Parents, friends, teachers, they've all been deluged in old-school pearls of financial wisdom that have come down through the decades. But what applied to baby boomers 30 years ago doesn't necessarily apply now. How could it? Economic times have seriously changed, the cost of living has soared and the financial landscape looks very different.
Getting a solid financial head start is already tough enough for a generation that's playing catch-up before they've set one foot out of college. The last thing Millennials (see Money Habits of the Millennials) need is to be bogged down with misguided money mantras – and boy, there are a lot out there.
In no specific order (yet all equally as important), we're officially busting some of the biggest money myths Millennials just shouldn't buy.
1. Cut Up Your Credit CardsAfter all, if you pay in cash you can't spend more than you have, right? Well, the same mentality can be applied to credit cards, as long as they're used wisely. Cutting up credit cards is advice that should be saved for people in or close to bankruptcy. Anyone able to use their credit cards with discipline should do exactly that.
It's not just that paying your monthly credit card bills on time crucial to building your credit rating. Many cards offer exceptional rewards programs (see Credit Card Rewards: Cash Back Vs. Airline Miles) you don't get when you use cash, and they're a great way to track your spending. You need a good credit history (see How To Establish A Credit History) to obtain everything from a residential lease to a bank loan (and the most favorable interest rate possible for it).
There's no reason you shouldn't put every purchase on your credit card to earn the best possible rewards. Just make sure you pay off your bill at the end of each month to avoid racking up interest charges that can quickly swallow any possible rewards benefits.
Also, having several cards (but not owing anything close to your credit limit – charge no more than 35% of your limit) will help your credit utilization ratio. This percentage is another important factor when you're being evaluated for a car loan or a mortgage.
2. Put It in the BankBack in the good old days, putting your hard-earned money in the bank was rewarded with decent interest rates that over time translated to an OK return. These days, the bank might be a safe place to store your cash, but it's not necessarily the smartest place to put it.
Savings accounts cause you to lose money over time because their low interest rates do not keep pace with inflation. They're also subject to maintenance fees that can nibble away at your bank balance. It's not terrible to keep a small emergency fund in the bank (see How Much Cash Should I Keep In The Bank?) – after all, it's still FDIC insured – but the bulk of your savings should be elsewhere.
3. A Penny Saved Is a Penny EarnedThere's a common misapprehension that penny pinching or scrimping on spending will lead to wealth faster. While spending frivolously is never advisable, your café latte intake in the short term is hardly going to put you out of the race in the long run. Accumulating wealth requires bigger, broader, long-term thinking that should be income driven rather than frugality fueled.
For instance, if you're making $30,000 a year, it will be nearly impossible to accumulate a large sum of money – even if you were to save all of your extra pennies. Focusing less on being stingy and more on broadening your earning capacity – via education or work experience, for instance – will increase your worth and broaden your income horizons. But try to spend strategically. Splurge on the networking dinner, but don't take Uber to get home.
4. All Debt Is BadNot only is it OK to have the right kind of debt, it can make a lot of financial sense. The beauty of bank loans (for practical purposes) is that you can have your financial cake and eat it, too.
Take a basic capital investment, such as a car. You could pay out $15,000 of your hard-earned savings to acquire the vehicle outright, or you could obtain a low-interest auto loan and pay it off in small, regular installments. This way, you can enjoy driving your own car while more of your cash remains available to put toward something else. Start by paying off any higher-interest debt you may have, such as balances on your credit cards. Other good candidates: saving for a vacation or a down payment on a home. Obviously, don't incur more debt than you can sensibly handle and don't stumble by accident into a subprime loan that charges too much interest.
5. Pay Off College FirstNobody wants to be burdened by student debt, so it's natural to make a priority of paying it all off as soon as possible, right? Not necessarily. A fundamental rule of finance is to diversify. In other words, don't put all of your eggs in one basket.
In your twenties, you're also at the time when compound interest is most in your favor because you have decades for even small amounts of money to grow (see Investing 101: The Concept of Compounding). It's also a good time to take risks and not stick only to the safest (least profitable) investments because, if one does tank, you still have lots of time to recover from your losses.
One approach to raise more money for investment: Extend your college-loan repayment period to lower your monthly payments and use the extra cash to start building a retirement fund (see Student Loans: Paying Off Your Debt Faster). While it's important to stay on top of student-loan payments, you will likely benefit more by also saving and investing in the future.
The Bottom LineIt turns out the old adage don't believe everything you hear also applies to money mantras. What may have been helpful advice decades ago often doesn't make sense in today's transformed financial landscape. Listen to what others have to say, but be sure to do your own homework.