Episode 2: Debunking Common Money Myths

About the Episode

On this episode of Making it Count, hosts Cristina and Will debunk common money myths with guests Katie Bowman, Senior Relationship Manager at Addition Financial, and Susan Sherman, Principal Relationship Manager of Lending at Addition Financial. Listeners will learn the truth about credit scores, how to cut costs, when to start saving for retirement, tips for buying a home, how much should be in your emergency fund and more. What myths will we debunk that you once believed? Find out on this episode of Making it Count!

 

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2:55

Will asks Question 1: What’s one of the most persistent credit myths you’ve heard?

Katie answers: “One of the biggest myths in regards to credit, is that once you pay off something negative from your credit report, your score will jump up immediately.”

Learn more: The Top 6 Credit & Debt Myths that Might Surprise You

 

3:45

Cristina asks Question 2: “If I shop around for a loan and get my rate pulled multiple times, does that hurt my credit score?”

Katie answers: “It’s good to shop within a window when making big purchases, like a home or a car. Typically credit bureaus can see that you're shopping for a new car or home within a certain window with a lender. It’s important to get pre-approved that way you’re not getting it pulled everywhere you go.”

Learn more: Is it Worth Trying to Get a Perfect Credit Score?

 

8:25

Cristina asks a follow-up question: “Does it matter if you do the 13th payment or if you pay a little extra each month? Is one better than the other?”

Susan answers: “Paying a little extra each month helps the interest overall, but either way is good for whatever works for you financially.”

 

9:40

Will asks Question 3: “What are some tips to help control our spending?”

Katie answers: “The first step is to look at your income and expenses. Credit allows us to spend more money than we make. One way to control spending is to only use your debit card or plan to carry cash so you can't spend more than what you planned for. Make a shopping list and stick to it. Or do payroll direct deposit or payroll deduction into a separate savings that is not attached to your checking so you’re not tempted to pull from your savings.”

Learn more: How to Manage Your Money Effectively on Any Budget

 

Will asks a follow up question: “So when I’m shopping for a car or home, what is the best window of time?”

Katie answers: “A month at the most for car shopping. It’s important that you talk with your financial institution so you know how they pull rates. Ask them: When do they pull their score and where do they pull it from? Is it a hard pull or a soft pull and are you just getting pre-approved or do you know exactly what you want to buy? If you’re just starting out, it’s a good idea to do your car research ahead of time and get pre-approved for the best rate and terms.”

Learn more: 5 Benefits of Getting an Auto Loan Pre-Approval

 

13:30

Cristina asks Question 4: “How do we save for retirement? What are some of the best ways to do that?”

Katie answers: “A lot of employers now have some kind of retirement plan that they will set for you. Even beyond that, if say, a student, is still in school and working a part-time job, it’s good to put a little bit from each paycheck into a retirement account, then when you have a substantial amount, speak with a financial advisor about investing it. It’s important to commit to starting early.”

Learn more: Retirement Strategies: When Should You Start Saving for Retirement?

 

Susan also answers: “I would say the same thing for a mortgage: at least twenty days.. As long as your shopping within the same industry, you can use that window to shop around for the best rate

Cristina asks a follow up question: “Can you explain the difference between a hard and a soft credit pull?”

Katie answers: “Soft credit pull is when a financial institution or other organization pulls just your score, not what makes up that score (in other words, not the details of your entire credit report). A hard credit pull shows all of your credit report information to explain why your score is what it is: what credit you have and your payment history. The hard pull does affect your credit.”

Learn more: The Credit Score Scale (300-850) Explained

 

Cristina asks another follow up question: “What’s the importance of pulling my credit score and how frequently should I pull it?”

Susan answers: “You want to make sure there is no fraud or unauthorized activity going on that shouldn’t be there and that the debt is being reflected accurately.”

Learn more: 6 Credit Card Fraud Detection and Prevention Tips

Katie also answers: “Since you can pull your report for free once per year from each credit bureau, you should pull your report every four months: Pull it in January from Experian, pull it in May from Equifax, and pull it one last time from TransUnion in September. That way, you can see what's going on throughout the year from each bureau and make sure there's no fraudulent activity, inaccuracies or mistakes, especially right before the holidays.”

 

10:19

Will asks Question 3: “A lot of our members still think that making minor spending changes such as bringing coffee from home instead of buying a latte is enough to help them save money. We’ve heard this myth referred to as The Latte Factor. What is a better approach to cost cutting?”

Katie answers: “It's a good idea to pull all of your credit card bills and checking account statements to go through and see where your money is really going. That way you know where to stay away from places that tempt you.”

Learn more: Debunking Budgeting Myths with Expert Money Saving Advice

Money Myths Buster Quiz

12:20

Cristina asks Question 4: “Some of our members say that they don’t need to worry about saving for retirement while they’re young. What’s the right age to start saving and investing for retirement?”

Susan answers: “Right now. No matter what your age is, now. The younger you are when you start saving, the better off you will be.”

Katie chimes in: “It will eliminate the pressure that you’ll feel later on in life. Give yourself more time and start now, and you won’t have to give up as much later. Plus, you’re setting a good habit of saving early in life. The longer you stick with the habit, the less it will feel like a burden.”

Susan also says: “When you go to put your money in a 401k it's done pre-tax, which means you are able to put more money into your account each time. It automatically comes out of your checking account so you won't even notice it and you budget with what is left being direct deposited into your bank account. Investing into a 401k is the smartest way and you should absolutely match to at least the highest percentage that your corporation is willing to match in contributions. That is free money!”

Learn more: 7 Retirement & Investment Myths that are Costing You Money

 

16:25

Cristina asks Question 5: “It’s pretty common for people to think that buying a home means they’re making an investment in their future. Is it a good idea to think of a home as an investment?”

