Common Money Advice That Can Actually Be Really Bad
Your financial life no doubt has lots of moving parts. From managing your savings and investments to paying your bills and sticking to a budget, it’s normal to feel overwhelmed and in need of some financial advice. The good news is that there’s no shortage of financial advice available from a multitude of sources, from the financial press to brokerage websites and beyond. The bad news is that not all of that advice is accurate. Even sound, well-intentioned advice can’t possibly apply to everyone, as each person has their own unique financial situation. Here’s some of the most often-quoted financial advice that doesn’t apply to every situation and in some cases can actually hurt you.
Cutting Out Your Daily $5 Coffee Will Make You a Millionaire
You’ve likely heard the often-repeated mantra that if you can only cut down on your expenses — the daily $5 coffee often being used as a prime example — you can be a millionaire. And like many of the dubious pieces of advice on this list, there’s a kernel of truth in this idea. Certainly, if you gave up your daily coffee and tucked away that $5 a day into an investment account, you might come up close. After all, if you invest that $5 per day, or $150 per month, into an investment returning 10% annually, after 40 years you’d have just about $950,000. But if that daily coffee brings you joy and inspiration, gives you ideas and allows you to work better, the real return in your life could be much more. As with many financial calculations, this one doesn’t factor in what you’d be giving up by abandoning your daily coffee, including your quality of life. In fact, if you’re clever and determined, you can likely find a different way to cut out $150 from your monthly budget and invest that money instead. That way, you can reach your 40-year goal of being a (near) millionaire and still enjoy your daily luxury.
Never Use a Credit Card
Credit cards typically carry exorbitant interest rates well into the double digits. There’s no surer way to financial ruin than to run up a bunch of charges on your credit card that you can’t possibly pay back. This has led some financial pundits to suggest that you should never even use a credit card. But the truth is that if you’re even the least bit financially responsible, using a credit card can actually be a great benefit to your life. Beyond the convenience factor of not having to carry cash, most credit cards these days offer you some type of financial reward for using them. Whether it’s receiving cash back, or airline miles, or proprietary points that can be redeemed for a wide variety of goods and services, using credit cards responsibly nearly always generates some benefit. Sometimes, just having a credit card can grant you perks, such as hotel status, airline club admission, free baggage or an automatic discount on certain merchandise. If you can manage to pay your bill in full every month, using a credit card can result in hundreds or even thousands of dollars of perks annually.
Keeping a Balance on Your Credit Cards Will Improve Your Credit Score
This bit of financial nonsense, once again, derives from a kernel of truth. Yes, it’s true that if you want to build your credit score, you’ll have to take on new credit and use it responsibly. However, this doesn’t mean that you’re required to carry a balance on your cards from month to month. In fact, the opposite is true. A whopping 30% of your entire FICO credit score is based on your amount owed, which includes your credit utilization. Your credit utilization is the percentage of your available credit that you maintain as an outstanding balance. The higher your credit utilization — and outstanding debt — the lower your credit score. You can still build credit over time by using your credit cards and paying them off in full on a timely basis every month. In fact, your payment history is the only factor that is even more important than your credit utilization, comprising 35% of your FICO score. So, get your credit and use it, but make sure you pay off your balances in full and on time if you want to keep that credit score rising.
Earning a Huge Salary Is the Only Way To Accumulate $1 Million for Retirement
It’s certainly easier to end up with a $1 million retirement nest egg if you’re earning a huge salary, but it’s far from the only way. In fact, if you start at a young enough age, reaching $1 million in savings by the time you retire can be relatively easy. Imagine this scenario: You’re earning a modest salary of $36,000 annually, and you can only afford to tuck away 5% of your income for your retirement savings. This translates to saving just $1,800 per year, or $150 per month. If you’ve got 40 years until you retire, however, that’s just about all you’ll need to hit your retirement target of $1 million. If you invest $150 per month for 40 years and earn an average annual return of 10%, you’ll end up with $948,612 by the time you retire. Since salaries generally rise over time, if you maintain your 5% savings rate — or even boost it to 10% or 15% — you could end up with $2 million or more for your nest egg if you start young enough. Even if you start later in life, you may have to increase your savings rate a bit, but you still won’t necessarily need a huge salary to reach $1 million in savings by retirement.
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