Misconceptions abound, whether it’s food or finance.
I was doing some searches on my phone to find an entry point to what I wanted to write about here…and I was surprised. Apparently, a peanut is not a nut and sugar doesn’t make kids hyperactive. Hmmm.
In any case, the world of personal finance— and this is where I wanted to go – is also home to more than a few mistaken beliefs. Here are seven I encounter regularly:
- Your income impacts your credit score. That’s not part of the formula. Lenders do want to know you’ve got money coming in before making a loan or issuing a line of credit so your income will be considered along with your credit score. The major factors that factor into good credit are how much you owe, your payment history, account types, your experience, and recent applications.
- Your pension or military retirement counts as income for IRA contributions. Please don’t make an IRA contribution based on income from a pension. I’m not saying that you didn’t earn the income, but it doesn’t meet the definition of what the IRS calls compensation for purposes of making IRA contributions. Alimony counts, nontaxable combat pay counts, but military retirement or other pension or annuity income doesn’t.
- No debt equals good credit. While I can certainly understand the perspective of those who swear off the use of any debt, it’s important to note that if you want to benefit from the system, you’ve got to be in the system. That doesn’t mean you need to have a lot of debt or that you need to carry a balance on your revolving debt (don’t!), but to have a good credit score and be able to access most traditional lending you must have demonstrated that you can manage credit effectively.
- Safe is safe. Nobody wants to lose money in the stock market. But safer alternatives might be exposing you to a different type of risk – inflation. According to the Bureau of Labor Statistics inflation calculator, over the last 30 years, a dollar has lost over 50 percent of its purchasing power. If things keep humming along like they have been on the inflation front, the erosion of purchasing power will become even scarier. Maybe safe isn’t always safe.
- A will avoids probate. The exact opposite is true. Your will sends you straight to probate. That’s not necessarily a bad thing, but if I had a dime for every time someone told me, “I don’t have to worry about probate, I’ve got a will,” I’d have a much more extensive estate to pass on to my kids.
- It’s the payment that matters. There are an abundance of loan calculators out there intended to help you figure out if you can afford your next major purchase, typically a home or vehicle. Well, the payment does matter – the principal and interest on your loan – but, there is a lot more that goes into the calculation of what you can afford. Last week my boss was telling me about the sweet sports car he bought as a young airman. It was a perfect example of what I’m talking about. A few months into the ownership experience he realized he couldn’t afford the insurance and traded it in. So, whether you need to add in maintenance, insurance and gas or homeowners association fees and upkeep costs, consider the total cost of ownership before your next major purchase.
- It’s not all about the money. It may seem counterintuitive way to finish this column, but it’s true. For most people, money is a means to some end(s). Doing the things you want to do, visiting the places you have always wanted to visit and generally, living the life you want to live. In that context, it’s clearly important. However, it’s creating the set of destinations or goals that fire you up and ultimately getting there, that brings satisfaction and fulfillment.
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