Financial decisions are complicated. The right answer in your situation depends on your unique circumstances and can change over time. Yet many people follow one-size-fits-all advice they learned from family members, the internet, or infomercials. Here are 10 financial myths that are either outdated, overrated, not always true, or flat-out wrong.
Myth: I can’t get Social Security until I reach my full retirement age.
Fact: If you qualify for Social Security, you can start taking your benefits anytime between the ages of 62 and 70. However, the sooner you take them, the less you’ll get.
Many people mistakenly assume they can’t get benefits before they hit “full retirement age,” as defined by Social Security, or that their benefit will suddenly jump at that point. This age ranges from 65 for those born before 1938 to 67 for those born in 1960 or later.
Your full monthly retirement benefit is based on your career earnings. If you start taking it before your full retirement age, it will be reduced by a fraction of a percent for each month between your start date and full retirement age. Start later and your benefit will be increased for each month between your full retirement age and start date, up to age 70, when increases stop.
For example, if your full retirement age is 67, you would get 70 percent of your full benefit at age 62 and 124 percent at age 70.
Here’s what may confuse some people: If you start taking your benefit before full retirement age and you’re still working, Social Security will reduce your benefit if you earn more than a certain amount; in 2022, the limit was $19,560. After retirement age, your benefits won’t be reduced no matter how much you earn. In addition, Social Security states on its website that when you reach full retirement age, the system “will recalculate your benefit amount to give you credit for the months we reduced or withheld benefits due to your excess earnings.”
Myth: Once I turn 65, I’ll get free healthcare from Medicare.
Fact: Medicare has multiple parts, and none is completely free. “While most people are satisfied with Medicare, what they don’t anticipate are the costs and what it doesn’t cover,” says Bonnie Burns, a consultant to California Health Advocates.
People generally pay zero premiums for Part A if they or their spouse paid Medicare tax for 10 years or more (usually deducted automatically from your paycheck). After an annual deductible, Part A generally covers most inpatient hospital costs except for very long stays.
Part B generally covers 80 percent of approved charges for doctor visits and outpatient services and 100 percent of preventive care. The base premium is $165 per month, but if you’re high income, a surcharge brings the monthly cost to between $230 and $560 per person.
Part D covers most prescription drugs, usually after a deductible and copays. Premiums vary widely but averaged $43 a month in 2022 for standalone plans, according to the Kaiser Family Foundation. If you’re high-income, a surcharge adds $12 to $78 to the monthly premium.
Medicare Supplement or “Medigap” policies help cover out-of-pocket costs that Parts A and B don’t. Premiums vary widely, depending on your age and what they cover, but the average cost for a comprehensive Medigap plan is around $150 a month for a 65-year-old.
Instead of all this, some people opt for Medicare Advantage (also called Part C), a managed care plan that combines Parts A, B, and prescription drug coverage. You will pay the monthly Part B premium (and Part B and D surcharges, if applicable), plus an additional premium if your plan charges one. With a Medicare Advantage plan, you can’t buy and won’t need Medigap. Medicare does not cover most dental care, routine eye exams, contact lenses, glasses, hearing aids, and long-term care. Some Medigap and Medicare Advantage plans provide minimal coverage for some of these costs.
Myth: Buying a new car always beats leasing.
Fact: Buying is usually, but not always, better than leasing, especially if you pay cash, or finance it and keep the car at least until the loan is paid off, which takes about 5.5 years on average.
With a typical three-year lease, you essentially are paying for the car’s depreciation over the first three years, when it depreciates the fastest. At the end of a lease, you return the car and have nothing to show for your payments. Or you can buy the car for its residual value, a price determined at the start of the lease based on its estimated market value at the end of the lease.
The main benefit of leasing is that your monthly payment is typically lower than a loan payment, because you aren’t building any equity in the car. Leasing could get you into a bigger, nicer, or newer car with more safety features, which could be important to some drivers. And if you usually buy a new car every three years, leasing would almost always beat buying, says Ronald Montoya, senior consumer advice editor for Edmunds vehicle review service.
Some people who leased cars before the pandemic came out ahead when global supply-chain disruptions sent the price of new and used cars skyrocketing. When their leases expired, they were able to buy their cars for much less than their market value.
Myth: My auto insurance will cover hit-and-run drivers.
Fact: If your car gets hit by a driver who flees the scene, your uninsured motorist coverage might not pay for repairs if the culprit isn’t found. If you have collision coverage, your insurance will pay to fix your car, but you may have to pay the deductible.
Myth: Potential employers can look at your credit score.
Fact: Employers can, under certain circumstances, see an employee’s or job applicant’s credit report, but this is not the same report lenders get. It does not include a credit score and never has, says credit expert John Ulzheimer.
