From the Loch Ness monster to the latest urban legend, some myths persist even when people ought to know they aren't true. These falsehoods can be fun, unless they are about money -- in which case they can do a great deal of harm.
Here are four financial "facts" you should always take with a grain of salt.
1. You should string out your mortgage to maximize the interest deduction
You may have heard someone advise you not to prepay your mortgage because you'd lose the interest deduction. That's true, but you'd also be saving on interest by paying off your mortgage over a shorter period of time. Given that the interest deduction only represents a portion of the interest itself, you'd save more money by getting rid of the interest, even at the cost of losing the deduction. It is true that the mortgage deduction helps make mortgages cheaper than most other forms of debt, so it makes sense to pay off other debts first. However, if you don't have other debts, prepaying your mortgage may be a good option.
2. You should always minimize your tax withholding
The theory behind this is sound -- why should the government be earning interest on your money until it pays your refund? However, the value of that theory is seriously diminished when interest rates are near zero, as they are now. The simple fact is that many people will simply whittle away a few extra dollars in their weekly paychecks, whereas they might accumulate a nice amount of savings in the form of a tax refund. The optimal strategy would be to minimize your tax withholding but use automated deposits into a high-interest savings account to achieve the same result while beginning to earn interest earlier. As a practical matter though, letting your withholding build up to a refund is a crude but effective savings method that won't cost you much in a low-interest-rate environment.
3. Deferring taxes saves you money
Even though deferring taxes can mean earning money tax-free in a retirement account, it all evens out in the end when you pay taxes upon withdrawing from the account -- unless your tax rate changes. This can make deferring taxes a good deal if you are making a high income and expect to be in a lower tax bracket when you retire, but it can make more sense to pay your taxes upfront if you are young and expect to be in a higher tax bracket by the time you retire.
4. It's easy to minimize credit card costs with 0 percent offers
One problem with this strategy is that opening and closing credit accounts can hurt your credit score. Another potential problem is that even while there is no interest for an introductory period, you may run into balance transfer charges. Focus on paying off your credit card balances rather than simply shuffling them around.
The best myths often have some basis in truth, and all of the above ideas may work in certain situations. But when they get passed along as absolute rules, they enter the realm of myth and start to become dangerous.