Financial advice from family and friends may not necessarily be based on facts. Here are five personal finance myths debunked.
1. Young People Have Lots of Time Before They Have to Think about and Start Saving for Retirement
Truth: Not beginning to save sooner in your career can lead to the reliance on debt to acquire major purchases like a car or home. It also requires you to have to save significantly more money in less time for retirement.
Solution: Start saving sooner! Even saving amounts as low as $25 a week, or $100 a month, will grow into a substantial amount over 40 years versus 20 years.
2. If You Just Had More Money, Your Financial Issues Would Go Away
Truth: It may feel like our financial worries would just disappear if we made more money. However, financial troubles are often compounded when we exercise poor spending habits with the money we do have, and more money wouldn’t necessarily change that. A Gallup poll reports that only “one in three Americans prepare a detailed…household budget each month that tracks their income and expenses,” which means that majority of working Americans don’t keep track of what they are spending. This lack of budgeting can easily lead to financial troubles.
Solution: Create a detailed written or computerized budget to keep track of, plan for, and control your spending. Having a budget will make you aware of any spending adjustments that may be necessary.
3. Paying Off Larger Delinquent Debts Will Improve Your Credit Score Faster
Truth: The amount of the delinquency does not necessarily affect your credit score—the delinquent status of the credit account is what will negatively impact it. Regardless of whether the credit account is $50 or $500, it will have the same positive impact on your credit score when it is paid and the account becomes current or paid in full.
Solution: If you have several bad debt accounts on your credit report, focus on paying off the bad debts that you can afford to pay and work your way up to the next debt account, also known as the snowball effect.
4. Paying Off Old Debt Removes It from Your Credit Report
Truth: Paying off old debt doesn’t mean that it will be removed from your credit report. Once paid, the debt’s status may change to settled or paid. Debts that are seven years and older should not be on your credit report, which means that it should not have an effect on your credit score.
Solution: After you pay off a debt, review your credit report to make sure the account status is updated to settled or paid. If a debt is seven years or more old, make sure it is no longer listed on your credit report. You can obtain free copies of your credit report from all three credit reporting agencies (Equifax, Experian, and TransUnion) at www.annualcreditreport.com.
5. A Divorce Will Release Me from Credit Obligations
Truth: Creditors do not recognize a divorce as removing the payment obligation of a coborrower, because the loan may have been approved based on the income and creditworthiness of both borrowers. If you and your former spouse were coborrowers on a loan, you are still both responsible for the debt after the divorce.
Solution: During a divorce, either pay off the joint credit accounts before the divorce is final or contact the creditor to apply for an individual loan to pay off the joint loan.
Knowing the truths behind these popular personal finance myths will help you get started on budgeting your finances.
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