Top 5 Money management myths
Many people have different beliefs about money and debt. Myths can make a serious impact on your ability to make sound financial decisions and potentially ruin your wealth potential if they aren’t debunked earlier. You can make huge mistakes related to money and debt just because you’ve bought into a faulty culture of personal money and debt advice. Some of the advice could be from a well-intending yet misinformed relative, teacher, friend or those you look to as financial professionals.
So how can you correct some of the most common money myths that you may still believe? The most vital thing to do is to recognize that they are myths.
Let’s look at the 5 most popular money myths:-
It is a myth that only rich people can save and invest. Anyone can do it, and it’s one of the best ways to grow your wealth. If you begin now to protect and gradually increase the amount that you keep, you’re able to accumulate enough reserves that can help you accomplish your goals. It is crucial to make enough savings as much as you can while you are still able to pay for the essential items such as rent, utility bills, and groceries. You will reap the fruits of your little effort later like when an emergency strike of an unforeseen event!
2. Credit cards are bad and should be avoided.
Another credit card myth to expose is that you should avoid credit cards. The truth is if you pay off your card balance in full each month to prevent the accumulation of interest, making purchases with credit can most of the times will be worthwhile.
A significant number of credit cards offer reward programs. If you make daily purchases with your credit card, you could quickly increase your points that you can redeem for cash, travel, or invest.
Also, proving that you can use your credit responsibly can help you increase your credit score which can make it easier for you to get a bigger loan to buy, like, a car or a home loan. It may also help you get a lower interest rate when you want to borrow in the future. If left to accumulate, a credit card can be disastrous. But if you monitor your spending and pay the card off every month, it could be pretty rewarding.
One of the other benefit of credit card is Revocability & Fraud protection. Not widely known. If you buy something on credit card and are not satisfied with your purchase or got scammed, you can ask for a refund. You can do this with the merchant or with the bank that issued your credit card.
If you come across a fraudulent charge on your credit card. While you can do these things even on your debit card, the money would’ve left your bank account by then. In the case of a credit card, the money would still remain in your bank account until you write a check. Psychologically, the fight to keep money in your pocket is easier to win than the fight to retrieve it from somebody else’s.
3. Debt is good
People hold on to another myth that there is a difference between good debt and bad debt. Good debt is considered as taking out a loan to buy a home or get an education while taking personal or credit card debt is viewed as bad debt.
They’re often believed to be good debt because the debt is for funding an investment which can later be financially beneficial. The interest rates on mortgages and student loans are typically much lower than those on personal loans or credit cards, and the interest may be tax-deductible.
In some cases, even the bad debt, for example, using a high-interest rate credit card can be beneficial. But there needs to be a limit to this myth.
Don’t spend too much in a house than you can’t afford just because it’s good debt. Don’t go to the most expensive school you find because student loans are available.
Debt is an enemy of your income because the monthly payments you pay to the credit card companies could have been savings put towards your retirement, your kids’ college, or even your down payment on a new house. Debt is thus not always right.
4. I am too young: I’ll make a lot of money to catch-up on my retirement.
Years can advance pretty quickly without noticing. It is good to prepare for your golden days early enough. Don’t put off the preparation for retirement for later if you’re able to start saving right away.
It’s tempting to put off retirement planning while you work on your other financial goals like paying off student loans, saving for a house, or putting your kids through school. These goals may feel immediate, while retirement feels so far away. But having more time on your side can be one of the best reasons to start saving for retirement. It’s important also to consider the opportunity cost of not saving.
Compounding happens when you earn interest or dividends on your investments, and if reinvested, the value of your investments grows. Capital appreciation over time increases your value of investments.
If you aren’t able to start saving early in your career, you may have to keep a lot later to make up for the value of lost time. So start as soon as now.
5. I already track my money, I don’t need to budget.
If you know how much money you have in your bank account, that’s enough. No. That’s a myth. Your statement balance is not a budget. If you keep track of your spending, you’re only analysing how you already spent your money. However, a budget is a plan of how you’re going to spend your money. It helps you know what to prioritize, for example, should you pay off your debt come before saving for your emergency fund, and planning for the future?