It is said that half knowledge is worse than no knowledge. Similarly, investors who have half knowledge about banking and finance are more prone to losses than those who have no knowledge at all. Every investor must understand banking before investing their money in funds. However, there are some myths regarding banking that may lead to financial failure. Thus, one must keep updating themselves so that they remain insulated during a financial crisis. Banking myths are the baseless beliefs of people which occur due to lack of knowledge. These myths may prevent a person from being a successful investor. Moreover, a lot of investors may lose out on good opportunities if these myths are not broken. Mentioned below are some myths which should be done away with:
- Rise in salary leads to higher tax range
- Renting home is a waste of money
- Higher investment may lead to crisis even if it is some brand correlation
- Investment should always be carried out in large sums
- Higher balance on a credit card means more credit value
- Home ownership is always a profitable investment and the advantage of it is mortgage interest
- Statistical downfall of stock market implies immediate selling of funds.
- Income tax is not really required
Investment is dependent on age
Let’s debunk them one by one
Myth: Rise in salary leads to higher tax range
Truth: Sometimes, a rise in salary does lead to a higher tax range. The myth generally follows that the higher the amount of tax ranges, higher would be the deduction from the salary, which would result in a lesser take home. However, such myths are not true. Moving into a higher tax range only increases the rate of tax paid on the last amount of incentive, not on the whole amount. These calculations follow the theory of Marginal tax. Thus, one should understand the distribution of tax deductions rather than following myths.
Myth: Renting home is a waste of money
Truth: Just as spending money on daily necessities such as food, clothes and transportation is not a waste of money, similarly, renting a home is not throwing away money unnecessarily. Such expenditure can actually be very helpful. Owning a home leads to expenses like property taxes, mortgage interest, maintenance and this amount is likely higher than the money spent in rent. In fact, by owning a home for the first five years, you are basically paying only the interest on your mortgage. Thus, renting a home is another expenditure which does not create any economic crisis. Also, for those who switch jobs, and therefore cities, often, renting a home is a better option.
Myth: Higher investment may lead to crisis even if it is some brand correlation
Truth: More often it is assumed that we get what we pay for. This might hold true most of the time, but not always. Branded items are not always of superior quality. They may at times compromise with the authenticity. With regards to investing money, not all instruments sold under the banner of renowned companies prove to be fruitful. One must check its liability before investing. However, one must also not think that investing money on brand-values is perilous. Investing money on certain brand-values is always advantageous, for eg, blue-chip stocks. This is because, even if their graphs show a downward movement, it does not mean necessarily mean a loss, it simply means slack growth.
There is sometimes a correlation between price and quality. However, this correlation is not always perfect. Thus, while determining an item’s value or a fund’s value, one must look at its past tag and examine the true indicators of its value. One must also check for its future potential.
Myth: Investment should always be carried out in large sums
Truth: Investing money in large sums is not mandatory. One with a limited range of investments can also invest in higher funds with a low percentage of ownership. Some brokerage firms require minimum amount of money to invest in certain funds or even open an investment securities account. Thus, one must not waste time in collecting huge funds for a large investment. Waiting for such opportunities may make you lose out on good investments and delay your goals. The process of investing with little money is advantageous at times as traditional bank savings account generally offer low interest rates which are barely of any use over the long run.
Myth: Higher balance on a credit card means more credit value
Truth: Carrying a high balance on credit cards does not result in a higher credit rating. This process simply means that you are taking your money out of your pocket and giving it to the credit card company in the form of interest payments. If you want to use a credit card as a means to improve your credit score, all you need to do is pay your dues in full and on time every month. If you want to take it a step ahead, avoid charging over a small percentage of your card’s limit as the amount of available credit you have used is another component of your credit score.
Myth: Home ownership is always a profitable investment and the advantage of it is mortgage interest
Buying a home is always a good idea. But with respect to investments, home ownership is not always the best option. Just like in the case of other investments, it involves risk which might decrease your investment value. Thus, paying a huge amount as interest every year and for its maintenance is not at all advantageous. The home mortgage interest tax deduction should only be considered as a minor way to ease paying all the interest. You cannot save as much money as you may think, and even if you save such an amount, a reduction in the costs that you pay is high.