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When it comes to the topic of personal finance, I know I’m not alone in saying there’s a lot I wish I learned sooner. And to make things more difficult, money is a notoriously taboo thing to talk about in the US. This has led to personal finance being riddled with misconceptions due to the lack of conversation and education.
If you’re just starting your personal finance journey and don’t know where to begin, you’re not alone. Let’s discuss some of the most common financial misconceptions that could cost you money in the long term, from retirement accounts to credit cards.
“I funded a Roth IRA, so I’m set for retirement”
But did you select your investments? Kudos to you for taking the initiative to open an account, however, that’s just the first step. If investments aren’t selected, the money in the account will not grow beyond interest you earn if your brokerage automatically stores funds in a money market fund.
You can choose from a variety of investment options like mutual funds, stocks, bonds, exchange-traded funds (ETFs), certificates of deposit (CDs) and money market funds. Pick investments that are a fit for your retirement goals, and ideally talk with a licensed financial advisor before you invest.
Once you select your investments, Roth IRAs offer tax-free growth and tax-free withdrawals at retirement. However, Roth IRAs have annual contribution limits ($6,500 in 2023) and income caps, so you’ll want to be strategic with your contributions. Consult a tax professional to ensure you’re eligible to contribute to a Roth IRA.
TL;DR: Roth IRAs can be a good way to grow your money and save on taxes. Just make sure you actually select your investments after opening an account so it grows over time.
“All I need to do is save money to be rich”
Sure, getting in the habit of saving is good. But being a good saver can only take your money so far. You have to consider other factors like inflation and the power of compound interest. In short, you may need to invest your money to build long-term wealth.
A few smart places to start are with a Roth IRA and 401(k) retirement accounts. The latter is especially great if your employer offers a 401(k) match as this is essentially free money and the perfect incentive to invest in your future.
Both accounts offer tax advantages that can help you save now and later. These are good places to start, but as you progress on your financial journey, you may consider other investments like a standard taxable brokerage account, real estate and a Health Savings Account (HSA), if you’re eligible.
“Every savings account is the same”
Let’s put it this way: The average savings account offers well under 1% APY. Meanwhile, many high-yield savings accounts are earning more than 4% APY at the time of writing. If you have $10,000 in a regular savings account, you’ll earn about $25 in interest over the course of a year. However, if you keep it in a high-yield savings account, your $10,000 could earn around $400 over the course of a year.
One of our favorite high-yield savings accounts is the Bask Bank Interest Savings Account, which earns 4.75% APY on all balances. There’s a minimum $100 deposit to open the account, but there are no monthly maintenance fees to worry about.
Essentially, you want to put your money to work and minimize the heavy lifting on your end. A high-yield savings account is one of the easiest ways for you to put your money to work and generate a little bit of passive income.
Related: Bask Bank review: Should you earn cash or airline miles on your savings?
“Having more than one credit card is bad”
If you’re irresponsible with credit cards, that’s true, and you probably shouldn’t have one. But if used responsibly, however, having multiple credit cards can improve your credit score. That’s because the “amounts owed” — your credit utilization ratio — make up 30% of your credit score.
This refers to the amount of available credit that you are currently using. A high credit utilization ratio (meaning you’re close to maxing out your credit cards) can often lower your credit score.
On the contrary, if you only use a small percentage (ideally less than 30%) of your available credit, then this may indicate you’re a responsible borrower. Hence, having multiple credits can give your credit score a boost since you have more total credit.
Here’s how you can calculate your credit utilization ratio.
- Add up the balances of all your credit cards.
- Add up the credit limits on all your cards.
- Divide the total balance by the total credit limit.
- Multiply by 100 to see your credit utilization ratio.
You can also see your credit utilization ratio by checking your credit reports. Likewise, websites like CreditKarma and Credit Sesame will show you your credit utilization on demand, among other statistics about your credit health.
On top of this, having multiple credit cards can help you earn more rewards on your everyday spending. For example, you might consider applying for a Bilt Mastercard® to earn travel rewards on rent payments, travel and dining. Plus, you could also apply for the Citi® Double Cash Card that earns 2% cash back on all purchases (1% when you spend, 1% when you pay). This maximizes your earnings regardless of what you purchase with your credit card.
Related: 6 reasons why you should have more than one credit card in your wallet
“Talking about money is taboo”
Personal finance is often made out to be a complicated topic that’s taboo to talk about. But the latter is the one reason why everyone thinks personal finance is so complicated — nobody talks about it. And if you were lucky enough to learn it in school, there’s a good chance it’s outdated or riddled with personal opinions.
Regardless, it’s important to educate yourself so you can determine your financial beliefs and goals.
If I didn’t work in the personal finance space, I probably wouldn’t talk about it quite as much with my friends and family. However, I can’t tell you how many times people have thanked me for sharing my knowledge with them. I try not to push my opinions, but rather start the conversation and pique their curiosity so that they can do their own research.
At the end of the day, all I want is for people around me (and who read my content) to feel empowered to take charge of their finances because they have the knowledge to do so.
Start the conversation with friends and family. You don’t have to take their advice, but it’s good to understand different perspectives and be comfortable talking about money. And who knows, you might even learn a thing or two.
Bottom line
There are a lot of personal finance misconceptions out there. Some are rooted in bad personal experiences and others have just been perpetuated and unchallenged for way too long.
The best thing you can do to become more financially literate and aware of these misconceptions is take the time to educate yourself on the topic. This way, you can confidently navigate your financial life and set yourself up for a more financially secure future.
Looking for a new savings account? Read our guide to the best high-yield savings accounts.
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