Myths About Money Often Prove to Be Costly
Have you made any resolutions for the new year? If not, here’s a suggestion: Vow not to waste money in 1994. It may sound simple, but many people waste money through misperceptions about a handful of costly personal finance myths.
Here’s a look at those myths--and the realities.
Myth: It’s a good idea to accept invitations to “pre-approved” credit cards--especially if they have low rates and fees--because then I’ll always have credit when I need it.
Reality: While you certainly should trade in a high-rate card for a low-rate card with no annual fee, you shouldn’t accept every “pre-approved” credit card that comes in the mail. Why? Having too many credit cards can hamper your ability to get a mortgage or personal loan, because lenders look at all your available credit--the credit limits--when they consider your borrowing ability. If you have tens of thousands of dollars in available credit--regardless of whether or not you’ve used the cards--you may be deemed over-extended.
Myth: I’ll need to have $1 million saved for retirement if I want to maintain my current lifestyle.
Reality: Investment companies and financial planners have been propagating this idea for several years, and have won over many consumers. No one knows exactly how much will be needed to retire comfortably, however, because the number will depend on inflation, your life span, whether you get a company pension and whether Social Security still exists when you retire. Your non-retirement assets--such as a home, stocks, bonds and mutual fund investments--are also pivotal. The bottom line: You may need $500,000 or $2.5 million. The one certainty is that you’ll need something , so start saving.
Myth: Balancing my checkbook is more trouble than it’s worth.
Reality: That may be true if you never bounce a check, but should you bounce one check as a result of not balancing your account, the bank generally will ding you with a $10 to $15 fee. And most merchants slap on their own charge for a returned check, which can range from $5 to $25. So, one bounced check could cost you between $15 and $40.
Myth: Everybody needs life insurance.
Reality: You need life insurance only if you have dependents or a spouse relying on you for financial support. If you are single, or if nobody relies on you for financial support, life insurance is a waste of money.
Myth: If I want to accumulate any real money, I’ll need to save substantial sums each month.
Reality: Saving even small amounts pays off over time. If a 20-year-old starts saving just $1 a day ($30 a month) and continues to save until retirement at age 65, he or she will accumulate more than $314,000, assuming a 10% average rate of return.
Myth: It’s difficult to save money on auto or homeowner’s insurance premiums without reducing my coverage limits.
Reality: The easiest way to save on property insurance premiums is to raise your deductible. The average State Farm Insurance customer has a $250 deductible on a homeowners policy and a $100 deductible on auto coverage, said Bill Sirola, a spokesman for the Bloomington, Ill.-based insurer. (The deductible is the amount you must pay before the insurer starts reimbursing you.)
If you raised the deductible on the homeowners policy to $500, your premium would drop about 10%. Raise the deductible to $1,000 and the premium could fall as much as 25%, Sirola added.
Auto insurance policies are less standardized, but raising the deductible from $100 to $250 or $500 would generally save between 10% and 40% on comprehensive and collision coverage premiums, which make up about half of average cost of auto coverage, Sirola said.
Myth: Paying off my mortgage in 15 years is a great idea, because it will save me a fortune in interest.
Reality: Short-payoff mortgages are a great idea when mortgage interest rates are high and investment returns are low. But when you can earn a higher return on your investments than you must pay on borrowings, it makes sense to take a long-term note.
If, for example, you borrow $100 at 7% and turn around and invest that money at 10%, you’re 3 percentage points ahead. And now, with mortgage rates lingering near their lowest levels in decades, it’s very possible that long-term investors can do just that. Consider locking in a low-rate loan for 30 years. Then use the extra cash to set up an automatic investment plan with an equity mutual fund.
