When I sat down to write Your Money: The Missing Manual, I knew I wanted to start with a chapter on happiness. (Well, to be fair, I was going to conclude the book with this chapter; my editor suggested moving it to the beginning, which was a stroke of genius.) In particular, I wanted to make the point that money doesn’t buy happiness. Because we all know that’s true, right?

Well, not so much, as it turns out.

Can Money Buy Happiness?
As I wrote the chapter, I found that I had trouble locating data to support my hypothesis. There were plenty of people (including me) who loudly proclaimed that money and happiness were unrelated, and their arguments were persuasive, but none of these folks ever offered numbers to support their case.

In fact, the more I read, the more I realized they were wrong. And so was I. The numbers actually show the opposite. Money does buy happiness; researchers have found a strong correlation between increased wealth and increased contentment. In their book Happiness, Ed Diener and Robert-Biswas Diener write: “Rich people and nations are happier than their poor counterparts; don’t let anyone tell you differently.”

But the authors don’t just make the claim — Diener and his son had the numbers to back up their position. Though it’s a widely-held belief, it’s a myth that happiness and money are unrelated.

Sometimes, as in the case of this money/happiness stuff, money myths are just plain wrong. Other times they sprout from a grain of truth.

Note: Here’s the thing: Though the correlation between money and happiness is strong, except for when it comes to boosting people from poverty, increased wealth has only a small impact on well-being. To put it another way, more money will make you happier, but unless you’re poor, it won’t make you much happier.

Do People Spend More When Using Credit?
Financial guru Dave Ramsey often cites a Dun and Bradstreet study that purportedly reveals people spend more with credit than with cash. I’d always accepted his claim as true, and hadn’t bothered to double-check it. But when I was researching the credit chapter for my book, I had to do more than just take things on faith. I had to find actual sources.

Nobody I know has been able to track down this mythical Dun and Bradstreet study. Even Dun and Bradstreet themselves have been unable to locate it. GRS reader Nicole (with the assistance of her trusty librarian Wendi) contacted the company and received this response: “After doing some research with D&B, it turns out that someone made up the statement, and also made up the part where D&B actually said that.”

In other words, the study doesn’t exist.

So why do Dave Ramsey and a host of others cite it? Who knows? It’s tough to trace the origin of urban legends, but that didn’t stopped Nicole and Wendi from digging further. They kept searching for the source of the D&B myth. Eventually, they succeeded.

Turns out, this “fact” doesn’t come from a study at all. Instead, it’s from a short (739 word) article in the March/April 1993 issue (vol42, no2) of D&B Reports (which is no longer published). The article, written by Robert J. Klein, a founding editor of Money magazine, isn’t available on the web, but I was recently able to read a copy.

It doesn’t say what people (including Dave Ramsey) claim it says. Here’s an excerpt:

Well-run businesses borrow money to finance plant, equipment and research. They do not borrow to pay operating expenses. Families should do the same. They should borrow to buy a house to live in, a washer and dryer to keep house more efficiently, a car for transportation to work, a college education for the kids. They should borrow to refinance existing debts at lower rates. They may even borrow to start or expand a family business. On principal, though, they should never borrow to pay for living expenses.

Sure, the article advocates against overuse of credit, but it doesn’t say anything about people spending more with credit than without.

My point isn’t that Dave Ramsey is wrong about this idea. My point is that he’s citing a bogus study, and then hundreds (or thousands) of others are subsequently accepting what he says as gospel. My point is this: It always pays to question what you hear, and to do your own research. (You should even question me. I do my best to provide accurate information, but I’m only human.)

Note: You can actually find a number of real studies to support the claim that people tend to spend more with credit than with cash. (For example, here’s a 2008 article from the Journal of Experimental Psychology: Applied that contains research into the effect of payment type on consumer behavior [PDF]. And a 1979 article from the Journal of Consumer Research. And an article from 1991 about the failure of competition in the credit card market [PDF]. And, best of all, a 2000 study from MIT’s Sloan School of Management [PDF] that actually demonstrates that people do spend more with credit than without. (Thanks to GRS reader Sashie for pointing these out.)

So What?
Why care about this stuff? Why bother to fact-check seemingly harmless claims about money? For some people, it may not matter. But as I try to build a unified financial philosophy, it’s important to know that I’m basing my beliefs on reality, and not on a bunch of conventional wisdom. I’m learning to question assumptions that I’ve held for a long time. Not all of them are correct.

