Did you ever foolishly believe something, like The 5-Second Rule, and were later scared to find out the truth? If so, you’re not alone. This is most people with foolish money myths, a combination of April Fool’s Day and Halloween – fooled or scared.
To celebrate April Fool’s Day in our own way, we’re covering seven foolish money myths that fool too many too often.
Credit Card Balance Transfers to 0% Interest Rate Credit Cards Are Good
For most, transferring credit card debt from a high-interest rate credit card to an introductory 0% interest rate credit card is an expensive transaction. The average credit card interest rate is over 15%. This makes an introductory 0% interest rate credit card offer for 12 months very enticing.
Not having to make interest payments on $5,000 of credit card debt, for example, would save you $750 over 12 months (contingent on how your credit card company calculates interest payments). However, most credit cards charge between 3% and 6% on credit card balances transferred to them.
Using our example above, you’ll pay between $150 to $300 up front to transfer your $5,000 credit card from a high-interest rate credit card to a 0% credit card for 12 months. That brings your savings down to between $450 and $600.
This is a good strategy to pay off debt, but it often only slows the bleeding as credit card interest rates return to the average after the introductory offer. Our example includes only transferring one credit card balance of $5,000. Most Americans have over two credit cards with a combined average balance of $16,748.
If you’re looking for ways to save money to help pay off credit card debt, a credit card balance transfer may not be your low-cost option. If you haven’t changed your spending behavior that led to credit card debt, no foolish money myths will be anything but a temporary Band-Aid.
Home Refinancing Is a Great Way to Pay Off Debt
Once upon a time, homes were like ATMs. There was always money to withdraw from home equity to buy bigger homes, bigger cars, bigger vacations, and to pay off bigger debts. That was until there was no money left to withdraw. This money management strategy, or lack thereof, is partly to blame for the 2008 housing crisis. Home equity for many homeowners dropped below what many homeowners owed on their homes.
Withdrawing on your home equity is not like withdrawing from an ATM. Whenever you refinance, you risk changing all the terms and conditions of your original loan. Thus, your interest rate and the length of your loan may change. If either or both increases, you’ll likely pay more on your home in the long run. While this may save you credit card interest rate payments today, you’ll pay more on your home tomorrow, which may negate today’s savings.
You’ll also be subject to closing costs between 3% and 6%. On a $250,000 home, this could cost between $7,500 to $15,000 to pay off your debt. Sure, most people wrap that into their new loan, but that’s also foolish money move.
As with credit card transfers, if you don’t change the behavior that helped you acquire your debt, no trick will help.
My home is a good investment
Owning a home is the American Dream, right? Carlton Sheets spent the mid-80s to the mid-90s swearing real estate was the ideal investment, but is it? The difference between what you pay for a house and what you sell a house for is not your return. Most Americans forget this.
Your home’s return on investment (ROI) includes closing costs, possibly for both your purchase and sale, mortgage interest payments, including Private Mortgage Insurance if you don’t put 20% down on your purchase, property taxes, homeowner’s insurance, maintenance and home improvement costs, including your time and labor.
For most Americans, their home is their largest investment, which makes it a concentrated position. A concentrated position is an investment that is a large percentage of an investor’s portfolio. Some investment firms define concentrated positions as 20% or more of an investor’s portfolio. For most Americans, the money tied up in their home is more than 20% of all their investment assets.
When adjusting for inflation and adding in maintenance costs, taxes, and illiquidity of real estate, the S&P 500 tends to outperform US residential real estate. Unless you’re receiving rental income from your home, and most Americans aren’t, your home may not be a good investment.
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Include Your Home Equity in Your Net Worth
There’s a never-ending debate among money pros on whether homeowners should include their home equity in their net worth. Some people adamantly oppose this. Their argument is that because the only way to truly free up your home equity is to sell your home, which generates a need to find a new home, you can’t necessarily take your money and run.
The opposing argument is that because homeowners can take out a second mortgage, a home equity line of credit (HELOC) or sell their home and keep the difference between their purchase price and sale price, that it’s inaccurate to not include their home’s equity in their net worth.
Your home’s current value is hard to estimate without an appraisal, which is a more accurate estimate but still just an estimate, or selling your house. As we learned after the housing crisis, assuming your home’s value increased since it’s purchase is, also, a foolish money mistake.
It’s probably best to include some of your home’s equity in your net worth only when you have 50% or more equity or if you could pay off your mortgage with the money in your other investment assets.
Savings Accounts Are a Good Place to Grow Your Money
Back in the day, many people used savings accounts as a conservative investment alternative to investing in the stock market. Savings accounts were particularly appealing to the oldest and youngest generations. Kids, myself included, learned of the benefits of compounding interest with a Passport Account, a basic savings account. It was easy to learn this lesson when savings interest rates were in the double-digits.
Twenty years ago things changed and ever since savings interest rates have stalled at historical lows. This makes savings accounts appealing to neither our youngest nor oldest generations or anyone in between. They’re, also, less lucrative than they used to be for emergency savings accounts, a layer of protection many Americans rely on to offset the costs of unexpected emergencies.
The emergency now is that there’s no difference in putting cash in a savings account or under the mattress. (It’s an extra-hard foolish money mistake to put money under your mattress.)
The Foolish Money Myths of The Latte Factor
An example of small day-to-day savings leading to a lot of long-term savings was cutting the cost of your daily Starbucks latte. The idea was that saving $5 a day would yield $1,000,000 in retirement. The problem is that the math never added up and never considered the effects of inflation and taxes on your $5 per day savings.
Many people mistakenly thought that if they cut their latte addiction in half that was all that was necessary to get their finances in order. They tried and often they failed. While small daily expenses do add up in the long run, curbing your fancy caffeine addiction or making that cup of joe at home shouldn’t be your retirement plan..
A Raise, Promotion, or a Windfall Will Fix My Finances
For most people, not having enough money isn’t the problem. It’s not spending wisely the money they have that’s the problem. This is why 70% of lottery winners go broke after winning their winnings. No raise, promotion or windfall of money will fix your financial problems until you change your financial mindset and keep more than you spend.
Unfortunately for many, money is the Groundhog Day of April Fool’s jokes. By knowing the more foolish money myths and how to avoid them, the more minor your money misfortune from being foolish.
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