False belief about money is one of the factors that prevent many people from becoming financially successful. Extensive financial myths adversely impact both your short-end and long-term net worth. Follow these money myths and avoid the outcomes of believing them.
1. If I Get an Increment That Bumps Me into a Higher Tax Slab, I’ll Take Home Less Salary.
Thankfully, this isn’t correct. Jumping into a higher tax slab only increases the rate of tax paid on the surplus dollar you earn. Suppose your previous salary was $30,000 a year and your current salary is $33,000 a year. As per the IRS‘s 2007 federal tax schedule, when your salary was $30,000 your marginal tax rate was 15%.
Now that your salary is $33,000, you fall under the 25% marginal tax rate.
“Marginal” is the key to unlocking this money myth. In this scenario, your first $31,850 salary is still taxed the same way as before you got your increment. With an income of $30,000, your takeaway salary will be $25,891.25. Now if you make $33,000, your takeaway will be $28,326.25. That’s all because only the extra $1,150 above $31,850 is entitled to fall under the 25% slab – not the whole $33,000. To know more about the marginal tax rate, click here.
2. Renting Is like Throwing Away Money.
Do you consider the money spent on food is like thrown away? What about those bucks you spend on gas? Both these expenses are your daily needs and you use them up despite knowing the fact that they have no lasting value. But they are necessary to carry out your daily activities. Rent money falls into the same category.
Now that you own a home, you still “throw away” money on expenses like mortgage interest and property taxes. In fact, for the first five years, you pay all the interest on your mortgage. Let’s understand this with an example – For 30 years, a $250,000 mortgage at 7% interest, means the first 60 payments would total about $100,000. Out of that $100,000 you “throw away” around $85,000 on payment towards interest. To know more about the mortgage payment, read Understanding The Mortgage Payment Structure.
3. You Get What You Pay For.
It’s a myth that higher-priced items aren’t always higher quality. Some generic drugs are medically acknowledged to be as effective as their counterparts. For example, a million-dollar home that falls into foreclosure and then resold for only $900,000 may still hold a value worth $1 million. When the price of Google’s stock fluctuates on a random Thursday because investors are panicking about the market condition in general, Google isn’t suddenly a less worthy company.
Though there is sometimes a direct relationship between quality and price, it isn’t necessarily a perfect correlation. For example, a $3 chocolate bar may be tastier when compared to a $1 bar, but a $10 bar may or may not taste significantly different from a $3 bar. So, always look for the value that the item has to offer and not the price tag while determining an item’s overall value.
4. I Don’t Have Adequate Money to Start Investing.
Some brokerage firms indeed require you to have a minimum amount of money to invest in a particular fund or even to open an account with them. However, waiting until you meet these minimums will get you frustrated and have a tougher time achieving your goal.
These days, it’s considerably easy to invest with very little money thanks to online savings accounts. An online savings account offers a more competitive rate based on the real-time situation of the market. Earlier in 2007, it was quite easy to find online banks offering 5% interest on your savings which was considered a pretty safe return on your low-risk savings account. Moreover, you can open savings accounts for as low as $1.
Alternatively, you could start a brokerage account with minimal funds through one of the various online trading companies. However, it’s not the best way to initiate your investment because of the fees you’ll pay each time you redeem or purchase shares. To know more about getting started with an investment, read Start Investing With Only $1,000.
5. Carrying a Balance on My Credit Card Will Increase My Credit Rating.
This is perhaps the most common money myth doing the rounds. It’s not carrying an outstanding balance and paying it off in small installments proves your creditworthiness. This strategy can only take money out of your pocket and give it to your credit card companies for interest payments. If you want to use a credit card as a medium to improve your credit score, pay off your balance in full and on time each month.
6. Income Tax Is Illegal.
Extremely Sorry, folks. There are various types of arguments here, but none will be validated in court. As per the tax code, paying taxes is voluntary. The IRS considers any argument against the tax as a tax evasion scheme and punishes the protesters with penalties, tax liens, seizure of property, interest, garnishment of wages – in short, whatever it takes to get tax defaulters to pay the due amount when they’re caught.
7. I’m Young – I Needn’t Bother about Saving for Retirement Yet.
The younger you are, the higher compound interest you have ahead of you. In simple words, compound interest is free money, why not take advantage of it? Your $50,000 amount may not grow to as much as a 20-year-old’s when you need it, but because you couldn’t turn that into $1 million doesn’t mean you shouldn’t try at all. Every extra dollar brings you closer to your goals.
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The Bottom Line
Just because a belief is common and popular doesn’t mean it’s true. So, next time you hear something about finance or money, think of it before taking it to heart. Financial myths turn out to be the biggest obstacle in your way toward financial success.