Under the federal Fair Credit Reporting Act, employers must get the applicant’s or employee’s written permission before pulling a credit report. If they make an adverse job decision based on the report, employers must notify the person and allow them to get a copy of that report.
At least 10 states, including Arizona, California, Nevada, and Oregon, have passed laws further limiting the use of credit reports in employment. California bans their use, with certain exceptions.
Myth: Paying off an installment loan will improve my credit score.
Fact: It depends on what else is in your credit report, but strange as it seems, paying off a home mortgage, auto, or student loan could ding your score for a few months, says Rod Griffin, senior director of consumer education for the credit service company Experian. When you pay off an installment loan, the status of the account will change to “paid” on your credit report. “That status change creates temporary instability in the report, often causing credit scores to go down a bit initially. Typically, scores rebound after a billing cycle or two and, assuming everything else is being paid as agreed, could exceed the previous mark,” he says.
Griffin added that open, active accounts of any kind will have more impact on credit scores than closed or inactive accounts. How much more “depends on the scoring model.”
Myth: Student loans are “good debt.”
Fact: “Education debt may be good debt, because it is an investment in your future. But too much of a good thing can hurt you,” says Mark Kantrowitz, author of How to Appeal for More College Financial Aid.
Try to graduate with less student debt than your annual starting salary—“ideally a lot less,” he adds. If your total debt is less than annual income, you should be able to repay your student loans in 10 years or less. Otherwise, you’ll struggle to make the loan payments and will need an extended or income-driven repayment plan. These repayment plans reduce the monthly student loan payments by increasing the repayment term. This means you’ll pay more interest over the life of the loan. However, your remaining debt could be forgiven after 10 years of making reduced payments if you work in a public-service job, or after 20 or 25 years otherwise.
Myth: Federal student loan consolidation will reduce your interest rate.
Fact: The interest rate on a federal consolidation is based on a “weighted average” of the interest rates on the federal student loans you’re consolidating. If you have several different rates, the weighted average is lower than the highest rate, but higher than the lowest rate, Kantrowitz says. “The weighted average more or less preserves the cost of the loans.”
The only way to qualify for a lower interest rate is through a private student loan, if your credit score has improved since you got the loans, he adds. “Shop around to find the best interest rate for you by comparing all of your options.”
Myth: Buying a home is better than renting.
Fact: Renting is sometimes the better option, especially over the short term.
Buying a home is a good way to build long-term wealth, mainly because paying down a mortgage is forced savings. There are also tax breaks for home ownership, and homes tend to appreciate at least as fast as inflation. When you borrow to buy, “you put up a small part of the price, but get appreciation on the whole house,” says Skylar Olsen, chief economist for Zillow.
But there are big one-time, nonrefundable expenses when you buy, and again when you sell. These costs vary, but Zillow pegs them at 3 percent of the purchase price for buyers, 8 percent for sellers, in its buy-versus-rent calculator. You’ll also have ongoing costs such as insurance, property taxes (which may be deductible), and maintenance.
When you start repaying a mortgage, your payment is mostly interest, so you’re not building much equity. Very gradually, your payment will include more principal and less interest.
Suppose you borrow $500,000 at 5.5 percent fixed for 30 years. In the first five years you will have paid a total of about $132,600 in interest and only $37,700 in principal. Even after 10 years, you will still owe about $412,700. Your payment won’t be more principal than interest until year 18. Fortunately, interest payments are tax deductible (but only on your first $750,000 in home-mortgage debt).
When you sell your home, you’ll keep what’s left, after closing costs, and won’t pay any capital gains tax on the first $250,000 in profit ($500,000 if married).
If you rented a home instead, and invested the down payment, closing costs, and any additional savings in stocks, you could still come out ahead of buying, even in the long term. That’s because stock market gains, over the long term, have generally outpaced home-price appreciation. But stocks don’t get the same tax breaks as homes, and not all renters have the discipline, or know-how, to invest those savings.
“Homeowning is a behaviorally friendly savings plan,” says Olsen.
Zillow and other websites have calculators that allow you to plug in variables and estimate what’s best for you, given certain assumptions. Nationally, renting is usually cheaper in the first five or six years; after that, buying usually wins, Olsen says.
Warning: Your results may vary.
Myth: Borrowing from your 401(k) is a good way to pay for emergencies.
Fact: It could be, if your plan permits loans, but it’s not a panacea. “People say, ‘I’m borrowing from myself, I’m paying myself back,’” says Bridget Bearden, research and development strategist with the Employee Benefits Research Institute. But you may have to pay a flat fee, which could be a meaningful percentage on a small loan. The loan repayment will usually come out of your paycheck.
If you quit your job with an outstanding loan and can’t repay it, you’ll owe income tax on the balance and—if you’re younger than 59.5—a 10 percent penalty. A further drawback is that the money you’ve taken out of the plan won’t be growing and compounding.