Financial Myths, Mistakes, and Misunderstandings
Throughout our financial lives, we may be influenced by myths, mistakes, and misunderstandings (MMMs). Here are just a few.
In the beginning . . .
"I don't invest because I don't know much about it."It's time to learn, because a basic understanding of investing concepts can help you make more informed financial decisions.
"Wow, they'll give me that much credit! I must be able to handle it." Just because the credit-card company or bank extends a large amount of credit to you, it doesn't mean you should use all of it. The more you borrow, the larger the monthly payments, and before you know it, you've bitten off more than you can chew. Figure out how much you'll owe based on the amount you borrow and determine if it will fit within your budget. Generally speaking, if you can't afford the payment, don't incur the debt.
"I'm young. I'll worry about retirement when I'm older."Planning for retirement involves saving enough by a desired age to enable you to support yourself without having to work. If you wait to begin saving for retirement, you'll have to sock more away or put off retirement to a later date. So the earlier you begin saving, the better.
Sometimes we think we know something and rely on it as being correct, when in fact it couldn't be further from the truth.
"I know my finances like the back of my hand. I don't need to write them down." You'd be surprised how often we think we know how much we can afford until our bills start to exceed our income. If you write down your expenses and income (e.g., create a spending plan or budget), you'll know how much you can spend.
"I'll dip into my retirement account and make it up later." First, if you borrow from your 401(k), you'll likely pay fees and interest. If you take money from a traditional IRA, you'll pay income tax on the amount you take and possibly a 10% penalty. Remember, these accounts are intended for retirement. Taking money out now increases the risk you might run out of money during retirement.
"My child will pay back the money I loaned to him or her." Good luck. That "loan" is probably going to turn into a gift, which isn't necessarily a bad thing if it really helps your child, but be sure you can afford the loan/gift before making it.
And later on . . .
As we get older, we may fall prey to some MMMs that can be the source of needless angst, such as:
"I won't need as much income in retirement." Maybe, but it might be a mistake to count on it. In fact, in the early years of retirement, you may find that you spend just as much money, or maybe more, than when you were working, especially if you are still paying a mortgage. And don't forget to factor in increasing health-care costs.
And speaking of health care, "the new health-care law cuts my basic Medicare benefits and services." Just the opposite is true. The Affordable Care Act (ACA) mandates that no guaranteed Medicare benefits are cut. In fact, the ACA expands Medicare benefits to include a free
annual wellness assessment.
And finally, "If I die without a will, the state will get my assets and property."This isn't necessarily true. Each state has intestacy laws, which determine who gets what when someone dies without a will. But those laws generally deal with assets in your name at your death that don't have a designated beneficiary or joint owner. In any case, if you want to have some say in who will inherit your assets after your death, you need to prepare an estate plan, which probably includes a will.