We break down some of the biggest finance myths out there so you can separate fact from fiction. Take your first steps towards developing smart money habits and improving your financial literacy with Norton Finance.
Financial myths can be a common source of confusion. Some things that may sound like common sense can actually be bad advice. We’ll cover everything from some of the biggest falsehoods surrounding budgeting tips, mortgages, tax and how to manage your money.
Myth: I need a massive deposit to get a decent mortgage
Reality: There are many government schemes designed to assist first-time buyers. Some, such as a Lifetime ISA, offer financial assistance from the government. For example, you’re able to save up to £4,000 a year until the age of 50. When you add money into your ISA, the UK government will contribute 25% of what you invest – capping out at £1,000.
So, if you invest the full amount, you could save up to £5,000 (£4,000 + 25% of that amount) for that year*. Likewise, a decrease of interest rates can lower mortgage prices. Looking at historical data, the average fixed rate for a 95% loan-to-value mortgage in July 2014 was 5.33% – it fell to 3.64% around September 2019.
However, in 2025 it stands at 5.72% – higher than before. But there are still 95% mortgages available, letting you pay just a 5% deposit. Remember, when it comes to looking for a mortgage don’t just rely on the high street. Use comparison websites or consult a broker with expert knowledge on the best deals. Working on your smart money habits can prevent personal finance mistakes.
*Your first payment into a Lifetime ISA needs to be made before the age of 40.
Myth: Paying my bills by direct debit is cheaper
Reality: Paying some bills, such as gas or electricity, by direct debit can be cheaper, as sometimes utility companies offer deals and let you spread the cost. However, that’s not always the case – typically with car insurance.
For many, paying for car insurance upfront isn’t feasible, which is why most providers offer monthly payment options. This might be beneficial in the short term, because you don’t have to pay the yearly cost all at once. However, there will be an interest rate added to your monthly payments, meaning you’ll end up paying more over time.
Myth: I am too young for a pension, and I can use the state pension anyway
Reality: This common financial myth isn’t true. Remember, the future starts now – preparing for it is key. The younger you start, the easier it will be. If you’re in your twenties or thirties, retirement can seem like a long way off.
With youth on your side and other financial commitments, like a mortgage deposit or monthly bills taking up a chunk of your earnings, it’s easy to put off saving for retirement. But where will you get your income when you stop working?
Starting your pension as early as possible could ensure you have a bigger pot invested in the markets and will hopefully ensure a happy and wealthy retirement. Investing as early as possible also gives you a better chance of making up for losses over time.
You can start with a smaller contribution and build it up as you get further into your career. If you’ve had a lot of jobs and pension providers over the years, it’s important to collate that information – even if you don’t combine those pensions into one pot.
Your workplace should offer a pension scheme that both you and your employer will contribute to. Talk to your pension provider about your saving options to find out what works best for you and your current financial situation.
Myth: It is illegal to avoid tax
Reality: Big banks and businesses are constantly in the news for failing to pay enough tax or any at all. This is known as tax evasion, which is quite different to tax avoidance. There are legal ways to avoid tax, often known as tax relief.
Everyone has a personal allowance they can earn before paying tax. You can also save and invest money in a cash or an investment individual savings account (ISA) tax-free up to a set limit, which is currently £20,000. Putting money into a pension is also subject to tax relief. There are other more sophisticated products too, such as Venture Capital Trusts and Enterprise Investment Schemes.
Myth: I have never had a loan or credit card, so my credit rating is fine
Reality: Avoiding taking out a loan or credit card won’t improve your credit score – in fact, it stagnates it.
Whether you are applying for a phone, mortgage or credit card, a provider will want to know your ability to repay. Their first port of call will be your credit rating, which is a record of all your debts, borrowings and financial products. These can be things such as credit/debit cards, savings accounts, broadband contracts, or mobile phone contracts.
To approve your application, providers need to see evidence that you can manage debt sensibly. So, even if you have no credit or debts, your rating may still be low.
If there’s evidence of you taking out a loan or using a credit card and consistently meeting the repayment agreements, this will reflect positively on your credit rating. It may be worth taking out a credit card, spending some money and ensuring you repay fully each month to build up your rating. These don’t have to be big purchases or things you wouldn’t normally purchase, you can use it for your weekly food shop, for example.
Myth: Saving small amounts of money isn’t worth it
Reality: Saving small amounts of money regularly can be more effective than saving large sums irregularly. This method helps you to foster budgeting as a habit and motivates you to spend wisely. Having a target amount to save each month can make you more conscious of your spending.
In fact, knowing how to save money each month is a key life skill that can support your aspirations and security. Also, with this method, you’re not committing too much money. That means it’s more flexible in the event you have expensive outgoings on a particular month.
There’s also compounding – when your money earns interest that builds over time. For example, if you save £200 per month with an interest rate of 5% over 20 years, you will save around £82,549.26 due to compounding interest. Rates are likely to change during that period, so this is a rough estimate to give you an idea of the power of compounding.
Myth: I don’t need to budget
Reality: In reality, budgeting is useful and almost certainly essential. Lack of it can lead to poor financial decisions, such as overspending and fewer savings. Budgeting helps you to track expenses, avoid debt, and plan for future financial goals.
Budgeting doesn’t explicitly limit your spending, instead it ensures you spend the right amount on the things you need. Additionally, including savings in your budget can make it easier to cover unexpected costs. Whatever your salary, a budget can help you stay on top of your money.
Myth: My partner looks after our money, so I don’t need to understand finances
Reality: You need to understand finances without solely relying on your partner. Developing smart money habits will give you confidence knowing that in the event of unexpected circumstances you’re fully prepared. Also, it removes some of the burden from your partner.
Handling every financial decision alone could be overwhelming, so if you both understand what’s happening with your money, you can equally contribute. This way the both of you can make informed decisions together. Financial knowledge is empowering, and helps you prepare for the future – after all, two minds are better than one.
Find out more about how to better handle your personal finances with our Know How blog.
Share:
