Unfortunately, one of the factors that will prevent many people from becoming financially successful is a false belief about money. In fact, widespread financial myths can negatively impact both your short- and long-term net worth. Throw away these top 10 money myths, and you'll avoid the consequences of believing them.
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1. If I get a raise that bumps me into a higher tax bracket, I'll actually take home less money.
Thankfully, this isn't true. Moving into a higher tax bracket only increases the rate of tax paid on the last dollars you earn. Suppose you're filing single, your old salary was $30,000 a year and your new salary is $33,000 a year. According to the IRS's 2007 federal tax rate schedules, when your salary was $30,000, your marginal tax rate was 15%. With a salary of $33,000, your marginal tax rate is now 25%.
The key to unlocking this myth is the word "marginal". In this scenario, your first $31,850 of income is still taxed the same way it was before you got your raise. With a $30,000 income, your take-home will be $25,891.25. If you make $33,000, you will take home $28,326.25. This is because only the extra $1,150 above $31,850 is taxed at 25% - not the whole $33,000. (To learn more, read How does the marginal tax rate system work?)
2. Renting is like throwing away money.
Do you consider the money you spend on food to be thrown away? 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 which are necessary to carry about daily activities. Rent money falls into the same category.
Even if you own a home, you still have to "throw away" money on expenses like property taxes and mortgage interest (and likely more than you were throwing away in rent). In 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% interest, your first 60 payments would total about $100,000. Of that you "throw away" about $85,000 on interest payments. (To learn more about mortgage payment schedules, read Understanding The Mortgage Payment Structure.)
3. You get what you pay for.
Higher-priced items are not always higher quality. Generic drugs are medically considered to be just as effective as their name-brand counterparts. A million-dollar home that falls into foreclosure and is repurchased for only $900,000 may still have $1 million worth of value. When the price of Google's stock drops on a random Tuesday because investors are panicking about the market in general, Google isn't suddenly a less valuable company..
While there is sometimes a correlation between price and quality, it isn't necessarily a perfect correlation. A $3 chocolate bar may be tastier than a $1 bar, but a $10 bar may not taste significantly different from a $3 bar. When determining an item's value, look past its price tag and examine its true indicators of value. Does that generic aspirin stop your headache? Is that home well-maintained and located in a popular neighborhood? Then you'll know when paying the higher price is worth it when it isn't (and you'll be on your way to understanding the venerable Benjamin Graham's principles of value investing, too). (To learn more, read Guide To Stock-Picking Strategies: Value Investing.)
4. I don't have enough money to start investing.
It's 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. However, if you wait until you meet one of these minimums, you may get frustrated and have a harder time reaching your goal.
These days, it's easy to start investing with very little money thanks to the proliferation of 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. In 2007, it was common to find online banks offering 5% interest, which is a pretty good return on your low-risk savings account investment when you consider that stocks historically return an average of 9-10% annually. Also, some online savings accounts can be opened with as little as $1. Once you're in a position to start investing in stocks and mutual funds, you can transfer a chunk of change out of your online savings account and into your new brokerage account.
Alternately, you could open a brokerage account with minimal funds through one of the online trading companies that have cropped up. However, this may not be the best way to start investing because of the fees you'll pay each time you purchase or redeem shares (generally $5 - $15 per trade). While these fees have been drastically reduced from when you had to trade through human stockbroker, they can still eat into your returns. (To learn more about getting started, read Start Investing With Only $1,000.)
5. Carrying a balance on my credit card will improve my credit rating.
It's not carrying a balance and paying it off slowly that proves your credit worthiness. All this strategy will do is take money out of your pocket and give it to the credit card companies in the form of interest payments. If you want to use a credit card as a tool to improve your credit score, all you really need to do is pay off your balance in full and on time every month. If you want to take it a step further, don't charge more than a small percentage of your card's limit because the amount of available credit you've used is another component of your credit score.
