I admit it, I have done some silly things in our attempt to get out of debt. Things that sound so logical at the time, but with further studying and common sense you can escape these ideas that are not only silly, they can be forever damaging to your financial future. They sound on the surface to be great ideas, perhaps even a short term fix that brings down the stress level that debt seems to cause.
Here are my 5 money myths that I am about to debunk
Myth #1 – Pay off your mortgage ASAP
You are determined to pay off your home. I mean you are paying thousands of dollars in interest per year and that can’t possibly be good right. I mean it’s impressive to see someone paying extra money each month on their mortgage or perhaps paying an additional principal payment each year. That’s great, but here are some things to consider before you go all in on paying extra on your mortgage.
- Are you investing the full percentage match into your 401k at work? According to Time.com Money, 1 in 3 Americans have $0 money in retirement and 56% of Americans have less than $10,000 saved for retirement. It’s kinda scary. You should never pay more on your mortgage unless you are taking advantage of an employee retirement fund, especially if the company makes a match on the money you put in. You are leaving money on the table if you don’t participate. So make sure your 401k is fully stocked until moving on.
- Do you have any other high interest debt? There is nothing sillier than to be paying extra on your mortgage while you at the same time have department store credit cards or other higher interest credits cards that are just racking up interest to the bank. Oh by the way, the mortgage interest is tax deductible and the credit cards are not. Pay your credit cards off first, highest interest rate first.
- Do you have insurance for your house and your cars and yourself? Bad things happen thats why it’s called an accident. Disasters don’t just happen because someone wanted it, they just happen when you least expect it. Make sure you have proper health insurance. I don’t care if you are 20 and are a marathon runner. Things happen. I am kinda a stickler for this one because my Dad was in insurance for 40 years. I heard this one a lot growing up!
- Do you have an emergency fund? You might say Drew, I don’t need extra cash in the bank earning almost no interest. Why does that make sense? It makes sense because you need a buffer in your budget in the event that something goes wrong. Whether you unexpectedly lose your job, your HVAC system in your home dies, or an unexpected health condition leaves you with some extra bills. Put some money aside for rainy days. I would suggest at least $1000 but this is all relative to your lifestyle. Everyone is different.
- Do you have your cars paid off? Why pay more off your house when the interest is generally low and tax deductible, when you are paying interest on a car that is not tax deductible. This only makes sense if you have a 0% interest rate perhaps on a new car.
After you have those items checked off and you are completely debt free except for your house, then feel free to pay extra as much as you want and get that house paid off. The interest may be tax deductible but you are still lining the banks pocket.
Myth #2 Cash is always King
You have heard this time and time again. Cash is King. However, there are some problems with cash that you may not immediately recognize. Let me debunk them for you.
- Cash can be easily stolen and it’s completely untraceable. I stopped at a gas station a few years back and was filling up when I noticed a $100 bill laying right there on the ground. Now I’m sure the owner didn’t attend for that money to drop out of their possession, but there it laid completely alone and unloved. It was One Hundred Bucks!! Just laying there…. Now I asked around to the people who were filling up their gas tanks to see if they lost any money and I went into the store to see if anyone had come in to ask if someone had found there money. After spending a bit of time there at that gas station trying to find the owner of this cold hard cash, I eventually threw in the towel.
- Debit cards are better, but not without problems as well. Debit cards are just an extension of your cash. It’s a plastic representation of your cash that’s just stored in the bank. If someone gets a hold of that card or the number off of your card, they can extract your hard earned money from your account. With online fraud activities, it has only gotten worst. I know because I have had this happen to me several times. Every time I have eventually gotten my money back, but it was gone from my account for a period of time while the bank sorted it all out.
- Credit cards by contrast, offer consumers a much better protection. First of all, it’s not your money behind that plastic card and you are not liable for fraudulent charged on your account. Now your may run into the same problem that you did with your debit card, however your money is not tied up while the bank figures it out. In addition, credit cards a lot of times come with their own perks like reward programs, travel insurance and other benfits.
The one thing you must consider is that if you use your credit card, you must pay it off monthly. This is the top reason why people get into debt.
