Welcome to WTFunds, where we do what nobody else does and… actually talk about money. Ever scrolled through your Instagram feed, wondering how your friends are affording their lifestyles when they’re making the same amount of money as you and you can barely rub two dimes together? Read on, because we’ll be talking to real people to break down how much things cost, and how they’re paying for it.
When it comes to money, people of all generations throw around catchphrases and adages like coupons at Macy’s without ever actually knowing if they’re true. People spend their whole lives soaking in all of these finance tips and philosophies, only to hit their twenties and have a total WTF moment because these tips are either completely untrue or are no longer suitable for the lives millennials lead. Mainstream media and older generations love to make jokes about avocado toast being the cause of our financial woes without actually acknowledging how different life is for young people today—riddled with student loan debt, an insane housing market, the list goes on.
We’re Lauren and Kelda, millennial sisters (and avocado toast lovers) living in Seattle, WA. After entering the real world ourselves and watching so many peers come to view money as a subject to be feared and overwhelmed by, we felt compelled to make finance an approachable and exciting topic, not only for our friends, but for all millennials. Instead of focusing on small actions like skipping your morning latte, we want our peers to understand the big deals—compound interest, credit scores, the power of investing—the needle-moving and life-changing concepts. While between the two of us, we do have a background in corporate finance, we truly believe that anyone can master their personal finances and that, no, you don’t need to be “good at math” to do so. Together we run Hello HENRYs, a blog on all things personal finance. Kelly Kapoor may be the business bitch, but we’re the finance bitches, betches.
Outside of bottomless brunches, Real Housewives marathons, and overpriced skincare, engaging in healthy debate (aka proving people wrong) just may be one of our favorite pastimes. There is no topic that makes this more true than money. Today, we’re sharing five of the most common finance myths and why they are actually so false.
1. All Debt Is Equally Bad
Did anyone else grow up hearing about debt as terrible, scary, or dumb? But then you were accepted to college and immediately encouraged to take out thousands of dollars in loans as the first “adult” decision of your life? Ironic, huh? The thing is, though, this happens all the time, and the reality is that the majority of millennials do have some kind of student loan debt. In and of itself, debt is obviously money that you spent without actually having, so in theory, it is never amazing. However, it’s super important to differentiate between kinds of debt.
Debt that is used to better your life can actually be seen as an investment that will help improve your financial health; and while yes, a trip to Bali 100% would better our lives, that’s not what we’re talking about here. Debt such as a mortgage or a student loan will (hopefully) give you a return on that initial debt investment. Provided that you are only taking out the exact amount that you truly need, receive a low (5% or lower) interest rate, and can afford the monthly payment, these debts are typically worth it and better your financial health.
Credit card debt, or a car loan for a new Range Rover (when your budget is more 2007 Toyota Camry), on the other hand, is not only hard to get out of, but is also not something that is usually an investment in your future and will cause your credit score to take a hit.
When evaluating your debt, always prioritize getting out of the “bad” debt and paying off the debt with the highest interest rate first.
2. Credit Cards Are For Emergencies Only
Okay, talk about scary. This kind of thinking is exactly why so much of the country is in severe credit card debt. Saying credit cards are only for emergencies or big (aka expensive) purchases, implies that credit cards should be used only when you don’t have the funds to cover the purchase yourself. Uh…what?
On the contrary, credit cards should only be used when you DO have the money to cover the purchase. Literally nobody should be judging you for using a credit card to buy your weekly groceries or morning Starbucks—which has happened to us, by the way. This judgment comes because people assume that if you’re using a credit card, it means you can’t afford it. Again, the exact opposite of when and why you should use a credit card.
As long as you can pay your balance in full each month, credit cards can be an amazing tool to earn rewards on money you are already spending. They can also provide travel/purchase protection and protection against fraudulent charges, and help you build credit, earn points for free travel, and a myriad of other amazing benefits. We use our credit cards for literally every single purchase that can be made using them. Obviously, we aren’t going to force anyone into using a credit card, but we are going to be extra bossy about ensuring that you use them only when you have the funds to immediately pay them off. And also a PSA: stop judging other people’s financial lives when you, very likely, don’t know anything about them.
