Stay out of debt. Buying a home is better than renting. Credit cards are bad. If these statements sound familiar—and they probably do—you might be surprised to learn that they aren’t necessarily true, at least not entirely. They are common personal finance myths. There’s more to these adages than meets the eye, and understanding the reasoning behind them can help you make better financial decisions.
You’ve probably heard that debt should be avoided. However, few people have the tens or hundreds of thousands of dollars in cash they would need to buy a vehicle or home without going into debt. A mortgage is actually considered a form of good debt because it is an investment that increases in value over time. A car loan is not necessarily a good debt, but a vehicle is necessary to get to work in most places in the United States. The key here is to try to put a lot of money down and get a shorter repayment period and low interest rates. Borrowing money for your education is another form of good debt. In some fields, a graduate degree can significantly boost your earnings and might be necessary to advance. You can take out private student loans to pay for graduate school, and if you’re still worried about debt, you might even be able to start paying off interest while you are still in school.
Buying Versus Renting
Family and friends who are pressuring you to own property might be telling you that you’re wasting money by renting a place instead of buying it, but this isn’t necessarily true. In particular, it isn’t true if you only plan to live in a place for a few years since the costs associated with buying and owning a home might not add up to your advantage compared to what you’d pay for a rental. Buying can also be dangerous if you don’t have a decent cushion for emergencies since a big repair can cost in the tens of thousands of dollars. Not only that, but homes can lose value. If you live in an area where mortgages are low relative to rent or where you plan to stay for years, buying might be worthwhile. But it’s worth putting your costs into a renting versus buying calculator or even talking to a financial professional if the primary reason you’re thinking of buying is because it’s a savvier move for your budget than renting.
There is nothing inherently wrong with credit cards. The problem is that they tend to have high interest rates, meaning that you can all too easily find yourself drowning in debt. However, if used responsibly, which means paying off your debt each month, credit cards can be convenient, can help build your credit score and may get you discounts on travel and other things. Having too many credit cards or applying frequently for credit cards may have a negative effect on your credit score, so you should avoid that as well.