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.