3. Monthly Rent Payments Are A Good Indicator Of The Mortgage Payment That You Can Afford
When Lauren bought her first home last year, this was a huge learning moment. For so long, we had heard “If you can afford $X in rent, that same amount could easily be your mortgage payment!” Not true. Owning a home comes with SO many additional monthly payments that are not part of the equation when you’re renting. Property taxes, home insurance, HOA dues, PMI (insurance charge if you put down less than 20%—which is extremely common for first-time home buyers). All of these additional fees can easily add up to hundreds of dollars a month in payments. In actuality, if you want your housing payment to stay the same from renting to buying, you’ll need to look for a home with a mortgage payment significantly less than your current rent payment.
Also, part B to this equation: Whoever said buying is always smarter than renting was so false. Buying a home can be a smart investment in your financial future, but it isn’t always. If you’re renting and making other key investing decisions, you can be equally as set up for success in your future, while also not having to deal with the nightmare of needing a new roof or water heater.
4. You Can’t Afford to Invest Until You Have No Debt
Actually—you can’t afford not to. Some financial advisors actually tell you not to invest until you have no debt…which, if you have student loans, would mean you aren’t making any investments until you’re probably in your early thirties, at least. Yikes! There is a super mathematical and logical way to look at this, and it’s called the interest rate. You want to throw your extra funds at the highest interest rate. If your student loan has the average 3.5% interest rate, but you could be earning 8-10% in an investment or retirement account, you’re effectively losing money by choosing to pay extra on your student loans. Obviously, you always want to make the minimum payments on all of your accounts each month, but after that, your priority for your extra funds should be to the option with the highest interest rate. If you have credit card debt, this will likely always win out.
While we’re on the topic of interest rates, another PSA, your hard earned savings and emergency funds should not be sitting in a traditional, low interest savings account at a brick and mortar bank. If you aren’t earning a minimum of 1.8% or higher on your savings account, you’re doing it wrong and leaving money on the table.
5. Closing Old Credit Cards Will Boost Your Credit Score
Credit scores are something people talk a lot about, but usually have no idea what actually goes into them. There is literally no mystery about them, though. Remember back in college when the professor laid out the syllabus and what percent each category was worth? I don’t know about you, but, as soon as we saw “Attendance” listed at just 5%, we basically gave ourselves a free pass to have a little too much fun on Thursday nights and miss every Friday morning lecture. I mean, at just 5%, we could still come out with an A. Credit scores are pretty much the same.
FICO literally lays out the five factors that go into earning a perfect credit score and how heavily each factor is weighted. Closing old credit cards hurts two of the five factors: credit utilization rate (30% of your score) and length of credit history (15% of your score). Closing old credit cards could impact almost half of what goes into your credit score. Not a decision to be made lightly.
Credit utilization rate refers to the amount of credit you are using as a percent of what you have available. Let’s say you have two credit cards. Credit card A has a $5,000 balance with an $8,000 limit. Credit card B has a $1,000 balance with a $20,000 limit. Currently, you are using $6,000 of credit out of $28,000 available—just 21% and below the max target of 30%. Let’s say you decide to close card B (after paying it off) because you barely use it. Your balance dropped to $5,000, but your available credit also dropped to $8,000! That puts your new utilization rate is 63%—not good!
In addition, while credit history is a smaller factor of your score at just 15%, this is a challenging one for millennials to score highly on because we don’t have time on our side. If you decide to close your old college credit card because you don’t use it much anymore, you’re literally closing one of your longest chapters of credit history—also not good.
Obviously, there are some exceptions to this rule—if closing one card would not drastically affect your utilization rate, you have accounts with longer/better history, a card has a steep annual fee that you aren’t getting enough benefit out of, etc. The point is, though, closing a card can have serious consequences on your credit score and is not a decision that you want to make lightly.
There you have it: five of the most commonly thrown around financial myths proven wrong. Talking money is never that fun or glamorous, but the most important thing is to nail the big picture ideas. By doing so, we promise that you can achieve your financial goals, like saving for retirement or buying a home, while still going to Soulcycle, happy hour, or whatever it is that enriches your life and brings you joy! Even with student loans and a less than six figure salary. We are living proof.
Images: Sharon McCutcheon / Unsplash; Giphy (3); whenshappyhr (2) / Instagram