6. Home ownership is a surefire investment strategy.
Just like all other investments, home ownership involves the risk that your investment may decrease in value. While commonly cited statistics say that housing appreciates at somewhere between the rate of inflation and 5% per year, if not more, not all housing will appreciate at this rate. In fact, it is perfectly possible for your home to lose value over the years, meaning that if you want to sell, you'll have to take a hit. The only way you'll avoid realizing a loss in such a situation is if you continue to own the home until you die and pass it on to your heirs.
Even in a less drastic situation, a job transfer, divorce, illness or death in the family could compel you to sell the house at a time when the market is down. And if your house appreciates wildly, that's great, but if you don't want to move to a completely different real estate market (another city), the profit won't do you much good unless you downsize because you'll have to spend it all to get into another house. Owning a home is a major responsibility and there are easier ways to invest your money, so don't buy a home unless you are attracted to its other benefits. (For more insight, check out Measuring The Benefits Of Home Ownership.)
7. One of the major advantages of home ownership is being able to deduct your mortgage interest.
It doesn't really make sense to call this an advantage of home ownership because there is nothing advantageous about paying thousands of dollars in interest every year. The home mortgage interest tax deduction should only be looked at as a minor way to ease the sting of paying all that interest. You are not saving as much money as you think, and even the money you do save is just a reduction in the costs that you pay. Interest tax deductions should always be considered when filing your taxes and calculating whether you can afford the mortgage payments, but they should not be considered a reason to buy a home. (To learn about this popular tax deduction, see The Mortgage Interest Tax Deduction.)
8. The stock market is tanking, so I should sell my investments and get out before things get any worse.
When the stock market goes down, you should really keep your money in. This way, you can ride out the dip and eventually sell at a profit. In fact, stock market lows are a great time to invest even more. Many seasoned investors consider a decline in the market to be a "sale" and take advantage of the opportunity to pick up some valuable investments that are only experiencing a temporary dip. Believe it or not, investors who continued putting money into the stock market during the Great Depression actually fared quite well in the long run. (To find out more on investing in a down market, read Survival Tips For A Stormy Market.)
9. Income tax is illegal.
Sorry, folks. There are quite a few different arguments here, but none will hold up in court. One is that the tax code says that paying taxes is voluntary. Another is that the IRS is not an agency of the United States. The IRS considers all of these arguments to be tax evasion schemes and will punish so-called tax protesters with penalties, interest, tax liens, seizure of property, garnishment of wages – in short, whatever it takes to get tax evaders to pay the full amount due when they're caught. Most tax protester arguments and the IRS's rebuttals can be found on the IRS website. Don't fall for this shenanigan - it will ultimately cost you much more than you were hoping to save by not paying your taxes. (To learn more, check out the Income Tax Guide.)
10. I'm young - I don't need to worry about saving for retirement yet. / I'm old - it's too late for me to start saving for retirement.
The younger you are, the more years of compound interest you have ahead of you. Compound interest is like free money, so why not take advantage of it? Someone who starts saving and earning interest when they're young won't need to deposit as much money to end up with the same amount as someone who starts saving later in life, all else being equal. (To learn more, read Why is retirement easier to afford if you start early? and Compound Your Way To Retirement.)
That said, you shouldn't despair if you're older and you haven't started saving yet. Sure, your $50,000 nest egg may not grow to as much as a 20-year-old's by the time you need to use it, but just because you may not be able to turn it into $1 million doesn't mean you shouldn't try at all. Every extra dollar you invest will get you closer to your goals. Even if you're near retirement age, you won't need your entire nest egg the moment you hit 65. You can still sock away money now and make a considerable sum by the time you need it at 75, 85 or 95. (For tips, see Playing Retirement Catch-Up.)
The Bottom Line
Just because a belief is common and widespread doesn't mean that it's true. So, if you hear something about money or finance, give it some thought before taking it to heart - financial myths will only stand in the way to your financial success if you believe them
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