4 misleading personal finance tips

Financial advice is everywhere, and some popular rules-of-thumb are so commonplace that we might not stop and question them. So just how reliable are these common financial tips?

According to some experts, the answer is mixed.

“Popular advice tends to be about doing what is simple and seems easy to stick to, since people have limited willpower,” says James Choi, PhD, professor of finance at Yale’s School of Management. “But much advice is over-simplified and doesn’t take into account economic research or people’s unique circumstances.”

Here are four financial myths that are outdated, incomplete, or downright wrong, as well as some research-based tips on what to do instead.

Myth 1: All debt is bad

The old advice: Debt — from credit cards or other loans — should be avoided. For example, one New York Times bestselling financial guide aimed at millennials claims that “credit card debt is never good.”

There is some truth to this advice. Using cash — physical dollar bills — makes spending feel more “real” and limits your spending ability to what you have on hand, in turn reducing overall spending. And high-interest debt can quickly compound into large amounts that are difficult to pay off.

However, the smart use of debt has benefits, ranging from building your credit score to helping you achieve long-term goals like home ownership or retirement. 

The better advice: Use debt wisely. Some debt is good.

Good debt creates value over time. For example, historically education has increased one’s short- and long-term earning potential, making education debt a reasonable investment. Home mortgages are another type of debt that is financially savvy for many people, given historic increases in home equity, tax breaks, and sometimes cheaper monthly costs than renting. 

Temporary debt, in the form of credit activity, can also help build your credit score, a number calculated by lenders that impacts the interest rate you get on future loans. Substantial debt and missed payments reduce your credit score. However, a high score requires that you have credit experience. This doesn’t mean you should hold on to debt — you can pay it off each month before it accrues interest. But a strong credit score requires a history of successfully paying lenders over a reasonable amount of time. 

Moreover, sometimes debt is necessary to survive. Job loss, unexpected medical bills, or just a few bad choices can cause even smart people to accumulate high-interest debt. So if you find yourself swamped, don’t fret. 

“Many young people take on substantial debt at some point,” Choi points out. “But most are still able to get financially healthy over time, especially considering that income and ability to save tends to increase with age.”

Instead of letting guilt or anxiety take over, assess the situation and make a plan. 

“Sometimes people get so overwhelmed with their debt that they ignore collection calls and try to ignore their finances altogether,” explains Todd Christensen, Financial Counselor and author of Everyday Money for Everyday People. “But when they sit down, assess the situation, and consider their options, it’s usually better than they fear.”  

Myth 2: You should save a chunk of every paycheck

The old advice: Save a constant percent of your income every month for the rest of your life, regardless of your current circumstances or how your life changes over time. For example, for a recent article comparing popular financial advice with economic research, Choi reviewed 47 popular financial advice books. He found that 32 stressed saving immediately and 21 recommended keeping your savings rate — usually 10 to 20% of your total income — constant across your lifetime.

There are reasons to start consistently saving as soon as possible. Early and regular saving capitalizes on compound interest (early savings grow more than later savings), and a set monthly investment may also reduce emotional responses to market fluctuations. 

Christensen points out that committing to regular savings early on also makes it a lifetime habit. 

“You can’t separate money from psychology,” he says. “If people don’t commit early on to automatically saving at the start of each month, then most fall into the habit of spending all their money and never get around to saving.”

But there are plenty of times it makes sense to prioritize other needs or financial goals over saving. 

The better advice: Make a budget for spending and saving based on your personal life circumstances and goals.

First, when you’re younger, it’s likely you’ll have less income to spare than when you’re older. So instead of sticking to a set rate, it is wise to increase your savings rate as your overall income increases. “It’s easy to view money passively,” notes Mariya Davydenko, PhD, a researcher at the Financial Consumer Agency of Canada and author of a recent research paper comparing research findings with financial advice from online media. “But it’s better to occasionally check in, consider the big picture, and update your plans given your current situation.”

Second, from a purely economic perspective, the optimal choice is almost always to pay off all high-interest debts like credit cards before saving. This is because most investments have a much lower rate of return, Choi explains.

Finally, even if you want to save every month no matter what, a flat rate of savings is not always optimal. “I recommend that everyone saves some money each month to create a lifetime habit,” Christensen says. “But…