Quite often, the facts that people tout when it comes to personal finance arent quite facts at all.
Sometimes theyre just opinions stated with authority, or theyre based on incorrect information or assumptions.
Is it any wonder theres so much confusion when many finance principles are counter-intuitive?
This post originally appeared onThe Simple Dollar.
Here are six key financial facts that people consistently get wrong.
Youre just inside the 15% tax bracket.
What happens if you make more?
Under this incorrect thinking, earning $500 more would actuallycostyou $3,875.
Obviously, earning a little more here would be a huge mistake.
But thats not actually how taxes work.
That adds up to a tax bill of $5,161.25.
If your income bumps up to $38,000 per year, the math doesnt change much.
You still pay 10% taxes on the first $9,275 of it.
You pay 15% taxes on the amount between $9,275 and $37,650.
This adds up to $5,271.25.
Youre still keeping $390 more.
That investment does well, turning into $150,000.
Should you be worried?
Maybe a little, but its not a doom and gloom scenario.
But thats not how it works.
You get your initial investment back without having to pay taxes on it.
And hes absolutely right.
But the key word isthis year.
Lets look at those tax brackets again:
Lets say you make $40,000 a year.
If you contribute nothing to your 401(k), youll pay $5,771.25 in taxes this year.
But lets say you contribute 10% of your salary to your 401(k).
But those taxes arent a freebie.
Lets say you make $20,000 a year from your other retirement benefits when youre old.
That would add up to $2,536.25 in income taxes.
However, lets say you also withdrew $4,000 a year from your 401(k).
That brings your income up to $24,000 a year and thus brings your taxes up to $3,136.25.
Thats an extra $600 in taxes.
A 401(k) doesnt mean tax free money.
It just means youll be paying it later on in life when you take the money out.
Dont get me wronga homecanbe a good investment in the right situation.
Its just not the right choice for every situation.
Lets compare the two.
Thats money thats lost to you.
All of that money vanishesa total thats usually far more than the cost of renting.
It is absolutelynotcut and dried as to which situation is better.
How do you figure out which is right for you?
Do you have a healthy job with some money in the bank?
Thats when you should consider home ownership.
Getting a $3,000 refund seems to be one of the high points of his year.
I dont have the heart to tell him that hes basically getting ripped off.
That adds up to $5,200.
His actual taxes at the end of the year add up to $2,200.
Thus, he receives a $3,000 refund because he paid in $3,000 too much throughout the year.
Now, lets look at a different plan.
That adds up to $2,340.
His paycheck each week is now $55 bigger.
Why is that second scenario better?
Lets assume my friend is putting money on his credit card to get to make ends meet.
If hes more financially responsible, he could save or invest that money himself.
Its an emergency fund.
[Edit: Corrected to differentiate between tax returns and tax refunds.]
Theyre working at a job that they hate.
Theyre unhappy in their personal lives, too.
They basically dread getting out of bed in the morning.
But the questions still roll in.
The questions that they share usually involve figuring out how to achieve some goal in their life.
My life is miserable, but I really hate my commute.
Help me figure out how to do it.
Thats a message I get pretty frequently.
Its never written quite that bluntly, but thats what the idea comes down to.
Soon, your life will return to the same routine.
Youll still be commuting to the same place.
Youll still be coming home to the same people.
Youll still have the same habits and life routines.
Buying something big and new wont change any of that.
There are two big truths that run through these questions.
you’ve got the option to be incredibly happy and fulfilled in a rundown shack.
you might be incredibly unhappy and miserable in a mansion.
Second,whether or not youchooseto be happy is also a vital factor in your own happiness.
What do you choose to think about when reflecting on life?
Do you see the negatives in the things around you or the positives?
Naturally, there is a component of mental health in here.
In the end, though, you choose your own life.
In large part, you get to decide how happy you are with it.
If youre unhappy, buying something new wont make you happy.
Sometimes, theyre just opinions stated with authority.
At other times, theyre based on incorrect information or assumptions.
Why exactly is it that youre wanting a big tax return?
There should be a real reason for every dollar you spendand every hour that you spend, too.
Good luck finding the truth!
Image byQvasimodo Art(Shutterstock).