Myth #3 Do it yourself always saves you Money
I can’t tell you how many times that I had a brilliant idea to tackle a task at home on my own, when you know darn well I should have hired a professional. This leads to a couple things:
- If you do work on your home, it may not be of professional quality. You may have saved a couple hundred to do the kitchen back splash yourself, but the end result is not quite right. The tile is not straight, the grout is not consistent. This breaks down the equity real quick that you have in your home. A project that saves you a couple hundred could cost thousands in the value that someone perceives your house to have if you sell it.
- There are jobs that could be dangerous if left up to you. Wiring your house with electrical wire, cutting down a big tree in the back yard or installing a new garage door. These are actually harder than they look and worst yet, if you don’t do them just right they could kill you. Did you know the springs in your garage door can be lethal? What if that tree doesn’t fall just right and it hits your house? What if you don’t install the electrical wire just right and your house catches on fire? I had the brilliant idea one year to change the brakes on my car by myself. BRAKES! …. On the CAR! Cars go fast! Brakes are important! …. None the less, I attempted it anyways. I got an entire weekend of frustration to where my cousin who is a car mechanic had to come over a bail me out. He had to actually take a sledge hammer to my rotors because they were rusted tight. Who would of thought?
You have to realistically check yourself to see if you can actually pull it off and secondly is it worth your time and frustration.
Myth #4 Pay off debt with the money in your retirement fund
As we were working through paying off the $75,000 plus of credit debt, I have to say I thought seriously many times to just take that cash that’s sitting in my 401k and pay off a large percentage of that debt that constantly stared at me. Don’t do it! When you are in such a whole of debt, you start to loose your common sense. It’s the easy way out and does nothing to set you up for the future and here is why:
- Higher Tax Bracket – First of all, when you take money out of your 401k you take it out at your current earning tax bracket which is likely to be higher now that it will be in retirement.
- 10% Tax Penalty – Secondly and almost more importantly, you get a pretty hard 10% penalty. Basically you take 10% of that 401k fund and burn it. So it could be up to 50% cut into that 401k fund if you just take it out now. It’s not smart no matter how you think it will help you pay off your debt. Just get serious about paying off your debt if it bothers you that bad. That’s how we paid off $75,000. We didn’t use our 401k fund and we didn’t go bankrupt. We just got serious, worked hard and got it done!
- Loss of years of before tax interest – For every $1000 you take out, you could have had $10,000 over a period of 30 years and $20,000 over a period of 40 years.
Myth #5 Pennies add up right? A penny saved is a penny earned
There are many ways to save money in your life. Stay at home more rather than going out to eat is one good way. Not only will it save you money, but it may be healthier to eat at home too. However, not all attempts to save a buck are created equal.
- Gas Trips – I love the gas buddy app when I am out and about because I can plan my trip around perhaps where the cheapest gas station is on my intended route, but here is the thing. Don’t go out of your way to get the cheapest gas because what you may not realize is that you are burning gas for every foot and mile your take to get to and back from that location. On a 16 gallon tank where you are saving 10 cents, well folks that’s only a max of $1.60 that you are going to save. If you have to travel a town over to do that, it’s not smart. You may burn $1.60 in gas getting there and back.
- Coupons – I have done this many times. You can actually buy coupons off of Ebay. Did you know this? Generally you need to buy then in bulk, let’s say 10 or 20. They are not free, you have to pay the people for their time to clip them and then pay them money to ship them to you. On top of that, you need to buy 10 or 20 of that item to even break through on the savings and by the time you are done with everything considered it might just not be worth it. In another scenario that I have caughts myself in is clipping coupons that offer me a discount off a product I don’t normally buy. That’s great that I can double the 75 cent coupon and get a $1.50 off that product, but I wouldn’t have normally bought the product to begin with. So instead of saving $1.50 on something I need, I spent $4.00 buying something I really don’t need.
The moral of the story here is that not all savings or investments or money decisions are created equal. Make sure that it satisfies your short and long term goals and what your about to do is really needed in your life. Think hard about your decisions and make sure its the right solution for you.
What are some of the money myths that you have run into?