Financial advice is everywhere, and some popular rules-of-thumb are so commonplace that we might not stop and question them. So just how reliable are these common financial tips?
According to some experts, the answer is mixed.
“Popular advice tends to be about doing what is simple and seems easy to stick to, since people have limited willpower,” says James Choi, PhD, professor of finance at Yale’s School of Management. “But much advice is over-simplified and doesn’t take into account economic research or people’s unique circumstances.”
Here are four financial myths that are outdated, incomplete, or downright wrong, as well as some research-based tips on what to do instead.
Myth 1: All debt is bad
The old advice: Debt — from credit cards or other loans — should be avoided. For example, one New York Times bestselling financial guide aimed at millennials claims that “credit card debt is never good.”
There is some truth to this advice. Using cash — physical dollar bills — makes spending feel more “real” and limits your spending ability to what you have on hand, in turn reducing overall spending. And high-interest debt can quickly compound into large amounts that are difficult to pay off.
However, the smart use of debt has benefits, ranging from building your credit score to helping you achieve long-term goals like home ownership or retirement.
The better advice: Use debt wisely. Some debt is good.
Good debt creates value over time. For example, historically education has increased one’s short- and long-term earning potential, making education debt a reasonable investment. Home mortgages are another type of debt that is financially savvy for many people, given historic increases in home equity, tax breaks, and sometimes cheaper monthly costs than renting.
Temporary debt, in the form of credit activity, can also help build your credit score, a number calculated by lenders that impacts the interest rate you get on future loans. Substantial debt and missed payments reduce your credit score. However, a high score requires that you have credit experience. This doesn’t mean you should hold on to debt — you can pay it off each month before it accrues interest. But a strong credit score requires a history of successfully paying lenders over a reasonable amount of time.
Moreover, sometimes debt is necessary to survive. Job loss, unexpected medical bills, or just a few bad choices can cause even smart people to accumulate high-interest debt. So if you find yourself swamped, don’t fret.
“Many young people take on substantial debt at some point,” Choi points …….