Susan answers: “Absolutely – it’s a big investment. Whatever you put as a down payment, you’re putting that little percentage toward your future. The market can go up and down, so you’re hoping you bought right and the property’s value will continue to go up. Plus, you can make extra payments on your mortgage each year to add to the equity you’re building in your home. It’s an investment because if you continue to rent, you have no control over the rental market and how much you might be paying per month to rent a home of similar size. Rent is always going up, but if you purchase you know exactly how much you’ll be paying each month. Every monthly mortgage payment you’re paying yourself. The Orlando rental market went up six percent in 2019.”

Learn more: Do You Still Believe These Home Buying & Mortgage Myths?

 

Will asks a follow up question: “How much is the typical down payment amount?”

Susan answers: “If you’re a first-time homebuyer (meaning you have not owned a home in three years), the minimum down payment is 3%. If you do own a home and can't qualify as a first-time homebuyer, the minimum is 5%. So you do not need to have the 10% or 20% that some people still believe you need. The reason you hear 20% as the common down payment amount is that it avoids the need for mortgage insurance.”

Katie chimes in: “Mortgage insurance is different than homeowners insurance which is different than the homeowners association dues. They’re three separate things. I also don’t think it’s a coincidence that the rental market is up 6% and mortgage interest rates are at an all time low. Although, I don’t think the monthly costs are what trip people up – it’s saving enough for the down payment, closing costs and whatever big appliances you’ll need in your new home. It’s seems almost impossible to save for all those expenses while paying a large amount on rent each month.”

Susan follows-up: “I always recommend talking with your lender because there are ways to come up with money for those items that people might not know about.”

Learn more: How to Save Money for a House Down Payment While Renting

 

22:10

Will asks Quick Question 1: “How can we debunk money myths every day?” 

Katie answers: “The first step is doing research and making sure you understand what the truth is when you encounter a financial question. Make sure you’re pulling information from reputable sources (the credit bureaus have great information on their sites) and not some random personal advice. Also, use your financial institution’s resources and go talk to someone's whose job it is to manage your money.”

 

23:40

Cristina asks Quick Question 2: “How can we utilize credit cards in the appropriate way that’s going to work for us?”

Katie answers: “It’s a common misconception that credit is bad. But credit is actually just a tool. We get to decide how we are going to use that tool – for good things (building credit through on-time payments and low utilization) or bad things (shopping sprees that can’t be paid off at the end of the month).”

Susan chimes in: “One way to improve your credit score is to use your credit card to pay for your standard, budgeted monthly bills. Then use your paycheck to pay off that credit card each month.”

Will also mentions: “If you can stick to what Susan describes, you can get rewards from your credit card by just paying your monthly bills. This is how I’m able to afford to go on vacations – I use my reward points for airline tickets, hotels, car rentals, etc. It’s all about making that money work for you.”

Kate warns: “If you’re new to the credit game, you have to be careful with that strategy. Unless you are disciplined with your money, you might end up going overboard and spending more on the card than just your monthly bills. But also, you can’t be scared of credit. You’re going to need it at some point in your life for those big purchases.”

Learn more: First Credit Card Do's and Don'ts Checklist

 

25:47

Will asks Quick Question 3: “How can we create an emergency fund and how much should be in it?”

Susan answers: “I say you always have to have at least $1,000 in your emergency fund. Then you build up to have at least six months of expenses saved up in another account.”

Will asks a follow-up question: “So let’s say we are trying to save money for an emergency fund and pay down credit card debt at the same time. How do we tackle all of that at once?”

Susan answers: “I believe you should prioritize saving for that first $1,000 in an emergency fund. Once you have that, put more money toward your debt to get rid of it. You want that emergency money so you don’t fall back into putting those expenses on your credit card and adding to your debt.”

Katie chimes in: “On the other side, if you have a nice amount in a savings account and also carry a high amount of credit card debt from month to month, just bite the bullet and pay that balance off with your savings. The amount you are paying in interest on that credit card debt could be put toward your savings goals once that debt is paid off.”

Learn more: A Critical Look at How to Pay Off Credit Card Debt Fast

 

28:26

Cristina asks Quick Question 4: “What's one great tip about how to start saving?”

Katie answers: “Set up your direct deposit to your savings account that is not linked to your checking account. It’s that simple. Name your savings account to give it a purpose. If it just says ‘Savings,’ it’s much easier to dip into. But if you label it ‘Reclaimed Wood Table’ you can picture what you’re saving for and it won’t be as difficult to resist pulling money from that account.”

Learn more: 6 Easy Ways to Save Money in 2020 You Could Try Now

 

30:05

Cristina brings up a CNBC article that looked at retirement trends among the Millennial generation (25 to 40 year olds). A recent survey reports that 66% of Millennials say they don’t feel on track with saving for retirement.

Katie responds: “One trend we notice among Millennials is that they job hop – they go from place to place every two to five years. Every time you move to a new job, you are reminded you have that money in a 401k and then it is given to you as a check when you leave. It’s up to you to invest that check in your new job’s 401k, versus spending it on a large purchase. I don’t have the research to back up this claim, but I suspect this could be a reason Millennials feel like they aren’t as on track as they would want when it comes to saving for retirement.”

Cristina brings up this fact from the article: “At 23, if you start putting $420 per month away, at age 67, you will be a millionaire (assuming you get a 6% annual return). If you start at 35 years old, you’d have to save $900 a month to reach the equivalent. So start now!”

Learn more: Retirement Strategies: When Should You Start Saving for Retirement?

 

34:58

The first step to avoiding being taken in by money myths is learning the truth about your finances. We’ve created a money myths quiz for listeners to test their money smarts. You can find it and more helpful tools in our resource center here.

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