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AS I’VE TRIED TO HELP folks understand financial issues, I’ve come across numerous money misconceptions. I wasn’t surprised—because, before I learned better, I too misunderstood some of these issues.
Here are the top eight misconceptions I’ve encountered:
Misconception No. 8: Consumer prices drop when inflation falls. Inflation measures the pace of price increases. Declining inflation simply means that prices aren’t rising as fast, but they’re still going up, albeit at a slower rate. Furthermore, the effect of inflation remains, with prices stuck at higher levels.
Inflation is calculated based on price fluctuations for a variety of goods and services. While specific items might slip in price, a positive inflation number—even if it’s smaller than before—still signifies an overall upward trend in prices, rather than a reversal to lower costs.
Misconception No. 7: Investing requires professional help. Investing can seem intimidating to beginners, leading many to conclude that professional guidance is the only way to go. But technological advances and a wealth of free educational resources, including HumbleDollar’s money guide, have transformed the landscape.
Unlike years ago, today’s investors have access to user-friendly investment platforms and simple, evidence-based strategies like target-date funds and index funds, eliminating the need to rely on professional money managers and stock brokers. Indeed, arguably, investing has become as straightforward as everyday tasks like grocery shopping.
Moreover, after learning the basics and gaining confidence, managing investments—especially low-cost diversified investment products—requires surprisingly little time and effort, and there’s no need for extensive knowledge of the financial markets or the economy. There’s nothing wrong with using an advisory service when the cost is reasonable and conflicts of interest are minimized. But doing so is no longer the only way to achieve your investment goals.
Misconception No. 6: Buying a home is always financially better than renting. Homeownership carries numerous benefits—emotional fulfillment, lifestyle upgrade, and a sense of stability and belonging. It still symbolizes the American dream. Buying a house for these reasons is fine, assuming it’s affordable. But whether it’s a better financial decision than renting is another story.
The cost of homeownership goes well beyond mortgage payments. You need to account for things like property taxes, homeowner’s insurance, regular upkeep, periodic renovations to maintain a home’s market value, and the opportunity cost of the tied-up home equity. All this money could potentially earn higher returns if it was invested elsewhere. To figure out whether buying a specific property at its current price makes sense, you need to do an objective analysis, devoid of social pressure and realtors’ marketing tactics.
Misconception No. 5: Social Security won’t be there when we need it. While the Social Security system faces financial challenges, it’s grossly misleading to suggest that the system is insolvent and that benefits could disappear. Projections indicate that the system’s financial deficit would potentially impact less than a quarter of scheduled benefits.
Social Security remains the financial cornerstone for millions of American retirees, with most of the funding coming from the payroll taxes paid by current workers. There’s a trust fund to cover the system’s funding shortfall and, without any changes to the system, the fund could be empty in roughly a decade. Even so, the current system would still be able to pay three-quarters of scheduled benefits.
Multiple proposals exist to improve the long-term sustainability of Social Security and avoid benefit cuts. Given Social Security’s pivotal role for citizens, failing to fix the system’s finances is almost inconceivable.
Misconception No. 4: Estate planning is for the wealthy. Estate planning encompasses a host of possible steps, many geared toward the wealthy, like creating complicated trusts, sidestepping probate and minimizing estate taxes. But contrary to common belief, there are some estate-planning steps that should be taken by everybody.
An estate plan addresses how we want medical, financial and legal decisions handled if we become ill or incapacitated and can’t make those decisions ourselves. A will safeguards our family, designating guardians for minors and outlining how we want our wealth distributed. Naming beneficiaries for financial assets—bank accounts, retirement accounts, life insurance and so on—streamlines the transfer of our assets after our death. Such basic estate-planning steps are essential for every adult.
Misconception No. 3: Everyone needs life insurance. Insurance—property, health, disability, life and so on—is crucial for limiting the risks in our financial life. But not everyone needs every type of insurance. Sometimes, the cost would be a waste of money because the financial risk involved isn’t significant.
For instance, term-life insurance is vital for those without substantial savings who have folks who depend on their income-earning ability. But if your death wouldn’t cause financial hardship to anyone, life insurance becomes an expensive product with minimal benefits.
