We all grow up getting personal finance advice from various places. But not all advice is equal...or practical for that matter!
You may be carrying around an outdated or completely counterfactual idea that you heard or read somewhere. Read on to see 5 Personal Finance Myths and learn what our very own GTS Financial advisors have to say about them. If you have any questions on these myths, don't hesitate to reach out and ask for help!
MYTH 1 - Keep Your Savings in the Same Bank as Your Checking Account
Generally, it's fine to keep a very small amount of money in your local bank savings account. However, the bulk of your emergency fund savings should be kept in an online bank account (sometimes referred to as a high yield savings account) which gives substantially more interest. Several online savings accounts offer 0.50% APR right now compared to many local banks, which are paying about 0.01%. Online savings accounts are still FDIC insured, just like your local bank.
MYTH 2 - A Retirement Plan Before 40 is Too Early
TRUTH - It's never too early to start planning for retirement to make sure you're on the right track and developing good money habits.
Before 40, retirement can seem like it's far away, which makes it easy to put off. The delayed gratification of saving and investing while you are young can be hard to master. However, it's precisely when you are young that you should be saving! When you are young, you can take advantage of compounding your money over time to set yourself up for a successful future. We generally recommend a savings target of around 15% to 20% of your income as a place to start - but any amount you contribute will help.
MYTH 3 - You Need a Lot of Money to Invest
TRUTH - Every dollar counts! Starting small is allowed, and it is much better than not starting at all.
It is a common misconception that the stock market is an exclusive club for the richest among us, but the truth is you don't need to reach a certain threshold of wealth to get started. Even $50 can get the ball rolling. Whether it's saving for a grandchild's college or starting to save in your first 401(k), every little bit helps! Boost your saving power by automating it. Most investment accounts allow some type of automatic contribution to be made so you can contribute whatever amount you can straight from your paycheck or checking account.
MYTH 4 - You Don't Need an Emergency Fund
TRUTH - Everyone needs an emergency fund. It's the building block of any financial plan.
You never know what life may throw at you. Having about three to six months' worth of money in a savings account is a must! We also never recommend investing your emergency fund as it could decrease in value due to market fluctuations right when you need it the most.
MYTH 5 - You Should Pay Down Your Home Mortgage Quickly
TRUTH - You should consider your overall financial picture and your current mortgage's interest rate before focusing on paying it off.
We're saving this somewhat controversial myth for last. While paying off your mortgage and being debt-free is most certainly a fantastic goal, it's important to look at the bigger picture before you rush to pay off your home. First, what is the current rate on your mortgage? Given today's historically low rates, it may not make sense to pay it off early, especially if you have other higher interest debt. Second, are there any other goals you should be applying your 'extra' money towards rather than making an extra mortgage payment? A few questions to ask yourself are:
- Do you have an adequate emergency fund?
- Are you on track for retirement savings?
- Are there any other major expenses coming up you should plan for?
If the rest of your financial life is in tip top shape, then potentially paying down your mortgage can be something to analyze.