Sometimes oft repeated “facts”, including those about money, turn out to not be so true after all. Here are five commonly held beliefs about personal finance issues and why it may be time to rethink them.
- The best way to save money is always to budget before buying.
Turns out, according to a new study, a budget is great -- except when you’re going after a big ticket item. The research, published in the Journal of Marketing Research by Brigham Young University and Emory University marketing professors, found that when people shopping for an expensive item (such as a computer, mattress or garage doors) set an upper limit on how much they were going to spend, they ended up spending 50 percent more on that single item than consumers not tied to a budget.
Those findings seemed so off-the-wall that the research team tested them in six separate experiments. The results were the same: a preference for higher-priced items. It’s not that budgets are bad, the researchers said. However, when people set an upper limit to spend, they tend to overlook the far less expensive choices.
Reality check: Don’t give up budgets but do consider this strategy to avoid over-spending on big ticket purchases: Start by determining what features and quality level matters most before you think about price. After you evaluate your choices based on quality, re-consider the price. Do you really need all those bells and whistles on an item that costs more? Probably not.
- You don’t need to save for your kids’ college tuition. They can work part-time and use grants and scholarships.
Sure, lots of us worked our way through college. But the costs of a college education have risen at a much faster rate than inflation while financial aid has declined. Consider that the Pell grant, the largest source of direct federal aid, hasn't kept up with rising costs. Twenty five years ago, the maximum Pell grant covered over fifty percent of the average cost of tuition, fees, room and board at a state four-year college or university. Today, it covers only about thirty percent of these costs.
What’s more, a study by economists for the Center for Economic and Policy Research recently found that a few decades ago a student could work full time during the summer at minimum wage and earn about two-thirds of yearly college costs. But now, the researchers found, a student would need to work at a minimum wage job full time for an entire year just to pay for a single year of study at a public university.
Those facts have left the majority of graduating seniors stuck with about $20,000 in student loans -- and ten percent owe $ 35,000 or more.
Reality check: You don’t have to give up saving for your retirement to save for your children’s college education. Look into a 529 savings plan. Most states offer them and you can usually start with only a $ 50.00 deposit. If you begin while your kids are young and put aside even a fairly small amount monthly, the savings will add up to a sizable college fund over time. And there’s a benefit for parents, too. Many states offer a state tax deduction for 529 contributions (check your plan to see what the maximum is).
- You checked your credit rating a few years ago so you know your credit score.
That may be true but, then again, it may not be. Did you check with all three credit reporting agencies -- Equifax, Experian and TransUnion? A recent Consumer Financial Protection Bureau study found that one in five people who check their credit rating will receive a score that is “meaningfully different” than the scores your creditors (mortgage lenders and credit card companies, for example) use.
If that sounds confusing, it simply means that different credit agencies may use different ways to calculate your score, even though they are working from the same information on your credit report. While the FICO (which stands for Fair Isaac Corporation, named after the company that created it) is the industry’s most used scoring method, there are also several other scoring models used which can yield conflicting numbers.
Reality check: Don’t assume you know your credit score if you haven’t checked in over a year. Take advantage of the Fair Credit Reporting Act (FCRA) which requires each of the nationwide credit reporting agencies to provide you with a free copy of your credit report, at your request, once every 12 months. If you find errors, both the credit report¬ing company and the information provider (the person, company, or organization who provided information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. Why it matters: a better credit score can translate to a better or worse interest rate on a mortgage, auto loan or credit card offer.
- Buying a house is always better than renting.
For many people, it’s a great time to buy a home. Mortgage rates have fallen while rents have gone up over the last few years. Some studies show that buying is now over 40 percent cheaper on average than renting in the 100 largest U.S. metro areas. However, that doesn’t mean that being a homeowner is always better than being a renter, at least for now.
When it makes more sense to rent:
- You can afford the mortgage on a house but not the extra costs, such as property insurance, taxes and home repairs.
- You don't expect to stay in the house at least five years. Real estate experts say purchasing a house you only live in for two years or so can be a money loser.
- Apartment living often makes more sense for singles, especially those who travel a lot and don’t have time for home maintenance.
- You haven’t saved enough money for an adequate down payment and/or you need to improve your credit score to qualify for a loan with a good interest rate.
Reality check: The New York Times has a free online rent vs. buying calculator that can help you decide if renting or buying is right for your budget.
- If you have a lot of money, you’ll be happy.
With enough money, you’d be wealthy and problem-free, right? Not necessarily. Take lottery winners, for example. Numerous studies have shown they often don’t solve their debt problems but end up in bankruptcy. Vanderbilt Law School researchers found that lottery winners who had a sudden windfall of between $50,000 and $150,000, were 50 percent more likely to file for bankruptcy three to five years after winning their prize.
The reason? It turns out that when people suddenly have or make more money, too many develop bad spending habits. Princeton University researchers found that, in turn, can result in feeling less happy about personal finances. In their study published in the journal Science, Princeton economist Alan B. Krueger and psychologist Daniel Kahneman, concluded that the link between money and happiness is not only exaggerated and but mostly an illusion.
Although having more income is often assumed to equate with well-being, the researchers found that people with higher incomes don’t necessarily spend more time in activities that make them happy. "People with above-average incomes are relatively satisfied with their lives but are barely happier than others in moment-to-moment experience, tend to be more tense, and do not spend more time in particularly enjoyable activities,” the researchers wrote.
That doesn’t mean having enough money won’t perk up your spirits -- but it isn’t the end-all and be-all way to a happy life. Other research, also from Princeton, has shown that for many low and middle income earners, as wages go up, so does their overall positive outlook on life. However, earning more than $75,000 don’t particularly boost happiness. Another study from the University of California at Berkeley also found that while having enough money to meet your needs can influence happiness, it is not the most important factor.
Reality check: You really can’t buy happiness. Instead, focus on a balanced life. Work toward an income that meets your needs, spend and save wisely – and make time for activities with friends and family that bring you joy.
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