There aren’t just four common financial misconceptions out there, but we need to start somewhere! Wouldn’t it be nice if there were classes on finance, taxes, and budgeting in high school, or even middle school? Unfortunately in most schools, there isn’t, and most people are left to fend for themselves. What’s worse, is that there’s a lot of vague advice, old wives’ tales, and just plain old misinformation about finance out there.
The truth is, everyone’s journey to financial health is different. But, there are a few general ideas that you should be well-informed on. Think of this blog article as adult education on some topics that are most often misunderstood. Below, we’ve debunked four common financial misconceptions.
Financial misconception #1: Credit cards are dangerous
We’ve all heard horror stories of friends or loved ones who find themselves drowning in credit card debt. It’s a common plotline in movies, on television, and in books. It’s easy to see why – it’s easy to get into credit card debt if you don’t know how to use them responsibly. And, you can’t forget just how important your credit score is for, well, almost everything.
Here’s the truth: Credit cards are neither good nor bad, but they can attain either result.
Credit cards are a tool that you can use for good or get yourself into trouble. You need to be responsible with your spending, keep your monthly balance down (it’s best to not carry a balance at all), and make sure you’re making your payments on time. If you follow these basic rules you shouldn’t run into any problems. And, you’ll have a killer credit score which is helpful when you want to apply for a loan.
Try not to rely on your credit cards too much. They are there for big and important purchases that you can’t live without, not the latest designer briefcase.
Financial misconception #2: Multi-level marketing could make you some quick cash
You may have already heard the phrase, “real entrepreneurs avoid multi-level marketing.” There’s a reason for that. Multi-level marketing (MLM) businesses, sometimes called direct marketing or network marketing, involve selling to people you know. Once you’ve sold your product to your parents, siblings, cousins, and friends, you’re required to recruit other people to do the same.
Here’s the truth: Multi-level marketing is almost always a lose-lose situation.
There are some legit MLMs out there, but it’s extremely rare. Most will require things like upfront fees, promises for more money if you recruit more people, or ridiculously high-profit projections. These are all red flags.
If an MLM is the real deal, you will simply earn money based on the product you sell, and there won’t be any pressure to recruit more people. Some MLMs are actually illegal pyramid schemes, something you definitely don’t want to be a part of.
Financial misconception #3: Timeshares are a good idea
Timeshares have been around since the late 60s. If you own part of a timeshare, it means that you own part of a vacation property. In theory, throwing in a few thousand on a timeshare sounds like a great idea, especially if you vacation in the same place often. You won’t have to worry about finding a hotel or Airbnb, which will make the whole thing worth it, right?
Here’s the truth: Timeshares are terrible.
Unlike other real estate investments that you should consider, a timeshare depreciates in value almost immediately after you buy into it. And, most timeshares have enormous yearly maintenance fees. These fees can range from $750 to several thousand per year. In other words, instead of spending a few hundred dollars on a week in a hotel, you’re spending well more per year on a property you don’t even live in full time.
Timeshares won’t generate you any extra income. If you’re going to dabble in real estate, make sure it’s with a property that will.
Financial misconception #4: Whole life insurance is for everyone
Permanent or whole life insurance is life insurance that lasts, you guessed it, you’re whole life. That means that no matter when you die, your beneficiaries receive death benefits. Some people use these types of policies as an investment account, as most include a cash value component. That means that once your policy is big enough, you can borrow cash from it.
Here’s the truth: Whole life insurance is wrong for 99.9% of people.
Much like MLMs or Timeshares, you probably will learn of whole life insurance from a very pushy salesman. You will hear it is a way to obtain life insurance, with a current living value. However, the costs of this life insurance are sky-high. The surrender value is a small fraction of what you pay.
There are also no guaranteed market returns, and all the whole life insurance setups we have seen have numerous fees which eat at what you put into it. That money is better spent in 99.9% of cases by purchasing term life insurance for 90% less. Invest the remainder directly into the stock market, or your chosen security/savings instrument. In the case that you do pass away, it will cover any leftover debts and can be used as an income replacement for any of your dependents.
If you want to invest in something, you’re better off in stocks, EFTs, or even real estate as mentioned.
Now that we’ve tackled these four common financial misconceptions, what should we discuss next?