8 Money Rules You Can (and Should!) Break, According to Money-Saving Experts
Learning how to save money can mean unlearning things you already know. Here are some pieces of conventional wisdom that may not be so wise.
Myth: The less debt you have, the better your credit report
If a small amount of debt shows that you manage money responsibly, and boosts your credit score as a result, no debt is even better, right? Wrong. Staying out of debt is great for your financial well-being, but not so great for your credit rating, money saving experts agree. Basically, if you haven’t borrowed anything, you’re not providing any information for the credit bureau to score you on.
The better idea: Open a no-fee credit card and charge only what you can pay off each month. Or take out a car loan and stay on top of your payments. You need to have these money rules memorized before you turn 40.
Myth: Always pay yourself first
Numero uno on the list of tips form money saving experts is “Pay yourself first,” which means that you should put money in your savings account as soon as you get paid, so you never miss it from your checking account. The trouble with that idea is that many people graduate from college burdened with student loan and credit-card debt, even before they start their first full-time job. If your savings grow at 1 percent interest, but your credit cards are charging you 18 percent interest, you’re not benefiting from cash in the bank.
The better idea: Pay off your credit-card balances as fast as you can afford to, starting with your higher-interest cards first. Once they’re back to zero, any money saving expert will tell you to apply that monthly payment amount to your savings, and then buy the things you want or need with cash.
Myth: All debt is bad
What are you borrowing for? A student loan, credit to start a business, a home mortgage, or a car loan to get you to your first job are investments in your future. The same cannot be said for the $10,000 credit-card balance that appeared one restaurant meal, one cute new outfit, or one state-of-the-art mobile phone at a time.
Every money saving expert agrees that education loans are “good debt.” In 2015, college graduates earned 56 percent more, on average, than high-school graduates over their lifetimes, the biggest disparity ever, according to the Economic Policy Institute.
The better idea: If you think of interest as the cost of money over time, it becomes easier to evaluate the merits of different kinds of borrowing. A college degree puts more money in your pocket over your entire 40-year career. Does that new sweater increase in value, or make you a better person? Do you really want to be making payments on it a year from now? Follow these habits of people who are great at saving money.
Myth: Coupons and other grocery strategies are great money saving tips
We’ve seen those people on TV with their price-tracking notebooks, their massive bags of coupons, multiple apps, and their storage shelves loaded with canned goods, personal-care items, and paper products. Consider two things before you dive into coupon collecting, according to money saving experts:
How much is your time worth? Do you want to spend an hour or two of it every weekend cutting, sorting, and filing coupons, comparing the best prices around town, and driving to different stores?
Are these the products you really want to buy? Are they the best deals? Even with a coupon and a sale, the nationally advertised brand of frozen pizza may cost more than the store brand—and they probably come out of the same factory.
The better idea: Your favorite supermarket probably has a loyalty program that will give you the best available price, track your purchases, and deliver coupons (by mail or to your phone) on the things you buy frequently. That’s how to save money at the grocery store.
Myth: Your credit history is confidential
Your financial information should be protected from prying eyes. But plenty of people and businesses are entitled to pull your credit report: employers, insurers, landlords, current and potential creditors, collection agencies, government offices, utility companies, and anyone who has a court order or judgment against you.
In other words, the people looking at your financial business may include your boss, your social worker, or your ex-spouse, if they’re entitled to court-ordered spousal or child support.
Unfortunately, according to Margaret Reiter and Robin Leonard, authors of Credit Repair (Nolo Press), “It’s not always easy to find out if someone who should not have access to your credit report has requested and received one anyway.” You can check who has pulled a credit check on you by looking for unfamiliar names or businesses on the list of inquiries included in your credit report. If someone has accessed your credit history illegally, you can take legal action under the Fair Credit Reporting Act.
The better idea: Apply for a credit freeze with all three reporting agencies, which keeps unauthorized entities from looking at your credit report or opening accounts in your name. Details are at FTC.gov.
Myth: Student loans in deferment don’t affect your credit rating
This one is partly true. If you have a deferment on your federal student loan—for graduate school, public service work, or a payment plan—it will show up on your credit report as “Paid as Agreed.” That’s the good news. The bad news: if you’re in deferment, you’re not making any progress on repayment, so that big pile of student-loan debt will sit on your credit report and eventually drag down your rating.
The better idea: Even if you’re in deferment, make at least a small payment on your student loans. Depending on the terms of your loans, you may be accruing interest even if you’re not currently required to make principal payments. How to save money on student loan debt: Apply for every scholarship and grant you can, try not to use student loans for living expenses, and definitely resist the temptation to max out your loan amounts to pay for spring break.
Myth: Investing is only for the wealthy and experienced
Does the thought of Wall Street make your head spin? Do you believe you need a degree in business to make money in stocks? Every money saving expert will tell you that investing part of your savings in the stock market is the smart way to increase your net worth. Remember, there are two keys to investing for regular people. One is to invest for the long term—even a volatile or down market will settle back into regular gains, so don’t panic and sell all your holdings if Wall Street has a bad day. The other is to invest in index funds, which hold a lot of different stocks or bonds, diffusing risk, and mimic the performance of indexes like the Standard & Poor’s 500 or the Russell 2000 small-cap index.
The better idea: Open an account at one of the discount brokerages, like Charles Schwab or Ally (here’s NerdWallet.com’s list of the best discount brokers). These companies specialize in guiding rookie investors through the process of opening accounts and choosing investments, and their sites are loaded with free research, calculators, and other tools. Read up on these personal finance tips you were never taught—but need to know.
Myth: Everybody needs a budget
Budgets work great for some people—if you’re already skilled with a budget, good for you. But budgets can be difficult if you’re a new grad, just getting started as a couple, or you work as a freelancer or salesperson whose income fluctuates from month to month.
Many of us are not a fan of spreadsheets and spending limits. If that’s you, don’t beat yourself up over it. Author David Bach told Business Insider, “People will try and go on a budget and then after two or three months, they lose their mind, they hate it.” Like any other program—a weight-loss diet or solemn vow to make it to the gym every day—if you feel compelled to follow a budget, you’ll resent it and stop doing it, and then feel like a failure.
The better idea: Track your spending and saving with a desktop app like Quicken, free online money-management tool like Mint, or a spreadsheet with your favorite categories. The apps let you link your accounts so transactions load automatically, saving you hours of typing. As long as you know where your money goes, and what your usual spending patterns are, you can spot a problem or adjust your spending to cover a shortfall.