7 Myths About Money
Whether the economy is in bull or bear market conditions, you still have to make smart monetary decisions about everyday expenses, loans, investing, and saving options. The marketplace is saturated with “financial gurus” and bad investing advice. That primarily has caused many myths about money, and its time we settle them straight. These seven myths will help you better manage your finances.
1. I Don’t Earn Enough to Save
This is one of the more popular myths. Especially from young adults just graduating college and earning less than they would like.
You often hear “I’ll save in my 30’s” or something along the lines of “The little I have left won’t make a difference.”
Saving is actually one of the main pathways to financial independence. The wonders of compound interest allow you to gain on any investment. Typically, people assume they need to have a lot of money to invest, which is wrong.
Let’s assume at age 25, you invest $3,000 into a tax-deferred investment account that earns 8% interest annually. If you continue investing $3,000 every year on top of 8% interest, you will amass $850,000 come age 65. Waiting until age 35 to start will drop you to $370,000.
The advice here is to start early.
2. I Only Need to Pay the Minimum on my Credit Card
Paying the minimum each month not only extends the life of your loan but also hurts your credit score. The longer your loan, the more interest you will pay. Credit cards typically have minimum payments around $30 each month. If you have only $2,000 in debt, with an 18% interest rate, it will take you 289 months to pay off your balance and cost you $4396 is interest.
Pay as much as you can on your credit card debt. Or better, use cash.
3. The Monthly payment is all that matters
Basing your financial decisions on the monthly payment can cause adverse outcomes. Just because you can afford the monthly payment does not mean it’s an excellent decision to buy. One of the main reasons individuals get in loan trouble is because they look at monthly payments and not the total amount.
Buying a $25,000 C class Mercedes may only cost you $450 a month, but going with the $14,000 Mazda will bring you down to $250. That extra $200 you’re saving per month can be the start of your retirement account.
Just because you can make the monthly payment doesn’t mean you buy it.
4. Buying a Home is Always Better than renting
This myth has primarily been associated with the American Dream. Buying a home does not always guarantee you and investment. For most of us, buying a home will be the biggest purchase we ever make. Typically, your house will come with a 30-year mortgage and lots of interest.
Although owning a house can have its write off advantages, it could cost you in the long run. Most people assume the value of their home will increase, and that is not always true. Selling your house for less than you paid for it can cause you to be paying off and old loan while you begin paying another.
If you do not foresee yourself staying in the same area for a while, then it is best to rent. If you want to live in the same city for most of your life, then it would be smart to buy.
5. Carrying a balance will improve my credit score
Carrying a balance can damage your score because it shows you have trouble paying down your debt. Credit score companies mainly monitor your account for on-time payments. Paying on-time is the best way to improve your score. Missing payments, late payments, and paying less than the minimum will all negatively after your credit score.
The best advice is to pay off your credit card monthly.
6. You Get What You Pay For
People typically associate a high price tag with quality. Most of the time that is the case, but occasionally you will overpay for an average product or service. Paying for expensive items will not necessarily make your life better.
Let’s use the car example in Myth 3. You save $11,000 in principle by going with the Mazda. Not to mention, Mazda’s are far less to repair than Mercedes.
Sometimes the cheaper option is better.
7. Debt is Bad
The theme in some of the myths above is to pay down your debts as soon as possible. This does not mean that debt is necessarily bad, though. The ability to obtain credit is essential because we need cars, houses, student loans, and so on. The idea is to embrace debt to help you advance your life but not take on too much where we can’t pay it all off.
Finding the right balance between debt and payoff plans will help you cut down on the interest.
Everyone must evaluate their own life and make the best decision for them. What works for you does not always work for someone else. The golden rule in financial management is to make sure your expenses are less than your income. If you can follow that, you will be in good shape.
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