For example, like most Americans, I used to believe that real estate always increased in value. As we’ve seen over the past five years, however, that’s just not the case. (In fact, over the long term, both gold and real estate are relatively poor investments, barely offering any return above inflation.)

I recently polled my followers on Twitter (at both the @jdroth and @grsblog accounts) for other examples of money myths that smart people ought to question. Here are some of the more notable responses:

  • Several readers don’t like the notion that “debt is a tool” or that “you need credit”. You can live in a modern world without credit, even though plenty of folks will try to convince you it’s impossible.

  • @ericabiz said: “Worst one: When people think that being poor is somehow virtuous, and rich = evil or taking advantage of others. It’s pervasive.” @mile73 said something similar: “If someone has ‘a lot’ of money, it couldn’t be because they worked hard to get it. It must be because they lucked into it.” These myths are most succinctly stated by @budgetsaresexy, who wrote that he dislikes the idea that “Money is for greedy people.” I agree. It’s not wrong to be rich, folks. Money isn’t a bad thing.

  • On a related note, many readers complained about the oft-cited Biblical quote, “Money is the root of all evil.” They pointed out that it’s the love of money that’s considered the root of all evil.

  • @crunchysue thinks it’s a myth that “You can plan on your salary increasing throughout your lifetime.” This highlights how statistics can be deceiving. In general, salaries as a whole will probably increase over time. But that doesn’t mean your salary will always increase. It’s important to budget on what you actually earn, and not what you hope to earn in the future.

  • @mile73 doesn’t like when people say, “There’s no point in saving. You could get sick and lose it all.” This one bugs me, too. It’s the whole “you can’t take it with you” mentality. Just because you might get sick, and just because you can’t take your wealth with you when you die, this doesn’t mean you shouldn’t save. Balance, people, balance!

  • @extremejacob doesn’t like the myth that frugal is the same as cheap. He also doesn’t like that most people measure standard of living in terms of spending and consumption.

  • A number of readers hate the popular belief that buying a home is always better than renting. As we saw recently, sometimes renting makes sense.

  • @chicagoelevated wrote that she’s fed up with the idea that if you do what you love, the money will follow. She’s pursuing a career in something she’s passionate about, but she’s seen first hand that hard work isn’t always profitable. (Still, I think it’s also bad to put up with a job you hate just to get a fat paycheck.)

  • @creditgoddess wrote: ” I don’t like: ‘A bad credit rating stays with you for life.’ Sure, if you don’t change habits, but it will improve if you work at it.”

  • Several folks hate shopping “myths”. @ambermae hates, “The more you buy, the more you save.” @moneyhighway agrees, as does @weathershenker who notes that if a sign says “Save 15%”, you are spending 85%: “Sales can be good, but if you truly want to save, don’t spend!” Great advice.

A couple of other folks dropped me notes by e-mail. For example, Claire wrote:

When I was in college, I found out what a bunch of bull “You’ll appreciate it more if you pay for it yourself” was. I was fortunate to not have to take out loans, but I saw close friends struggle with paying for tuition since they had no support. We all valued our education equally. I didn’t screw around & party and waste my opportunity at college; neither did my friends.

Think For Yourself
This has been a long post to make a simple point: Don’t just accept conventional wisdom, and don’t blindly heed the advice of financial “experts”. Listen to this stuff, sure, and consider it. But think for yourself. Do your own research. When you hear somebody make a claim — even if it’s somebody you trust — seek independent verification before you make life decisions based on the information.

Do this for blogs (including this one), but also do it for books and magazines. The more you learn, the better you’ll be able to spot errors and fallacies and situations that don’t apply to you. You’ll also find it easier to question sources that you once considered authoritative.

Remember: Nobody cares more about your money than you do. If you don’t take the time to double-check the financial advice you receive (in person, in books, and in blogs), then there’s a good chance you’ll end up in financial trouble. Be smart, and look out for yourself.

What do you think of the money myths I’ve mentioned here? Are they myths? What myths bug you the most? Has a money myth ever led you into financial trouble? (I suspect that quite a few GRS readers have been hurt by the “your home will always increase in value” myth.) And, most of all, how do you learn to separate fact from fiction?

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