What are Debt Myths? The definition of a myth is: an unproved or false collective belief that is used to justify a social institution.
There are many common debt myths where it relates to your personal finance and retirement goals. Many people will argue the fact of whether or not debt can be used to make you wealthy.
Common Debt Myth #1 - Transforming Debt into Wealth
I am in total disagreement with the idea of transforming debt into wealth. America has been deceived into believing that debt is not big deal and you can use debt to make money.
I'm not sure where the concept came from that you can borrow your way to financial success? At some point, you have to pay back those debts.
Many times you'll here the argument that you can use a 0% cash advance on your credit card to invest in the stock market. This is a very risky way to try to make money. You should never invest money you do not have. The stock market goes down and you have as much of a chance to lose money and have no way to repay the debt as you do to make money from the debt.
Have you ever heard a wealthy person say they became rich by being in debt? Becoming wealthy is about working hard, making the right financial and investment decisions and having a frugal lifestyle. You'll never hear a millionaire say they became wealthy by having debt. If you do, it's a debt myth because it's just not true.
Common Debt Myth #2 - Should I consolidate my Debt?
While consolidating your debt may help you manage it, you're just kicking the can down the road when you really need help with debt problems. You must have a debt relief plan to pay down debt and start living debt free.
Download free debt reduction software or you may want to start with creating a debt reduction spreadsheet. List all your debts from highest to lowest and track your progress from month to month. It will give you a great feeling when you see your debts decrease.
Common Debt Myth #3 - Debt helps your Credit Score
When you say this out loud, it doesn't even make sense. Actually, if your debt ratio is too high it will lower your credit score. Your credit score would be the same or better if you are living debt free and continue to pay your monthly bills and mortgage on time. If you're keeping debt around simply because you think it helps your credit score, think about how much better off your finances would be by not paying that interest.
Common Debt Myth #4 - I get an Interest Deduction on My Taxes
One of the best debt myths I've heard is "I need the interest on my home mortgage for my tax deduction".
OK, let's talk about this one a little more. Let's suppose you pay $5,000.00 interest on your home mortgage and you get a $5,000.00 tax deduction. Supposing at your tax bracket you're paying approximately 25% taxes on your gross income. You reduce your taxable gross income by $5,000.00 meaning you saved 25% of $5,000.00 which is $1250.00.
Yes, you saw that correctly - you just spent $5,000.00 to save $1250.00. Doesn't make sense does it?
Have we as a society invented our own Debt Myths to "impress our friends and neighbors"? Don't fall into the trap of these debt myths and pay the rest of your life.