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As a Northstar advisor, I love working with our members. Most folks we work with are well educated on financial topics, engaged in their own finances, and think strategically about their future.
Our members keep me up to date on exciting new apps for managing cash flow, innovative savings account options, and creative investment strategies. However, I’m always surprised by the pervasive financial myths that seem to live rent-free in the heads of many people I work with. Here are some common personal finance myths I’d like to dispel.
I think I see this myth come up most frequently with 401(k)s. Having an overwhelming number of accounts from old company 401(k)s doesn’t mean that you are innately diversified—it just means you have a lot to keep track of.
Your investment brokerage is just a place to park different investments, and there are pros and cons to working with any institution. Having similar S&P 500 index funds at three different brokerages makes about as much sense as driving to three different grocery stores to buy the same brand of yogurt.
If you keep funds at multiple financial institutions, ensure there is a unique reason to do so, like access to a particular exciting investment or an easy-to-use interface.
Similarly, if all the banks you’re looking at pay the same savings interest rate, you’re not getting more interest by having $500 at two different banks rather than $1,000 at one bank. There’s no “hack” here, keep it simple!
This myth is pervasive and dangerous. Banks encourage people to never close credit cards, because of the hit your FICO score can take. They aren’t lying that closing a card can lower your credit score, but it’s temporary, and doesn’t hurt anything if you weren’t planning to apply for new credit anyway.
If you don’t want to have an open line of credit somewhere, you’re the boss! Don’t let anybody tell you that you “can’t” or “shouldn’t” close credit accounts. However, consider timing: If you would like to close an account, ensure you’re not closing it on the precipice of a major credit event, like purchasing a home.
Let’s say you want to refinance your home and need a 740 credit score to qualify for a low APR mortgage. Your score was 741, but when you closed a credit card, your score dropped below 740, and you’re no longer eligible for the fantastic rate. That would be disappointing. Situations like these are why I caution people to be careful about making sudden moves that could impact their credit score.
That said, we live most of our lives not about to go into a major credit event. Consider your lived experience and what you need your credit score for in the near future before letting a creditor convince you into keeping an unwanted account open. If you close a card and your score dips, it’s possible the temporary dip doesn’t impact your financial situation.
I’m going to go out on a limb and say that most financial advisors agree that if your employer matches your 401(k), you should try to contribute enough to get the match if you can afford to. But what if there is no match? Is it still worth it?
The short answer is yes, and my colleague Curtis wrote a full article about this. There are concrete benefits to using a 401(k) even if your employer doesn’t match your contributions. A 401(k) is a straightforward way to set money aside for retirement, either with a tax deduction now and tax-free growth option (traditional) or tax-free growth and withdrawal option (Roth). 401(k)s are an easy way to save for retirement because contributions are automated using payroll deductions, making the savings simple to “set and forget,” so you aren’t tempted to use the money for something else.
Another option for saving for your retirement on a tax-advantaged basis is contributing to an IRA. IRAs have their own advantages, such as generally having access to a broader range of investment choices. But there are disadvantages, too—such as the 2025 annual contribution limit, which for an IRA is $7,000 for the under-50 crowd, and income limits apply.
For many saving for their retirement, saving $7,000 a year may not provide a large enough nest egg to fund an “ideal” retirement. By contrast, the 401(k) annual contribution limit is currently $23,500. If your employer offers a 401(k), consider exploring this opportunity. It’s a great thing to talk to a Northstar Advisor about.
As for the “Roth vs. traditional” retirement savings debate, both are wise options—but I won’t belabor the point, you can learn more in this post from my colleague Jimmy.
This myth is rooted in a fear of triggering “gift tax”—many people are aware of the $19,000 figure, but have a misconception of what it represents. $19,000 is the annual “gift tax exclusion.” But that doesn’t mean that a gift of $22,000 will immediately trigger taxes—what it actually triggers is an extra tax form.
If you give someone a gift worth more than $19,000, you would have to file a “gift tax return” and report the excess against your lifetime exemption. As of 2025, the lifetime exemption is $13.99 million.
Unless you think you’re going to pass on over $13 million to your heirs or $26 million for spouses, you probably don’t have to worry about ever paying gift taxes or federal estate taxes.
Filing a gift tax return is an annoyance, so many people try to stay below $19,000 just for convenience. Keep in mind that the lifetime exemption changes somewhat frequently, as Congress enacts new legislation.
I saved my most important myth for last. If someone offered me a TED Talk, this would be my topic. Here in the U.S., we have a “progressive” tax system. That means the more money you make, the higher your tax rate will be.
As of 2025, the tax brackets start at 10% and go up to 37%. I’m not sure people understand how this works, so I’d like to explain.
Let’s say you’re single and have $11,925 in taxable income after all deductions. You’ll pay 10% income tax on those earnings and have “filled up” the lowest tax bracket. If you made $100 more than $11,925, you’ll jump into the next tax bracket, which is 12%. Only that $100 is taxed at 12%! The rest of your money is still taxed at 10%. Someone in this position would have a *marginal* tax rate of 12%, but an *effective* tax rate of 10.01%.
So, please never fear earning more money because you think you’ll end up paying more tax! If you get a raise and make a few dollars into a higher tax bracket, then yes, those dollars that spilled into the new bracket will be taxed at a higher rate. But that won’t have any impact on the taxation of the money you earned in the lower brackets—those will continue to be taxed at the lower rates that correspond to each of the lower brackets.
By and large, I find that people often know much more about personal finances and managing money than they give themselves credit for! One of my favorite things to do is to recognize and celebrate when somebody has a solid financial foundation and is already on a great path!
However, I think the pervasiveness of these financial myths is a good reason to talk to financial advisors like my colleagues and I here at Northstar. We can help you separate fact from fiction in all the financial “noise” out there, and help you get to a position where you’re much more confident in your financial decisions.
Diana
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About the author: Diana Freeburg is a CFP® with more than 10 years of experience in financial planning. Prior to joining Northstar, Diana worked as a financial advisor at Remedios Financial Planning and within the non-profit sector.
