Thursday, February 23, 2017

4 Basic Personal Finance Facts People Constantly Get Wrong

financial facts
Very often, the so-called “universal truths” that people believe about personal finance are completely wrong. Myths circulate, grow, and persist because people have the facts wrong and don’t bother finding out the real truth.

Here are four facts that people always seem to get wrong. Inaccurate assumptions get repeated year after year and are even passed down through the generations. It’s time to put a stop to the nonsense, right now.

1. You Don’t Have to Be Worried About Moving Into a Higher Tax Bracket

“Be careful- that’ll put you into a higher tax bracket!”. There’s a particularly annoying and persistent myth out there and it has to do with what happens when you earn more income, thereby pushing you into a higher tax bracket.

It’s true: we have what’s called a progressive tax system, where higher incomes are taxed at higher rates. But what most people don’t get is that not all of your income is taxed at the same rate. Only the portion of your income that puts you into a higher bracket is taxed at the higher rate. The rest is taxed as it always was, in the lower brackets.

2. Individual Investors Rarely Clean Up on the Stock Market

In general, a do-it-yourself approach to life’s tasks can save you a lot of money and turn you into a very resourceful person. Usually, all it takes is a little know-how and a lot of energy.

However, one area where this philosophy doesn’t apply is investing in stocks. When it comes to the stock market, a little bit of knowledge is actually worse than no knowledge at all. That’s because people with no knowledge of the stock market will either consult a financial advisor or they’ll invest in no-brainer low-cost index mutual funds.

But the person with just a little knowledge is in danger of thinking he or she can DIY it with stocks and get rich. Not usually the case. There’s a reason why financial professionals have to complete training courses in trading and/or get certified to do their jobs. This is not easy stuff and the little guy who goes in with just a little knowledge can make a lot of bad decisions.

3. Getting as Huge Income Tax Refund is NOT Reason to Celebrate

Every year at tax time, people get excited about their tax refunds. The bigger the better, they think, and even go onto social media to brag about how excited they are and how much they’re getting back.

But they shouldn’t be excited. Rather, they should be embarrassed for not understanding what a tax refund really is. It’s really just your own money that you’ve allowed the U.S. Department of Treasury to hold onto. Meanwhile, you may be struggling to make ends meet. Call it what it is: a loan to the federal government… a tax-free loan!

This misconception about tax refunds is so rampant that retailers have noticed. Starting around February, they start aiming their marketing campaigns at these misguided taxpayers, hoping they’ll spend their “windfalls” in their stores. Don’t fall for this one and have your withholding adjusted so not too much is taken out next year.

4. You Need to Start Saving When You’re in Your 20’s

No joke- the power of compounded interest makes such a difference that the money you sock away in your 20’s can bring more value than money saved at any other time in your life.

In your 20’s, you have so many investment years ahead of you that even just a tiny bit invested during that decade can make a huge difference by the time you’re 65.

Finally, the key to mastering personal finance is learning the facts and avoiding hearsay. Learning the four facts you’ve just read about is a great way to start making your own smart decisions.

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