Contact: Bill Pratt
301-788-2711
Bill.pratt@prattfinancialgroup.com

These 3 Common Financial Myths Do More Harm Than Good

Some common financial advice is based on bad math and fails to consider the human element

[Washington, DC] – “Sometimes the most expensive mistake a person can make is to listen to their accountant,” according to Bill Pratt, former credit card executive and author of Extra Credit: The 7 Things Every College Student Needs to Know About Credit, Debt & Ca$h (Available August 2008).
 
Pratt says “As with any advice, sometimes information gets repeated enough that it becomes accepted, even if the information is harmful. Many accountants and financial planners offer advice based on things they have heard without really studying the impact of the advice or the logic.”

Myth #1 – You don’t want to pay off your mortgage since you will lose the tax deduction.

Well, of course you will lose the deduction, which is why you should pay your mortgage off last, after all of your other debts. Unless you are in the 100% marginal tax bracket, you still lose money by paying interest on your mortgage. If paying mortgage interest was such a great thing, then why do people get excited when interest rates decrease? That means you are paying less interest. You only get to deduct your marginal tax rate, usually around 25%. Thus, for every dollar you spend in interest, you will save 25 cents in taxes. It is still a loss of 75 cents.

Myth #2 – Pay off your highest interest rate first.

Mathematically, this approach makes the most sense. Unfortunately, this approach does not make the most sense emotionally. Since money is based more on behavior than math, it is imperative to start paying off debt in a way that will result in more immediate satisfaction. After all, that sense of instant gratification is what gets most of us into debt to begin with. Start with the smallest debt. This way you will be able to more quickly see the fruits of your labor and your sacrifice. Thus, you will be more likely to continue in your efforts to pay off your debt. If you start with the highest rate, and it happens to be a $15,000 credit card, you may give up after one full year since you have yet to pay it off.

Myth #3 – Save six months worth of expenses in your emergency fund

This myth combines human emotions and bad math. Yes, you should have six months of expenses saved, but not yet. You need to pay off your debt first. If you are struggling to pay your bills and are able to maybe save 5% of your salary that means you are spending the other 95%. You would have to save 5% per year for the next 10 years to have six months worth of expenses saved. You should instead focus on reducing your expenses, partly by paying off your debt. Start with the smallest debt and begin paying more than the minimum. Once that debt is paid off, roll those payments onto the next smallest debt and so on. Before you know it you will find that your monthly expenses are lower so will need to save less to cover your expenses, and it will be much easier to save six months of expenses when you are able to put 40% of your salary in savings after your debt is gone. This is a long, steady process, but well worth it if you want to reduce your financial stress and take control of your life again.

To get a copy of Extra Credit, log onto www.extracreditbook.com or www.Amazon.com. To schedule an interview or a seminar, please call Bill Pratt at 301-788-2711.
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Bill Pratt educates his audiences about how to make the best decisions with the right attitude to improve their own lives and the lives of those around them.  To schedule an interview or a seminar, please call Bill Pratt at 301-788-2711.