credit card balance with 24% interest. You can only afford to make the minimum payment, which barely scratches the surface. When you get a $2,000 tax refund, you put the whole thing toward your balance. This wipes out your debt completely, so you no longer have credit card debt. Great, right?

Wrong. If you didn’t over withhold taxes, you would have more money in your pocket during the year and would have paid down your credit card debt slowly over time. This would save you more money on interest rather than waiting until you got a tax refund.

Whether you adjust your withholding allowances to get a bigger paycheck or a bigger tax refund depends on your personal preference. Some people may opt for more money in their paycheck, but end up spending it on lattes and shopping whereas taxpayers who prefer a tax refund to pay down debt use over withholding as a forced savings mechanism. One important thing to also consider is how new tax laws impacted your tax situation and your overall tax picture so whether you prefer a bigger paycheck or a bigger tax refund, it is important to adjust your withholding every year. You can also use the TurboTax W-4 withholding calculator to easily figure out your personal withholding allowances and give your W-4 form to your employer.

 

Zina Kumok (52 Posts)

Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Debt Free After Three.