The Myths That Steal Your Wealth

As our elected leaders work through a seemingly insurmountable mountain of debt, Americans face their own personal finance hurdles. Personal savings rates have plummeted over the last decade; we have witnessed sky-rocketing personal debt, and a rampant uptick in education loans. Even through the recent economic challenges, the most overlooked quality of personal finance as it pertains to the average American is that it is mostly personal. Yet, the financial industry applies a set matrix of pre-determined products such as credit cards, home equity lines of credit, auto loans, and consumer credit as if all of the personal situations were the same. The lesson learned from the mortgage meltdown and subsequent evaporation of housing values, is that all personal finance situations are not the same. The rules of the financial universe have led to household debt that drove the national savings rate to zero. We have been sold a bill of goods in the form of financial myths that do more to limit our wealth and income potential than they do to improve our lives. From credit scores to 0% interest, the  financial myths below have conspired to undermine the wellness of our personal finance and create a lifelong consumer of financial products:

Myth 1

A Good Credit Score Reveals How Good You are With Money

The marketing and branding of the FICO score, commonly known as the credit score, may have created an entire culture of indebtedness on it’s own. The falsehood we learn from so called experts is that the credit score is a numerical representation of how great we are at handling money. Truth be told, the credit score is nothing more than an indicator of how often we interact with debt, and how often we pay that debt on time. In short, the credit score of a consumer improves when they interact with home loans, credit cards, auto loans, home equity credit lines, etc. on a more frequent basis. So in fact, the more often you are in debt (and pay on time) the higher your score. How much debt you have hardly seems like a measure of our financial IQ. Given a choice between a person with a $20,000 credit limit or one with $20,000 in the bank, I’d say the latter is better at handling money.

Myth 2
We Have to “Build” Credit

Personally, I heard this myth over and over as I became a young adult. In order to buy a home and car I needed to “build” credit. By build, the financial industry meant for me to jump into the game of debt through low limit credit cards and inexpensive auto loans. The money I wasted building credit from 18 until my late twenties on auto loans, credit cards, and 0% interest consumer loans nearly bankrupted me. In the documentary "Maxed Out ", James Scurlock points out that credit card companies have targeted college campuses looking for new customers to absorb their expensive financial products. To be more accurate they aim to give new consumers a taste of credit so they'll be back for more credit "building". It seems odd that credit card companies would target a young customer base who largely have little to no disposable income? Not if the goal is to sell the impressionable youth the blissful content of buying what you want now and paying for it later by perpetrating the “build” your credit myth. The truth is that building credit is a necessity for those who want to be in debt for the unforeseeable future.  If you have a desire to unlock you’re financial potential then building credit is unnecessary.

Myth 3
Car Payments are a way of life 

The auto loan is the second largest purchase for most Americans after their home. The major difference between the two, except for recent vintage, is that cars lose value very quickly. According to Edmund’s.com, The average car payment in 2007 was 475 dollars. If a person took an auto loan at the age of eighteen and kept paying the average payment for various cars through the age of 58, they would spend 228,000 dollars in a lifetime. Imagine for a moment that car payment was invested in a growth stock mutual fund over the same time frame at an average growth rate of 8%. In 40 years that car payment would be worth 1,680,813.32!

Myth 4
0% interest is “same as cash”

“24 months same as cash"... “0% for 36 months”.... “buy now pay later” ........The preceding tag lines have been used to sell furniture, building construction items, carpet, cars, etc. The 0% is supposed free financing for a purchase over an agreed upon term so the consumer can buy now and pay later. The problem is one thing is left out of the equation, risk. Risk represents the monthly payment that cannot be made, the loan that cannot be paid off in time, job loss, major health event, or other unforeseen financial emergencies. If a consumer has outstanding same as cash debt and cannot make the payment, they are hit with an interest charge for the entire term. Risk is the variable that changes the equation and spoils the “same as cash” myth.

“Your largest wealth building tool is your income” That quote by nationally recognized financial expert Dave Ramsey illustrates the importance of eliminating the myths that have waged an assault on our future. If we stay away from the traps that suck the dollars out of our savings accounts, college funds, and retirement accounts, maybe we can show our elected officials how to climb that seemingly insurmountable summit.