We’ve all heard them, those sage money sayings that offer fortune cookie insights into how we should be living life and managing our finances. But how much actual truth is there in these common money phrases? In this article, we take a closer look into five common money phrases to help you separate fact from fiction.
#1. There is No Such Thing As Good Debt
When it comes to personal finance, debt is often cast as the villain of the story and for good reason. It can be all too easy to get into way more debt than you can afford to pay off every month. Then when you carry over a balance, you end up paying quite a bit of interest. One five dollar latte could easily end up costing you double or more if you pay only the minimum payment or if you pay late and incur additional fees.
Taking on too much debt can lead to financial stress. The more money you have to put towards repaying debt, the less you have available to help meet your savings and other life goals. With all of those potential downsides, it’s not a wonder the debt has a bad reputation.
But debt can also be used to improve your financial outlook. This type of debt is called good debt and includes things like mortgages and student loans. Mortgages help you buy a personal home or investment properties that can increase your wealth and generate passive income streams. Student loans can help you complete your college degree and secure a higher paying job than you would have otherwise been able to.
Even items that are traditionally considered to be bad debt, like credit cards, can be beneficial if used properly. For example, many credit cards over cash back rewards, travel miles, or extra perks like travel insurance if you use them to make purchases instead of cash. Just remember to pay it off in full every month to really reap the rewards!
Verdict: False, with a but. Debt, in moderation and for the right reasons can improve your overall financial future. So we’re going to say this one is false.
#2. I Suck At Budgeting Because I’m Not A Numbers Person
Many of us don’t get much in the way of personal finance education growing up. As adults, we have to start budgeting and figuring out how to hit all of these major financial milestones like paying off student loans and socking away enough cash to retire someday. This can be pretty intimidating.
Mastering your finances isn’t really about the money. Sure, you need basic arithmetic skills to make sure you have a workable budget (and for everything else, there’s bound to be an app or online calculator for that). But the real challenge when it comes to money isn’t the math. It’s staying on top of those daily habits that can make or break your financial plan.
Having to say no to yourself today so that you can have more money to reach a financial goal that you have in the future isn’t fun but it’s a muscle that gets stronger with practice. Viewing your finances as a work in progress and taking time to learn more about how to manage your money will allow you to retire this money phrase in no time.
Verdict: Completely false. It’s not really about the numbers and everyone can develop strong money management skills with a little time and effort.
#3. Cash is King
We often hear that using cash can open doors to discounts and privileges that could never be had using a loan or credit cards. But is that actually true?
There are times when you can get a discount for paying with cash, like at some gas stations or with home contractors. The discount is often less than 3%–the amount the vendor would have paid in transaction fees.
One other often cited benefit of cash is that it decreases the likelihood of overspending. The theory is that using cash requires you to physically hand over your hard-earned dollars so you pay more attention to how much you’re spending. Plus it’s impossible to spend more cash than you have on hand.
On the other hand, there are quite a few downsides to using cash. Physical cash can be lost or destroyed easily. Also, there is little recourse for stolen or lost cash. You can only report it to the authorities and hope for the best.
If you use debit cards for things like rental deposits, the total cost is actually charged to the debit card. It places a hold on your funds that won’t be released until after the rental is over. This can take several business days. In comparison, a credit card can have a temporary hold without an actual charge and be immediately released.
Avoiding credit cards also means giving up perks like cash back rewards, hotel or airline points, and benefits like travel insurance, car rental insurance, and extended warranties. This could amount to a loss of thousands a year.
Sticking to cash can also negatively affect your credit. A strong credit history is important for getting good rates on more than just credit cards or loans. It can be used for determining insurance premiums, utility deposits, and even job eligibility. It’s difficult to build good credit if you only ever use cash.
Verdict: Mostly False. Cash is easy to use and can score you a discount sometimes, but the occasions where it’s actually the best option are rare.
#4 A House Is A Good Investment
This common saying is one that recent college grads and newlyweds tend to hear pretty often from parents and grandparents Owning a home can be a fantastic life move under the right circumstances. It can give you the space and privacy you’ve always wanted. You also are free to change it to suit your needs without having to ask permission. That’s pretty liberating.
Homes are frequently the single largest purchase and asset that a person has at any point in their life. That means that a significant portion or even most of a person’s wealth can be found in a home. But that doesn’t necessarily make it a good investment.
An investment is something that you purchase with the expectation that it will increase in value over time, aka, offer you a return on your investment. It’s the amount of return the investment receives over time plus the amount of risk involved that really determines whether something is a good investment. So let’s look at how this shakes out with houses.
Home values fluctuate and there is no way to guarantee that any particular home will increase in value. Still, over the long-term 30 years or so, home prices do usually go up, but by as much, as you’d think. A recent study found that homes appreciate about 3% on average, which is right around the annual rate of inflation. That means that a house can be a great way to maintain or hold value, but isn’t necessarily the best way to build wealth.
Owning a home also comes with quite a few costs that need to be considered when thinking about whether homeownership is a good investment. There are the transaction costs you pay when you first buy the house, mortgage interest, property taxes, repairs, maintenance, and general decor costs.
These costs can make owning a home quite a bit more expensive than renting and investing the difference. And they cut into the already meager 3% average appreciation rate for real estate. When you take costs into consideration, homes tend offer a lower rate of return than just about any investment aside from cash.
Verdict: False, with a but. Your primary residence should not be considered an investment because the return is not the best option out there, but it can be a good asset to own because it can hold or slowly grow in value in the long run and supply you with many hours of enjoyment.
#5. Renting is Throwing Away Money
Maybe you’ve heard this from your parents or from some home-owning friends that want you to join them in the suburbs. They point out that you won’t have anything to show after months or years of making rental payments. Money down the drain.
Okay, so they may have a bit of a point there. Because you don’t own the apartment or house that you are renting you don’t get the benefit of the equity that you rent helps the owner to build. But there are also a lot of great upsides to renting.
Renting can be cheaper than owning a house–even a comparably sized house. Houses come with maintenance costs that rentals just don’t have. If you invest the difference, you could actually end up being wealthier in the long run.
Renting offers more flexibility. One of the best things about renting is that you can pick up and move to a new city or country at the end of your lease. You don’t have to worry about selling your house and incurring all kinds of costs just so that you can take that dream job halfway across the country.
Verdict: It depends. There are way too many factors at play for there to be a clear winner in the renting vs. buying debate.
Like most tall tales, these common money myths all have some amount of truth to them but the devil is in the details.