From your newsfeed to your friends and coworkers, financial advice comes at you from every direction. Sometimes it’s worthwhile. Other times, not so much.
But somehow, it’s the very worst money tips of all that manage to become enshrined as gospel — and what better time than the start of April to separate the fabulous from the foolish? April Fools’ Day is here, which means people across the country are falling for gags they should have seen coming. Don’t let yourself become one of them — especially where these financial myths are concerned.
Myth: When You Finally Pay Off Your Credit Card, Close It
There’s a common misconception that it’s best to close rarely used credit cards, especially ones that led you into financial trouble. When you’ve finally paid off a lingering toxic debt, it’s perfectly natural to want to be done with that card for good.
However, before you bust out the scissors and say goodbye to that burdensome hunk of plastic, keep in mind that Experian — and just about every other authority on credit — wants you to keep it open.
That’s because when you cancel a card, you lose all of its available credit. That raises your all-important utilization ratio and dings your credit score. It also hurts your score by lowering your credit age. So, a better solution might be to keep it, but just hide it away until you know are certain you can use it responsibly.
Myth: You Should Only Rent Until You Save Enough To Buy
Homeownership is the key to the American dream — for some people. According to research from CJ Patrick Co. and First American Data Tree, it’s cheaper to rent in 26 of the country’s 50 top metros and cheaper to own in 24 — a nearly even split.
But that’s not the only reason this money myth does not pass the April Fools’ test.
As Forbes points out, the upfront expenses of homeownership are so high that you shouldn’t expect to recoup your costs for five to seven years. If you plan to move before that, buying simply doesn’t make financial sense.
Also, according to HomeAdvisor, the average homeowner spends more than $3,000 per year on maintenance that a renter passes onto the landlord.
Myth: Pay Off Your Student Loans Early So They Don’t Follow You for Life
Unless you have a mortgage, your student loans are probably the biggest debt in your financial world, which makes them an obvious target for early repayment. But that’s not always a good idea.
If you don’t have other debt, and you have extra cash to throw at the principal, by all means. But it almost never makes sense to pay early if you don’t have an emergency fund, if you have other high-interest debt, or if it means not contributing to your 401(k).
That, according to Forbes, is because student loans tend to have low interest rates — especially federal loans — which puts them in the category of healthy debt. Instead of paying down loans with 3% interest or less, that money could be earning 7% on the stock market.
Myth: If You Don’t Have an Emergency Fund, a Credit Card Will Do
For people with lots of open credit, an emergency fund in a low-yield savings account might seem like a foolish place to store money that could be earning big gains on the market. The problem, as Time Next Advisor points out, is that all that open credit isn’t your money.
If the unexpected happens and you don’t have cash reserves to cover the expenses, chances are good that you’re not going to have the cash to pay the balance on your makeshift emergency fund credit card. So, within a month of your emergency, your new emergency will be revolving debt with an interest rate approaching 20%, which will make the next emergency even harder to handle.
Myth: I’m Young — Saving for Retirement Can Wait
This one might just be the biggest April Fools’ myth of all.
Because of the power of compounding, time is more valuable than money when it comes to investing. Compounding is what happens when the money you invest grows through interest or dividends. Then that larger amount earns even more interest or dividends, which then adds even more to your ever-growing investment, which then earns even more interest or dividends.
Fidelity Investments lays out a sample scenario of two different investors, one who starts saving at 35 years old and another who waits until 45.
Presuming gains of 7%, the 35-year-old contributes $7,000 a year for 30 years and ends up with $707,511 at age 65. The second investor contributes $15,000 a year — more than twice as much — but 20 years later at age 65, has only $657,978.
When it comes to saving for retirement, time truly is money.
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