Financial advisers correct common personal finance mythsFARGO – Misconceptions about money can make for some costly mistakes. The Forum asked five local finance experts about the most common money myths they hear, and why they think such assertions are wrong.
By: Sherri Richards, INFORUM
FARGO – Misconceptions about money can make for some costly mistakes.
The Forum asked five local finance experts about the most common money myths they hear, and why they think such assertions are wrong.
Their answers touch on all areas of personal finance – saving, spending, investing and planning.
Keep in mind financial advice can be subjective and dependent on personal circumstances, but these financial fallacies will likely prove problematic for most anyone’s pocketbook.
Myth 1: Saving can wait.
Response: It’s time that makes savings grow, not the amount you put in, says Herb Snyder, a professor of accounting at North Dakota State University.
Starting to save even small amounts early on will allow you to harness the magic of compound interest.
A 22-year-old who invests $20 a week for 40 years will end up with $132,876.50, assuming a 5 percent rate of return.
Comparatively, a 42-year-old who invests $40 a week for 20 years at 5 percent ends up with $71,673.84.
That’s a difference of more than $61,000, even though both savers set aside a total of $41,600.
“Saving is a habit,” Snyder says. “If you get in the habit early of saving money, it’s one of those things like exercising or eating right. It’s easier to do when younger.”
Snyder often hears this myth paired with another: “I have to pay off my debt before I can save.” Because of compound interest, it’s important to save while also paying down debt, Snyder says.
Cutting expenses, like dining out and fancy coffees, can make it possible, he says.
“No matter how broke you are, you can save money,” Snyder says.
Myth 2: If I keep up with my minimum payments, I’m doing OK.
Response: “Many don’t realize the minimum payment barely covers the interest and finance charges,” says Nancy Kvamme, who owns In The Black Money Coaching in Moorhead. “You are not making any progress on paying off the principal of the debt.”
Consider this example, calculated on Bankrate.com: If you make a minimum payment of 1 percent of balance plus interest on $1,000 of credit card debt at 18 percent, it will take 9 years, 5 months to be rid of the debt, and you’ll pay $923.12 in interest on top of the $1,000 principal.
Myth 3: Marrying someone with bad credit will negatively affect my credit score.
Response: No, your credit is your own, says Morgan Almer, a financial counselor with the Village Family Service Center in Fargo. You don’t inherit your spouse’s credit score.
“What they did in the past doesn’t affect you,” Almer says.
However, it can affect your future when applying for credit jointly. Lenders will default to the lower score when considering credit-worthiness, Almer says. A poor credit score can affect your ability to secure a loan and the interest rate you get. Landlords, insurance companies and employers all may check credit scores, too.
Also, if you borrow money jointly and delay or miss monthly payments, both scores will be negatively affected, Almer says.
Myth 4: I’m not rich, so I don’t need an estate plan.
Response: While the estate tax does typically affect individuals with a higher net worth, estate planning covers more than just taxation.
Having such plans in place is important for all income levels, says Patrick Chaffee, chief wealth management strategist for Bell State Bank and Trust.
“Estate planning doesn’t have to be complicated, but it covers things such as who takes care of your finances if you become incapacitated or who will care for your children if you pass away,” Chaffee says.
Myth 5: Investing in bonds is much less risky than investing in the stock market.
Response: Both have their risks, says Paul Meyers, financial adviser and president of Legacy Wealth Management.
“Bond prices move also,” Meyers says. “They move generally in opposition to interest rates.”
So as interest rates go higher, which many expect they will do in coming years, the value of a bond portfolio can go down, Meyers says.
The bond holder may receive a 4 percent dividend from the bond, but could lose 4 percent in asset value, he says.
Meyers says his job is to choose investments that have an appropriate risk compared to their return.
“Right now, we are having people shy away from bond investing and instead using what we call dependable income, securities that pay dividends but are not bonds, so when those interest rates go up, those securities won’t go down in price,” he says.