Misconception No. 2: To save for college, it’s essential to fund 529 plans. Faced with steep college costs, parents often prioritize saving for their children’s education. But while 529 plans offer tax-free growth and many have reasonable investment costs, these plans also come with significant drawbacks.
If the money isn’t used for education purposes, parents could face steep tax bills, including tax penalties. That’s why parents might want to consider other strategies that offer greater flexibility, such as stashing college savings in a regular taxable account or funding a Roth IRA, where contributions can be withdrawn at any time for any reason.
Misconception No. 1: A higher income guarantees faster financial independence. Sure, a big paycheck makes it easier to save. But in the end, what matters is your savings rate as a percentage of your income, rather than the size of your paycheck. In other words, a modest earner could potentially achieve financial freedom faster than a high-income individual with undisciplined spending and savings habits.
Moreover, high living costs mean you need a proportionately larger nest egg to sustain that lifestyle in retirement, making financial freedom even harder to achieve. By contrast, modest earners—who save a significant portion of their income and live well within their means—will need a much smaller nest egg to be financially independent.
For instance, assuming historical stock market returns, it might take 36 years to achieve financial independence if you save 15% of your income. But if you save 25%, that cuts this timeline to 26 years, while a super-saver with a 35% savings rate might get there in as little as 20 years. These projections don’t hinge on your annual income. Rather, they depend on your investment returns—and your willingness to save.
Sanjib Saha is a software engineer by profession, but he’s now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.
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Sanjib, I think we need to clarify that what you’re describing in Misconception No. 8 is “disinflation,” a decline in the rate of increase in the inflation rate, not “deflation,” a decline in the inflation rate itself.
During a disinflationary period, the inflation rate is still positive, but not as great as it has been. Prices may not rise as fast as before but, as you point out, they still can remain stubbornly elevated.
Consumer prices should fall during a deflation when the inflation rate turns negative.
Thanks, Philip. Yes, what we are seeing now is disinflation, or falling inflation. But I don’t know how many people are aware of that term.
With deflation (negative inflation), prices might fall across the board but deflation is perhaps the least desirable outcome long-term, as that’d be caused by recession, job-loss, pay-cuts, etc. As much as we’d like prices to fall, we need to be careful what we wish for :).
I agree with the intent of your Misconception No. 8: “… Consumer prices drop when inflation falls. Inflation measures the pace of price increases. Declining inflation simply means that prices aren’t rising as fast, but they’re still going up, albeit at a slower rate. Furthermore, the effect of inflation remains, with prices stuck at higher levels. …”
But, you may want to change the first sentence, augment the explanation or even add an 8A: Consumer prices ≠ “Inflation”. Inflation is an individually determined process. People change their purchasing – it is a very dynamic process.
That was always a main lesson in my pre-retirement planning seminars when I discussed with pre-retirees how inflation will affect their retirement. Framed in the context of what portion of their retirement income was indexed for inflation (Social Security, and a limited portion of their defined benefit pension) and what portion would not be indexed for inflation.
My example was: “When the cost of ground beef exceeds $10 a pound, you won’t buy it. You will change. (Rapidly snapping my fingers) When shopping, you will make those changes in your personal market basket of goods and services everyday, every second, almost unconsciously … Beef too much? Chicken? Chicken too much? That other white meat? Still too much, meatless tonight or perhaps smaller portions of chicken or pork.”
I often confirmed: “… Importantly, if you are like most every other American, that is what you already do today. And, when it comes to indexing your income in retirement, my bet is most of you had years without a pay increase or a dislocation when you or your spouse lost or discontinued employment. You adjusted then. Expect adjustments in retirement, too.”
Thanks, BenefitJack. You are pointing out two important aspects:
Effect of substitution and consumption pattern: This is calculated and published as chained CPI. Although, this tends to be less than the headline CPI, the difference isn’t very big. E.g., the 2023 Dec numbers for CPI vs chained-CPI are 3.4 and 3.2 respectively. Unlike the regular CPI, the chained number gets revised a few times until final. The history can be found here.An individual may experience different level of price increase than the published inflation numbers. This is expected as the published numbers are average for a representative group of consumers, and do not reflect a particular consumer. A classic YMMV :).
Thank you for an excellent article. It should be a must-read for financial beginners.
Re: #2 Paying for higher education.
