5 Money Misconceptions
Everyone knows diamonds are formed by putting a lot of pressure on coal, right? Apparently not. But surely what I remember learning in elementary school about Lincoln abolishing slavery with the Emancipation Proclamation is true? Nope, that happened three years later with the passage of the 13th Amendment.
My world of personal finance is also home to more than a few mistaken beliefs. Here are five I encounter regularly:
1. Your income impacts your credit score. That's not part of the formula. Lenders want to know you've got money coming in before making a loan or issuing a line of credit so your income will be considered along with your credit score. The major factors affecting your credit score are how much you owe, your payment history, account types and activity.
2. Your pension or military retirement counts as income for IRA contributions. Please don't make an IRA contribution based on income from a pension. I'm not saying that you didn't earn the income, but it doesn't meet the definition of what the IRS calls compensation for purposes of making IRA contributions. Alimony counts, nontaxable combat pay counts, but military retirement or other pension or annuity income doesn't.
3. No debt equals good credit. While I can certainly understand the perspective of those who swear off the use of any debt, it's important to note that if you want to use the system, you've got to be in the system.
That doesn't mean you need to have a lot of debt, but to have a good credit score and be able to access most traditional lending you have to demonstrate or have demonstrated that you can do it.
4. Safe is safe. Nobody wants to lose money in the stock market. But safer alternatives might be exposing you to a different type of risk -- inflation. Since I graduated high school a mere 30 years ago, a dollar has lost nearly 60 percent of its purchasing power. Pull that dollar I found tucked in the baseball card box in my mom's basement out and it's going to buy a whole lot less than it used to. Maybe safe isn't always safe.
5. A will avoids probate. Actually, the exact opposite is true. Your will sends you straight to probate. That's not necessarily a bad thing, but if I had a dime for every time someone told me, “I don't have to worry about probate, I've got a will,” I'd personally have a much more extensive estate to pass on to my kids.
Surprised? No worries. Unlike science or history, money management is not a big part of our formal learning, so I'll forgive you ... but spread the word.