5 Financial Myths And Legends, Debunked!
The beginning of spooky season is officially here. The telling of myths and legends is a part of spooky season that everyone loves to participate in. Therefore, we thought we would share our own myths and legends this month; about finances of course! Although this time of year is associated with scary things, your finances don't have to be scary. There are so many financial myths out there that aren't true at all and it's time to debunk them.
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Myth 1: You should carry a credit balance to increase your credit score
This myth is the opposite of the truth. You should never carry over a credit balance if you can help it! Credit scores are calculated using a credit utilization ratio. This means the less debt you have relative to how much lenders are willing lend you, the better off you are. Credit cards can help boost your credit score, if they're paid off in full at the end of the month. If you can't pay the full balance of your credit card off at the end of the month, at least pay more than the minimum.
Read More: Everything You Need To Know About Credit
If you find yourself having trouble paying off your credit in full at the end of the month, it's time to re-evaluate your budget and spending habits. A good rule of thumb is to only spend 30% of your credit limit. This will help your credit score as well as help you pay off your bill in full at the end of the month. So, carrying over a credit balance does not increase your credit score and this is definitely a financial myth.
Myth 2: You only have one credit score
It's not crazy to think that you would only have one credit score. In fact, most people think they only have one credit score, but it's not true. You can find your credit score at one of the three credit reporting agencies: TransUnion, Equifax, and Experian. If you check your credit score at all three, there's a good chance you'll see a different score at all of them. Although the number may be similar, this means you have more than one credit score.
There are also thousands of banks that can calculate your credit score and they may be using different formulas to get your number. The credit score could only have a small difference at each, but even that small difference can dramatically affect any mortgage or loan interest rate you might be offered.
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Myth 3: I don't need an emergency fund. I have credit cards.
This myth is not only untrue, but can be dangerous for your finances. Never rely on credit cards, seriously don't do it. You might think you have plenty of room on your cards so you don't need an emergency fund. Not only should you not rely on credit cards, but you need to be saving or topping up your emergency fund on an ongoing basis! An example of why you might need an emergency fund would be job loss. If you lose your job, it could take longer than you think to get a new one. Other instances whereby you may need an emergency fund are a rough economic time such as an expensive car repair, injury, or sever illness. If you're relying on your credit cards during any of these times, you'll inherit a ton of credit card interest.
The general rule of thumb is to save at least six months' worth of living expenses in your emergency fund. If you're new to starting an emergency fund, start off with a goal of saving three months' worth of living expenses and build your way up to saving six months. Having an emergency fund is a financial security blanket. You might think ‘that will never happen to me,' but you never know when life will take an unexpected turn and having that financial security blanket can be a lifesaver.
Myth 4: A savings account is a good place for your emergency fund.
Speaking of emergency funds, where should you keep your emergency savings? It's not uncommon to think an emergency fund should be stored in your savings account. The truth to this myth is: don't keep your emergency fund in your savings account. Your emergency savings should remain separate from your regular financial savings. That being said, here are some good options for housing your emergency fund:
- Money Market Account: This is a safe option because you collect interest on every deposit just like you would with a savings account. This account gives you the flexibility of a checking account because you can write a check or use a debit card for sudden emergencies. There may be a limit to the number of transactions you can make in a month.
- High Yield Savings Account: You can open this account at your bank or an online bank and you'll earn high interest, and you can make unlimited deposits.
- Certificates of Deposit (CDs): You won't be able to take out money as freely as the first two options with a CD. You'll have to commit to a certain period of time where you cannot touch your deposit, but you may earn a higher rate of interest. A CD works well as a supplemental emergency fund where you keep more readily available funds in a different savings account for acute emergencies.
Myth 5: You need a lot of money to invest.
Investing can be a confusing financial topic; and there are a mind boggling number of myths about investing. However, investing isn't as difficult as some people make it out to be. A great way to start investing is by participating in your company's 401k. Investing in your retirement is always an awesome idea, and it doesn't take a lot of money to do so. You can start with putting just a few dollars into your 401k, if that's all you can afford. Any money you put in your 401k is a fantastic investment for your financial future because of the tax breaks that come with it. To make things easier, you can set up automatic payments to your 401k. By doing this, you won't have to think twice about losing any money from your paycheck to your retirement savings. You'll start to see your small investment add up over time. This is the perfect way to start investing with a small amount of money.
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You might have heard of some of these myths and, believed them to be true! It's easy to get caught up in different financial myths without doing the research to decide what is true and what is not. Credit, credit scores, emergency funds, and investing can be confusing financial topics until you look more closely and find reputable information. Now that these myths are debunked, your finances will spook you no more.
Tweet @NavicorePR to tell us your favorite financial myths that you've come across. We'd love to hear them!
Katherine Fatta is the Social Media and Content Specialist at Navicore Solutions. She creates fun and informative social media posts that engage the public. She’s also the host of Navicore’s podcast, ‘Millennial Debt Domination.’ You can listen to our podcast here.