I roughly estimated costs for post-secondary education for my 2 children and started investing the year they were born. I chose to establish a bond ladder scheduled to mature throughout the 8-9 years I anticipated they would be in college and possible grad school. During their grade school years I purchased zero-coupon single state municipal bonds (federal and state tax-free). This approach didn’t accumulate as many dollars as a taxable equity/bond account but it was a think once and forget-about-it process. I didn’t want to fret about trying to maximizing returns while minimizing risk. I was happy with the results.
For our grandson I have been funding a 529 plan with a $10,000 annual gift which also reduces my estate. It is in my name with him as beneficiary so if he decides to forgo higher education or become a drug-addled slacker I can always gift the account to a needy local kid, or, heaven forbid, go back to school myself.
Thanks for sharing your personal approach, Rich.
All good points. WRT #8 seems to throw off a lot of politicians, right up to and including at the top. Inflation is not as bad as it was, but prices are even higher than they were, and people are feeling it.
Thanks, Mark. Lots of folks are scratching their heads about why economy seems to be doing good (no recession, healthy employment) and people don’t seem to be convinced. As you point out, the elevated prices from just a few years ago explain the puzzle, at least partly.
WRT No 2, saving for college, I wholeheartedly agree with Sanjay’s advice to set aside, if one can, education funds in a taxable account in the parent’s name just in case you don’t need to spend it on education. I had four kids to get through college and used the Coverdell ESA early on, then 529s when those became a better option, but I also set aside funds in a taxable college pot in me and my wife’s name. When one of my sons went to medical school (he didn’t need all his college money because of scholarships), I gave that money to him and because the military paid for medical school and a living stipend, that money became a little nest egg which has benefited him greatly.
Thanks, Patrick. I think the biggest challenge with college savings is that it’s a wildcard expense. It can be a small amount if someone studies in-state or in community college, or a large amount if the student has to go out of state or pursue further studies. There are so many factors involved, the range can be very big. If most of the college fund is mostly in 529, then a lower actual cost would be a suboptimal choice. If only a small portion of the college fund is in 529, and the actual cost turns out to be much higher, then the tax benefits of the 529 may be miniscule compared to the total cost of college. With so many uncertainties, it’s hard to plan ahead and optimize.
In regard to your note #3 regarding disability insurance the tax you would owe of any disability benefit you received is dependent upon if the premiums the employee paid were pretax or post tax dollars.
Per the IRS-
I decided to stop having disability insurance after my working career ended but while I was working I wanted any disability benefit to be free of tax. Fortunately, I never needed to utilize the protection the disability insurance afforded me.
Best wishes for a happy retirement.
Thank you for the note and your wishes, William Perry. I didn’t know about the taxation of disability income until recently while researching to answer an acquaintance’s questions.
Great list. Pity about No. 8 , though….
I do disagree a bit with No. 6. “Owning” your own house is not just a financial decision. Not worrying about a bad landlord, obnoxious fellow tenants, and even more important, rising rents, any of which could lead to an unplanned and unwanted move provides peace of mind. Actually owning the house after paying off the mortgage is even better. I lived in mine for over 20 years after I paid off the mortgage, and the profit from the sale mostly covered my entry fee to a CCRC.
WRT No 3, I carried term life while married and raising step-kids, but not since. I carried disability insurance on top of that provided by my company while I worked, and I do think disability is as important as term life if you have dependents, and desirable on its own if you don’t. You’re probably more likely to wind up disabled than dead, especially if you have a physically demanding job.
Thank you, mytimetotravel. Regarding #6 – you are absolutely right that there are many nonfinancial reasons to buy a house, and buying a house for those reasons makes perfect sense. In many cases, it can be great financial reason too depending on the purchase price vs comparable rent, job/location stability and so on. What I notice (amongst many people I interact with) is that there’s an assumption that it’s always a financially better choice, and renting is always bad financial decision because the renter is paying the landlord’s mortgage. Running the numbers after accounting for all direct/indirect costs of owning tells which decision is financially better.
Regarding #3, I agree that disability insurance is very important too, and not many people I come across have them even though they should be.
Younger people have a greater chance of being disabled than dying, so disability insurance is more important, but most do not know that.
I think owning a home provides a measure of security as well and insulates you from a landlord leases and such even if not meeting financial criteria.
