Following on from our exploration of common gasoline-saving myths last week, we thought we’d take a look at some of the more general nuggets of money management advice which frequently gets quotes. Are they grounded in truth, or are they falsehoods which have been ingrained into popular culture simply through retelling?
If I Earn Just Enough to Enter the Next Tax Bracket, I’ll Be Worse Off
This advice on avoiding the higher tax bracket is very common-place, and has probably gained its level of popularity (and believability) due to the baffling nature of income tax.
To cut a very long story, you don’t suffer financially if you earn just enough to enter the higher tax bracket. This is because it works on a marginal basis; this means that crossing over the threshold into a higher tax bracket doesn’t mean you’ll get hit with the higher rate on all your income, just the excess portion which fell above the threshold.
To demonstrate, if you earn up to $17,850 you’ll pay 10% on that. If you earn $20,850, you’ll pay 10% on the $17,850 and 15% only on the remaining $3,000.
Still confused? Check out this handy chart (courtesy of Ulmer Scientific) which illustrates real take-home income compared to the amount of tax paid:
As for the take-home message, there’s no reason to fear the next tax bracket.
Myth Status: False
A Good Degree Pays for Itself
From a financial standpoint, making the decision to work towards a college degree is a difficult one. Unless you’re studying purely for the love of learning in a particular field (and there’s nothing wrong with that), the question of return on investment is an important one when choosing a degree.
The only real answer to whether a degree will pay dividends in the long-run is… it depends.
Some degrees are ‘worth’ more than others from an ROI perspective, and it’s an easy value to calculate: how much does the degree cost, versus the median income for professionals in that field over the course of thirty years.
Of the most popularly chosen degrees, here’s the best and worst in terms of how long they take to pay back:
While choosing a profession based solely on potential income isn’t a particularly fulfilling way to live life, a college degree isn’t necessarily worth much in the longrun.
Myth Status: Semi-true
Women Spend More Money than Men
This one sounds intuitive, and that’s because it is. However, not in the way you might expect.
On average, women live longer and as a result get more time to actually spend money. In addition, insurance costs are usually higher given longer lives and the tendency for women to take more time off work for childcare reasons over their male counteparts. It’s this gender bias in the insurance industry which results in a higher expenditure for women, not a propensity to engage in retail therapy.
Myth Status: True
Payday Loans Damage Your Credit Score
Defaulting on any loan, short-term or otherwise, can have a negative effect on your credit score. The simple act of taking one out, however, does not.
At the same time, successfully paying back payday loans are not likely to increase your credit score in and of themselves. However, demonstrating good credit management across the board always bolsters your reputation as a responsible borrower.
Myth Status: False
Stopping to Pick Up a Penny Isn’t Worth The Time
This is one money argument that has been the subject of much bar discussion. The popular myth-busting guru at The Straight Dope did the math and came up with a positive answer, but that was back in the eighties. Let’s see if we get the same result in 2013.
If we take the statutory minimum wage of the US to be $7.25, that averages out at $0.002 per second. If we assume it takes five seconds to reach down, pick up the penny and stash it in a pocket, at minimum wage you could have earned $0.010069…
…a tiny, tiny fraction over the worth of the penny itself.
(image courtesy of xkcd.com)
Now, we could advise on increasing the penny-picking value by picking it up quickly, but this probably wouldn’t off-set the fact that this only applies to those working at minimal wage. If you earn more than this, or are in a state which has a higher standard minimum wage, the penny on the sidewalk further decreases in value.
This is all academic, of course, since you’re not likely to be earning money at the time you find the penny, but in a very technical sense it’s true that it isn’t worth the time to pick it up.
Myth Status: True