Five common money misconceptions

Misconceptions abound. Everyone knows diamonds are formed by putting a lot of pressure on coal, right? Apparently not. But surely what I remember learning in elementary school about Lincoln abolishing slavery with the Emancipation Proclamation is true? Nope, that happened a couple of years later with the passage of the 13th Amendment.

The world of personal finance is home to more than a few mistaken beliefs, too. Here are five I frequently encounter:

Your income affects your credit score. That’s not part of the formula. Lenders want to know you’ve got money coming in before making a loan or issuing a line of credit, so your income will be considered along with your credit score. The major factors affecting that score are how much you owe, your payment history, account types and activity.

Your pension or military retirement counts as income for IRA contributions. Don’t make an IRA contribution based on income from a pension. I’m not saying you didn’t earn the income, but it doesn’t meet the definition of what the IRS calls compensation for purposes of making IRA contributions. Alimony counts, nontaxable combat pay counts, but military retirement or other pension or annuity income doesn’t.

No debt equals good credit. While I can certainly understand the perspective of those who swear off the use of any debt, it’s important to note that if you want to use the system, you’ve got to be in the system. That doesn’t mean you need to have a lot of debt, but to have a good credit score and be able to access most traditional lending, you have to demonstrate that you can do it.

Safe is safe. Nobody wants to lose money in the stock market. But safer alternatives might be exposing you to a different type of risk: inflation. Since I graduated high school 30 years ago, a dollar has lost nearly 60 percent of its purchasing power. Pull that dollar I found tucked in the baseball card box in my mom’s basement out, and it’s going to buy a whole lot less than it once did. Maybe safe isn’t always safe.

A will avoids probate. Actually, the exact opposite is true. Your will sends you straight to probate. That’s not necessarily a bad thing, but if I had a dime for every time someone told me, “I don’t have to worry about probate; I’ve got a will,” I’d have a much more extensive estate to pass on to my kids.

Surprised? No worries. Unlike science or history, money management is not a big part of our formal learning. But spread the word.

J.J. Montanaro is a certified financial planner for USAA, The American Legion’s preferred provider of financial services. Submit questions for him online.

This material is for informational purposes. Consider your own financial circumstances carefully before making a decision and consult with your tax, legal or estate planning professional. USAA means United Services Automobile Association and its insurance, banking, investment and other companies. Banks Member FDIC. Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers. USAA Financial Planning Services® refers to financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner TM in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.