Outsmart these 5 common money misperceptions.
Whether you think of yourself as money-savvy or you’re acutely aware of where your personal-finance knowledge is lacking, it’s always good to make sure you aren’t managing your money on assumptions that are faulty to begin with.
Here are a few common money myths to kick to the curb.
Myth No. 1: Credit cards are evil
With the average credit card debt sitting at just over $15,000 per household, it’s easy to think that plastic is the irresponsible way to pay. Not so fast.
It’s not the method of payment that’s the problem; in fact, having credit cards can actually help your credit score. A full 10% of your credit score depends upon having a mix of credit types — installment credit, like a car loan, and revolving credit, like credit cards.
In addition, credit cards offer more security than any other form of payment, allowing you to dispute fraudulent activity without footing the bill.
Myth No. 2: Skipping your morning coffee will make you rich
Cutting back on small expenses might offer some breathing room in your budget over the long term, but money not spent doesn’t necessarily equal money saved. To grow that money, it would need to be put into a place where growth can occur — like an investment account or, at the bare minimum, a savings account.
You may think cutting out a daily expenditure is putting you on a path to financial independence, but that’s only step one.
Myth No. 3: It’s too risky to invest your money
The truth opposing this myth is simple — it’s too risky to not invest your money.
If you’re already diligent about socking away money each month, that’s a great start. But with interest rates sitting so low, money put into a savings account will likely lose more to inflation than it can make up in growth. That’s where investing comes in.
Through the power of compounding, a single $500 investment made at the age of 20 earning a conservative 5% return would be $4,492.50 at the age of 65. Imagine that scenario with ongoing contributions and larger returns. It would put any savings account to shame.
Myth No. 4: All debt should be paid before saving
Unfortunately, emergencies and unexpected expenses occur at all stages of life — even when you’re working to pay off student loans or crawl out from underneath credit card debt.
A study recently released by Bankrate found that 60% of Americans wouldn’t have the funds available to cover even small hiccups — like a $500 medical bill or car repair. Think about how many of those expenses you’ve run into in the last six to 12 months; probably at least one.
If you want to avoid incurring more debt as a result of life’s curveballs, work to save while paying off debt. This will give you a better chance of smooth sailing to the finish line.
Myth No. 5: You should borrow the most money offered to you
Wondering how much house you can afford? Don’t let the loan amount offered by the bank be your guiding light.
Those in the business of making loans are incentivized to offer the biggest loan possible that you’ll be approved for. So while they may be checking out your debt-to-income ratio, this simple equation doesn’t always offer an accurate snapshot of what you can actually manage to pay each month.
The same goes for credit card limits — having a $20,000 limit doesn’t mean your finances can easily handle paying back $20,000 worth of purchases.
What myths are you guilty of falling for? Share in the comments below!