It is surprising the amount of financial misinformation that is around. Be it due to the internet, a crazy uncle, and whatnot people have very unclear ideas about finance and sound financial decision making. Let’s debuk 4 financial myths that are absolutely wrong, and what you should know instead.
Myth 1: Moving to a higher tax bracket can lead to lower net income
Many believe that if their salary increases enough to push them into a higher tax bracket, then their net income (i.e. income after tax) decreases. This, luckily, is not the case.
Singapore has a marginal tax rate system – a term that describes a fairly straightforward concept. Essentially, it means that different tax rates apply to different portions (tax bracket) of your income.
For example, in Singapore, the first SGD$20,000 that you earn are taxed at a rate of 0%. The next $10,000 that you make are instead taxed at 2%.
Let’s assume that you make $28,000 a year. You would not need to pay taxes for the first $20,000 that you make, but only pay a 2% tax on the next $8,000 that you earn on top of the first $20,000. Essentially, you would pay $20,000*(0.0%) + $8,000*(2.0%) = $160 in taxes.
Play around with this Excel file to understand better how Singapore’s tax bracket work!
Myth 2: Buying is always better than renting
How many times have you heard someone (your parents, siblings, and your insane friend joe that lost 1,000 dollars in a betting scheme) saying that renting is a terrible financial decision? Well, they are wrong. As everything in finance (or almost everything), it depends. Sometimes renting is better, sometimes it is worse.
Housing and rental prices vary over time and by geography, so there is not a quick and dirty rule. To make a reasonable comparison, you must consider the full cost of ownership, which goes well beyond the price tag on the house. You have to consider property taxes, mortgage costs, purchase transaction fees, and property maintenance.
Also, you must take into account your short-term and long-term goals. Houses are very illiquid, meaning that it can be challenging to sell them. Therefore, if you plan to move or need more space in the foreseeable future, you probably should not buy a house just yet (unless you want to invest in property).
In short, buying a house is no simple task. Be diligent!
3) Credit balance leads to a better credit score
Having a credit balance does not influence your credit score. Instead, you will be charged interest for your payments.
If you want to maintain a solid credit score, consider two things: your payment history, and credit utilization.
A history of late payments or delinquent accounts will hurt your credit score. Similarly, high credit utilization (i.e. how much of your available credit you are actually using) hurts your credit score as well.
In essence, banks want to understand whether you pay your debts or default your payments, and they don’t care about credit balance.
Use the following table to check your credit score.
Myth 4: Higher cost means better value
This is not always the case. Although the two are often correlated, never assume that higher cost translates to better value.
Before purchasing a new product, say a brand-new TV, you have to be sure that it meets your needs. Think about what you want from a TV and what you are going to use it for. Ask yourself, what creates value for me? Better quality? Trendier Brands? High customizability?
Also, scrimping is just as bad. If watch TV every day because you are a movie aficionado, then you should probably buy a high-end TV.
In short, ignore the price tag when buying a product. Think instead of what the product is going to do for you.
In a nutshell
Today we were able to debunk 4 financial myths that are absolutely wrong. We have learned how tax brackets work in Singapore. We covered why ranting can sometimes be more advantageous than buying a house. We also briefly brushed over credit scores and how we can improve them. Finally, we uncovered the differences between value and cost and why it matters.