The 11 Principles Series: Do Not Believe In Money Myths

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.

  • CT

    I think you are a little too hard on debt here. These aren’t really myths, more like “dangers”. Here are my comments on each one:

    1. Debt really can be a tool if you use it correctly. Student loans are a great way to pay for college, and without mortgages many people would never be able to afford their first home. Also, there are plenty of people who have become millionaires with the help of debt. The most common example is debt to start a business. Almost all businesses lose money for the first few years, and often the owners use debt to keep the business going. Debt is a very important tool for businesses in general, and the bond market would not exist without it.

    2. I agree with this. Consolidation is only a tool to make it easier to get out of debt.

    3. I agree with your main point here, don’t buy too big of a house than you can afford. If you can’t afford any kind of house, don’t buy one. Too many people focus on their monthly payment (especially in ARMs). With that said, building equity in a house is important, so if you don’t already own a house you should at least be saving for a downpayment on one.

    4. This one isn’t a myth, its a fact. If you want a good credit score, you need to have a long record of past payments, which means you need to have carried debt over that period. This doesn’t necessarily mean that you have to pay interest, you can have a credit card and pay off the balance every month.
    There are some times when it makes sense to keep an account open just to help your score. Keeping a credit card account open helps keep your debt utilization low by keeping your credit limit high. Keeping a student loan debt can sometimes actually make you money, because CD and money market rates are often higher than student loan interest rates.
    Credit agencies are not stupid, it is their job to figure out who is going to pay them and who isn’t. They look at past payments closely because that is the best way for them to predict if you will pay them in the future. Having a low credit score will cost you money if you need to carry debt. Unless you can afford to buy your next home with cash, you will want your mortgage interest to be as low as possible, which means having a good score.

  • Steve


    I just came across your blog via a link from consumerist. I really enjoy what I’ve read so far.

    A lot of what you say about debt, especially in regards to how our culture views debt, is right on the money.

    What most people, especially Christians, don’t realize is how much the bible has to say about money, debt, greed, possesions, etc.

    Deut. talks about how debt is a curse. Proverbs 22:7 says “Just as the rich rule the poor, so the borrower is servant to the lender” .

    I’ve bookmarked your page, and look forward to the rest of the 11 Principles Series!

  • Lonnie

    Regarding Myth #3 above. When you say 25 to 30% of household income, is this gross or net income?

  • Erik

    To be conservative, I would say net income. Basically, if your take home pay is $4,000. I would try to keep your mortgage payment no more than $1250 a month. You could probably get away with $1300 or 1400, but you wouldn’t have much left over to save at the end of the month.

  • suzie

    I liked what you said about people boasting their credit score. Although it is silly to be judged on it – we unfortunetly are.