There are many myths about money and how to handle it. The key is identifying those myths and not falling into the trap that many other people fall into when it comes to money myths. I have identified four myths about money, and I will explain why I believe they are myths and how you can avoid being deceived by them.
Myth #1: Debt is a Tool, and you can use it to become wealthy
This is probably the most controversial myth in personal finance. Many people will disagree over the issue of whether debt can be used to become wealthy. I totally disagree with it, and I believe that we were deceived into this notion by banks and money lenders. They have helped to cultivate a society where being debt is no big deal and you can actually use debt to make money.
I know the big argument for debt is mortgaging real estate investments to make money and using 0% credit card cash advances to invest and make money in the stock market. However, all of these are very risky ways to make money with debt, and they are not 100% full proof. The stock market goes down and so does the real estate market. You have as much of a chance of losing money and having no way to repay the debts as you do of making money from leveraging debt.
I have never met or read about a millionaire who said that being in debt helped them become a millionaire. Hard work, making the right investment decisions, and being generally frugal is what most millionaires attest to helping them become financially independent. Being debt only makes the banks wealthy in the long-run. You may think that you are playing the system, but realize that at any time you could get burned when you are playing that game. If you want to debate me one this one, I encourage it. Leave a comment on this post.
Myth #2: Consolidating My Debt Will Solve My Problem
Wrong. Consolidating your debt will only delay your problem with debt. The real problem is you. The person that got you into the debt is staring at you in the mirror. Debt consolidation can help you manage your debt a little better by lumping it into one big payment and possibly lowering the interest rate, but it won’t help you pay off the debt. You must devise a plan that helps you get out of debt. The only to do this is by aggressively paying off your debts with large payments each month. If you don’t have much money left at the end of the month, then read my upcoming article about how to earn extra side income to help pay off debt and save up for large purchases.
Myth #3: Do Whatever it Takes to Buy a House as Quickly as Possible
Buying a house is one of the biggest financial decisions you will ever make. Because it is so easy to get a mortgage nowadays, buying a house has become less of a big deal. It is a big deal, and now you must be even more cautious because so many mortgage lenders are willing to extend a loan even if you will have trouble paying it back. Buying a house is so much more than paying a mortgage payment. There are property taxes, homeowner’s insurance, routine maintenance, unexpected maintenance, and gobs of other little things you’ll need to pay for when you own a house. You need to have some ACTUAL cash saved up in order to be fit to own a house. My advice is to try to save up at least the normal 20% for a down payment and try to buy a house with a payment that you can afford according to a 15 or 20 year mortgage. The typical rule of thumb is to try to have a mortgage payment that takes up 25 to 30% of household income. This is a very conservative payment, but you will not become house poor! What’s the joy in owning a house if it is the reason that you struggle paying the rest of your bills?
Myth #4: You Must Keep Outstanding Debt to Have a Good Credit Score
I would NEVER keep credit card, student loan, or car debt around just to keep a good credit score. In fact, you can get lower your credit score if your debt load is too high. You could be debt free and continue paying a mortgage on time and your credit score will be fine. What I hate the most is that people are SO obsessed with their credit score. Suze Orman teaches people to be obsessed with their credit score, and they base their financial decisions on what is best for their credit score instead of what is best for them. Isn’t that backwards? It’s called personal finance, not credit score finance. You probably think my stance on the credit score is naive. I know, I should think like a real financial professional (pushing my nose up). So, what if a multi-millionaire walks in to get an insurance policy, and he receives an extremely high quote for the policy because his credit score is a 0. Why is his score a 0? Because he doesn’t need to borrow money! Don’t you think that is more naive? If I was that multi-millionaire, I’d walk right out of that insurance agency, because that is lazy of that insurance company to quote a rate based on someone’s credit score. In order to keep a good credit score, you need to keep debt in your life. But with a lot of debt in your life, you are MORE of a risk to default on a loan. That why I think the credit score is a horrible way to measure someone’s financial status. People tout their credit score like it indicates how much money they have. I’d rather say to someone that I have $500k saved up rather than telling them I have a 750 credit score. But, that’s just me.