5 Financial Myths That Might Be Costing You Money
When it comes to money, it seems like everyone believes they are an expert. Financial advice from friends, family and coworkers almost always comes with the best of intentions. Unfortunately, finance can be so complicated that sometimes it’s difficult to sort fact from fiction.
Here is a list of five common financial myths that could be costing you money.
1. Gold Is The Best Long-Term Investment
Any time there is trouble in the economy or a shaky period in the stock market, TV commercials pop up everywhere advising viewers to “protect your wealth” by investing in a tangible asset such as gold. The myth is that, in the unlikely event of an economic collapse, tangible assets such as gold have some inherent value that cannot be destroyed.
The truth of the matter is that gold, silver, diamonds and other precious metals and stones would likely have less “value” in a post-apocalyptic society than coal, cloth and rope. As a matter of fact, gold, like anything else, is worth exactly what a buyer is willing to pay for it and nothing more.
Historically, gold has dramatically underperformed the stock market as an investment, yielding less than 2 percent annually versus the 6 percent to 7 percent annual yield of the stock market.
2. By Climbing To A Higher Tax Bracket, You Will End Up Keeping Less Money
Here’s how this myth goes: The tax rate jumps from 15 percent to 25 percent for individual income over $36,900. Fifteen percent of $36,000 is $5,400, resulting in $30,600 post-tax earnings. Twenty-five percent of $37,000 is $9,250, resulting in $27,750 post-tax earnings. So unless a raise bumps you significantly into the higher tax bracket, this example shows that it’s better to earn slightly less than the threshold of the higher bracket.
The key to understanding why this myth isn’t true lies in the concept of marginal tax. Income more than $36,900 is taxed at a 25 percent rate, but all of the income earned up to that threshold is taxed at lower rates. In the example above, the actual tax owed by the $37,000 earner would be 10 percent of the first $9,075 ($907.50) plus 15 percent of the income from $9,075 to $36,900 ($4,173.75) plus 25 percent of the income from $36,900 to $37,000 ($25) for a total of $5,106.25.
So yes, you want that raise, no matter how small it may be.
3. Consistently Making Small Payments On A Credit Card Balance Is The Best Way To Improve Your Credit Score
It’s true that making prompt payments on a credit card balance will improve your credit score, but making minimum payments is no better than paying off the entire balance each month. Carrying the balance does nothing to improve your credit score. Visa Inc (NYSE: V) and American Express Company (NYSE: AXP) will get along fine without monthly interest donations.
4. It’s Better To Close Unused Credit Card Accounts
Your credit score takes into account your total available credit and the percentage of that credit that is being used. This number is referred to as the “debt to credit ratio” and the lower the number is, the better it is for your credit. There are two ways to improve this number: decrease your debt by paying off your balances (see No. 3 above) and/or increase the amount of credit that is extended to you. Therefore, an open, unused credit card is not hurting your credit score; it is actually helping it by adding to your total credit line without contributing anything to your debt level.
5. Bonds Are Safe Investments, So A Portfolio Of 100 Percent Bonds Is The Safest Portfolio
Bonds are, in fact, less volatile (and presumably safer) investments than stocks. However, putting all of your portfolio eggs in one basket isn't the safest approach to investing. Diversifying investments into different asset classes (stocks, bonds, oil, gold, real estate, etc.) is a good approach to reducing risk. While it may be true that reducing the amount of stocks in your portfolio can reduce the overall risk, eliminating stocks all together might actually increase risk.
These five common myths barely scratch the surface of the body of misinformation that is out there about money. Before making any major financial decisions, it is always best to make sure you fully understand what you are doing and why.
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