Here Are Some Misconceptions That Prevent You From Making Impeccable Financial Decisions

A new report found that many U.S. adults are making poor financial decisions because of their low financial literacy level. It was also found that people still fall for the common misconceptions about managing and investing their money. The TIAA Institute-GFLEC Personal Finance Index studies an individual's knowledge of personal finances. In this year's report, most people got the answers correct only half of the time. As per economist Annamaria Lusardi, comprehending risk consistently proves to be the most difficult concept for adults to grasp, per CNBC. "When we’re trying to look at the basis of financial decision-making, a key question is the relationship between return and risk," she added.

Here are the five major misconceptions about investing and managing finances.

1. Diversification

The misconception is that investing in a single company's stock usually ensures a safer return than a stock mutual fund or exchange-traded fund. However, the fact is that when you invest in one company's stock, it's like putting all your eggs in one basket. Therefore, exposing your savings to huge losses if the company ever sees some tough times. “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.

2. Return and risk

A major misconception is that stocks will give the highest return with little risk when compared to savings accounts and bonds. However, in the US,  there is a higher risk associated with this as stocks are way more risky than bond prices or cash in a savings account. “People feel like, I can get a higher return with no risk… but basically, a higher return is always a reward for higher risk," said Lusardi.

3. Compounding

Compound interest can make your savings grow way faster since you are earning interest on the original amount of money deposited plus the interest earned. It is one of the greatest gifts of savings. Compound interest rewards for commitment, consistency, and more.

4. Credit card balance

Some feel that carrying a balance on their credit card will help with their credit score. However, the credit score is determined by your on-time payments, your credit utilization, and the average age of your credit accounts. The only thing that will not help you better your credit score is carrying a balance from month to month. Another misconception that many people have is that using credit cards is bad. Using credit cards has many perks, like earning rewards and cash back on purchases without paying interest.

5. Renting is bad

Buying a home is part of the American dream. However, according to experts, buying or renting a home depends on where you live and when you purchase the home. Depending on the circumstances and financial situations, it might make more sense to rent rather than to buy. For example, buying a home sounds like a bad idea if you don't have enough funds for maintenance.