I know two younger adults who suddenly lost their housing when their landlords decided to take advantage of a hot housing market in the first half of 2021 and sell the rental houses they were living in. Northern California is a tough housing market under the best of circumstances, and especially in areas that have been affected by wildfires, it can be very tough to find replacement housing if your landlord wants you out. So there’s that.
Agreed. We often take choices that are financially poorer on paper, but a superior choice in the grand scheme of things. I paid off my mortgage despite the low interest rate. It was a conscious, and arguably financially-worse, decision. But the peace of mind and the sense of freedom was valuable.
I’d argue that disability insurance is especially important if you’re single — because, if you suffer a disability, there’s no spouse or partner to continue bringing in an income.
And/or if you’re a single-income household. I had to go on disability due to pregnancy complications that required bedrest. My husband was in law school at the time, and I was supporting our family of three going on four. I was very thankful both for disability insurance that replaced a portion of my income plus a mortgage disability policy I’d taken out that made our mortgage payments while I wasn’t working.
…I was 33 years old and healthy, but you just never know what might happen.
Thank you for the excellent listing and description of many common misconceptions! I recently had a “Aha!” moment with Number 8, realizing that inflated costs rarely, if ever, return to their pre-inflated values. Rather, they only increase at a slower rate moving forward.
Thanks, Jeff. Yes #8 is very common in my experience.
Thanks, Sanjib, for your concise summary and clear explanations. Thanks, also for including the link to the Social Security Challenge. Fun fact: one of my cousins, an actuary, serves on the committee that developed the educational video game. 😊
Thank you, Linda. Nice to know about your cousin’s contribution in the useful educational game. Please convey my regards.
Your mention of Social Security is important.
The fact is SS can be made sustainable with minor changes in the funding and payroll taxes shared by worker and employer. The current state is simply the result of decades of Congress ignoring the situation and in some cases spewing misinformation, especially related to the deficit.
If anyone was serious about SS, adjusting funding modestly to sustain the program would be automatic every few years based on the actuaries annual analysis.
Instead, people are mislead and misinformation abounds, it’s quite disgusting really. We collectively can’t seem to acknowledge that the goodies we want and come to rely on must be paid for by everyone.
Not really surprising though given the way many people handle their personal finances
Thank you RQuinn. It seems lot of people are starting SS early because they fear that delaying might reduce their benefit. Too bad that the SS issue has been lingering on despite possible solutions.
If I talk with someone long enough, one or more of these will pop up. Number one is especially deadly to your financial health.
🙂 Thanks, Edmund.
Thank you for the great article. Does the new rule allowing 529 savings to be converted to a Roth IRA for the beneficiary (SECURE 2.0) change your mind at all on using that savings vehicle?
Thank you, Jamie. To be clear, 529 is great for many situations, especially when the kids are young, the parents are in high tax-brackets, state tax deduction, and so on. At the same time, the taxes (earnings taxed as ordinary income) and penalties for unqualified withdrawals should be considered carefully. The new ROTH makes it little more flexible, but I don’t know if that moves the dial too much towards favoring 529.
Some parents prioritize college savings at the cost of their own retirement. For them, the best use of any surplus fund is to add it to their own retirement, rather than a beneficiary.
Someone I know from a personal circle got divorced when her child was in high-school. She had very little experience with financial decisions, and her income/savings were low too. She asked a financial professional for help. The advisor had her contribute to a not-so-great 529 plan. It was invested in short-term bonds during the low-interest rate years because the money could be needed in just a few years. Given her situation, I did not see much justification in taking on the 529 restriction. She did it because she understood that 529 was the pretty much the only way to save and pay for college. I know some other folks who decided not to do 529 (or not more than a small amount) once they internalized all the restrictions and tax-rate and penalties.
In my opinion, the most important things for college funding is to (a) save for college and mentally separate the fund, and (b) invest it according to time horizon and risk. If these two are done, missing the tax advantage from 529 might be fine for someone who values flexibility.
I never used a 529 and did what you are suggesting. I simply saved the money in our joint investment account and paid college costs from that
Thanks, Boomerst3. Despite missing out any tax advantages, this approach gives maximum flexibility and minimum headache.
Good points, thank you.