Yes, debt is a four-letter word, but that doesn’t mean paying it off is always the right thing to do. Likewise, saving money and paying with cash are often lauded as good things. Except that’s not always true either.
Money is complicated, and many people long for simple solutions. This can result in myths around the “wrong” and “right” things to do with your finances. Dig a little deeper, though, and you could find you’re costing yourself in the long run.
Here are five money myths you should rethink.
Myth #1: Pay Off Your Mortgage as Quickly as Possible
The money you can save by prepaying your mortgage is pretty impressive. One extra principal payment each year on a $200,000 loan could mean paying $21,470 less in interest and shaving four full years off the usual 30-year repayment term.
The problem comes when you ignore more important financial priorities in your zeal to pay off your house. Before making extra payments, financial planners say you should make sure:
- You’re contributing enough to your 401(k) to get the full company match
- You’ve paid off all your other, higher-rate debt
- You’re adequately insured
- You have an emergency fund
If you can do all that and still have extra money to throw at a mortgage, then have at it. If you don’t, though, don’t feel bad that it may take you the full 30 years to pay off your house. With today’s rock-bottom interest rates, it’s pretty cheap debt to have.
Myth #2: Cash Is King
Using cash—or its plastic equivalent, a debit card—can help over-spenders better track their outflows and stay on a budget. Compared to credit cards, though, these payment methods have some serious drawbacks.
Cash is easy to steal and untraceable, while debit cards give fraudsters a direct path to your bank account. You have to wait to recoup stolen bank funds, and that can cause a cash-flow crisis if you’re living paycheck to paycheck, says Beverly Harzog, a consumer credit advisor for LendingTree and author of The Debt Escape Plan.
Credit cards, by contrast, offer greater consumer protections. You don’t have to pay fraudulent charges, and issuers can help you resolve disputes with merchants. Credit cards typically provide a host of other benefits, such as travel insurance, replacement coverage if an item you buy is stolen, and warranty extensions.
When you use credit cards responsibly, they don’t have to lead to debt. Thanks to your card’s smartphone app, your charges are as easy to track as the cash in your wallet. If you pay your balances in full every month, as you should, you’re not paying for the convenience and protections of a credit card, but you are helping to build your credit scores.
Myth #3: DIYing Saves You Money
I once asked readers to tell me their do-it-yourself fails. Botched attempts to save money ranged from an awful self-inflicted haircut to an oil change that ruined an engine.
Some jobs should clearly be left to professionals for safety reasons: Rewiring a house, installing a garage door (the springs can be lethal), or trimming a big tree, for example. Other tasks may be doable by amateurs but may involve more effort, time, or mess than you’re willing to endure. That could include oil changes, painting, hanging Sheetrock, or even gardening.
“I think with DIY, it can be a mistake if it’s a project that you’re likely to only do once or twice in your life AND it requires specialized tools and skills,” says Jeff Yeager, author of How to Retire the Cheapskate Way: The Ultimate Cheapskate’s Guide to a Better, Earlier, Happier Retirement. Consider what your time is worth and your tolerance for frustration before automatically assuming it’s smart to do it yourself.
Myth #4: Pay Off Debt Quickly, Even With Retirement Money
Credit card debt is bad, no question. But what’s worse is depleting your retirement funds to pay it off.
Every $1,000 you withdraw from a 401(k), IRA, or other retirement plan will trigger federal taxes and penalties of $250 to $500, depending on your tax bracket. You also lose the future tax-deferred returns that money could have earned. Figure each $1,000 withdrawal costs you $10,000 in future retirement income if you plan to retire within 30 years (assuming 8% average annual returns, which is the norm for the stock market). The toll is $20,000 if you plan to retire in 40 years.
Leave your retirement money alone for retirement, and find other ways to pay off your debt.
Myth #5: A Penny Saved Is a Penny Earned
Some frugal hacks almost always make sense. Planning meals and cooking more at home, for example, is a relatively easy way to slash your food budget.
But some moves don’t save enough to be worth the effort, and could even cost you more in the long run. A classic example: burning an extra gallon of fuel to save a few pennies at the gas station.
Clipping coupons may save money, or they may entice you to buy stuff you normally wouldn’t. Also, consider whether spending a little now may save you more in the long run. Instead of washing baggies, for example, buy reusable containers. Rather than buy cheap paper towels (or worse yet, reusing paper towels), invest in a few more kitchen towels and have a stash of rags handy.
Before you opt for the cheapest solution, in other words, make sure it’s the right solution for you.
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