Don’t believe these money misconceptions: 3 things to know that can help improve your finances

Many
U.S.
adults
are
making
financial
decisions
with
a
generally
poor
level
of

financial
literacy,
a
new
report
finds.
Part
of
the
problem:
People
continue
to
believe
common
misconceptions
about
managing
and
investing
their

money.

The

TIAA
Institute-GFLEC
Personal
Finance
Index gauges
an
individual’s
knowledge
of
their
personal
finances.
The
index,
which
has
been
conducted
annually
since
2017,
asks
respondents
questions
about
borrowing,
saving,
earning,
investing
and
other
money-related
areas.

In
the
latest
version,
most
people
got
the
correct
answers
only
about
half
the
time. 

Comprehending
risk
consistently
proves
to
be
the
most
difficult
concept
for
adults
to
grasp,
said
economist
Annamaria
Lusardi,
who
founded
the
Global
Financial
Literacy
Excellence
Center
in
2011
and
is
a
senior
fellow
at
the
Stanford
Institute
for
Economic
Policy
Research.
Yet, “when
we’re
trying
to
look
at
the
basis
of
financial
decision-making,
a
key
question
is
the
relationship
between
return
and
risk,”
she
said.

Here
are
the
facts
behind
three
common
misconceptions
about
investing
and
managing
finances
that
stump
many
Americans: 

MISCONCEPTION:
Investing
in
a
single
company’s
stock
usually
provides
a
safer
return
than
a
stock
mutual
fund
or
exchange-traded
fund.

FACT:
Investing
in
one
stock
is
like
putting
all
your
eggs
in
one
basket.
It
exposes
your
savings
to
significant
loss
if
the
company
is
in
trouble. 

Many
mutual
funds
and
exchange-traded
funds
—
especially
ones
that
track
a
broad
market
index
like
the
S&P
500
—
hedge
this
risk
through
diversification,
by
buying
the
stock
of
many
different
companies.

When
it
comes
to
your
retirement
savings,

target-date
funds
can
be
another
smart
option.

“You
don’t
have
to
be
an
investment
guru,
you
can
always
start
with
the
target-date
fund
that’s
in
most
retirement
plans
to
get
you
in
the
game
for
a
young
person,”
said
Paul
Yakoboski,
a
senior
economist
with
the
TIAA
Institute.  

Target-date
funds
have
become
the
most
popular
investments
in
workplace
retirement
plans,
such
as
401(k)s.
As
investors
approach
retirement,
the
fund’s
mix
of
investments
becomes
more
conservative,
decreasing
the
portion
of
stocks
and
increasing
the
portion
of
bonds
or
cash.

MISCONCEPTION:
Over
time,
stocks
generally
give
the
highest
return
with
little
risk
when
compared
with
savings
accounts
and
bonds.

FACT:
The
U.S.
stock
market
is
considered
to
offer
the
highest
investment
returns
over
time,
but
there
is
a
higher
risk
as
stocks
are
more
volatile
than
bond
prices
or
cash
in
a
savings
account. 

“An
asset
that
brings
a
higher
return
also
has
a
higher
expected
risk,”
said
Lusardi,
who
is
also
a
member
of
the

CNBC
Global
Financial
Wellness
Advisory
Board. “People
feel
like,
I
can
get
a
higher
return
with
no
risk
…
but
basically,
a
higher
return
is
always
a
reward
for
higher
risk.”

Investors
with

a
longer
timeline
toward
their
goal
often
have
greater
opportunities
to
weather
that
risk.
But
if
you
have
a
short-term
goal,
experts
typically
advise
keeping
the
money

out
of
the
market.

For
savers
and
short-term
investors
looking
for
a
steady
return,

high-yield
savings
accounts
can
be
an
attractive
option,
with
top
interest
rates
currently
hovering
between
4%
and
5%,
according
to

Bankrate.
There’s
almost
no
risk
to
money
in

federally
insured
deposit
accounts,
unlike
investments
that
are
subject
to
the
daily
changes
in
the
stock,
which
can
result
in
much
higher
risk. 

MISCONCEPTION:
If
you
had
$100
in
a
savings
account
and
the
interest
rate
was
4%
a
year,
you’d
have
$104
after
5
years
if
you
left
the
money
to
grow.

FACT:
A
$100
deposit
left
in
a
savings
account
earning
an
interest
rate
of
4%
per
year
over
5
years
would
total
$121.67
with
compound
interest.

Compound
interest
can
make
your
savings
grow
faster
since
you’re
earning
interest
on
the
original
amount
of
money
deposited
plus
the
interest
earned.
Check
out
the
Securities
and
Exchange
Commission’s

compound
interest
calculator
to
calculate
the
interest
you’re
earning
on
your
savings. 

Compounding
can
be
one
of
the
greatest
gifts
for
savers
and
investors,
many
financial
advisors
say.
You’re
not
necessarily
rewarded
for
complexity
when
it
comes
to
your
portfolio,
said
certified
financial
planner

Preston
Cherry,
a
member
of
the

CNBC
FA
Council
and
the
founder
of
Concurrent
Financial
Planning
in
Green
Bay,
Wisconsin.

“You’re
rewarded
for
commitment,
consistency,
and
compounding,”
he
said.

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