When it comes to personal finance there are a lot of different approaches and ideas out there and often it can be hard to tell what is good advice and what isn’t.
Below are 5 of the most common myths around personal finance.
1. Income is the same as Wealth
Often people confuse these two concepts as being the same thing. Surely people who earn a lot of money are wealthy right? Well that’s not always the case.
Many people earn more than enough money to become wealthy they simply do not hold on to the money they earn and end up spending it on various unnecessary things.
Likewise even on a low income, if most of the money is saved or invested that person can find themselves with a very healthy bank account.
There is a fantastic article on this very myth here.
2. Having a Credit Card is a Bad Idea
You might have been warned about credit cards in the past by friends or family. They usually tell you some horror story about a person getting into mountains of debt at a high interest rate.
Now that scenario can definitely come true but with some financial discipline you can make credit cards work in your favour.
First of all, having a credit card and paying it off in full every month, not only incurs zero interest for you, but also helps you build up a healthy credit history that can help you with getting finance in the future like a car loan or a mortgage.
A second use of credit cards that not many people are aware of are their ability to earn you rewards points. Certain credit cards come with a rewards points scheme such as a frequent flyer program or flybuys.
How this works, is every dollar you spend on the credit card usually translates into 1 reward point.
So one strategy you might use is if you purchase everything on your credit card that you would’ve usually purchased on your eftpos card you will now be getting rewards points which build up very fast.
But wait, won’t that cost me interest!? If you pay off your credit card in full every month, you do not get charged any interest at all. That means as long as you stay disciplined, you will be earning rewards points absolutely free!
3. I Don’t Earn Enough to Save Money
Often people say, that because they have a low income, there is no point in saving money. This couldn’t be further from the truth!
Even saving $20 a week would leave you with just over $1000 at the end of the year. Imagine how many presents you could afford with an extra $1000 at Christmas time.
Saving money, like anything else, is a habit. Once you get in the habit of putting money aside every week, it quickly snowballs and you end up building quite a healthy savings account.
A good strategy can be to put aside a certain percentage, say 10% of your pay into a savings account then as you earn more money, you maintain the same percentage. So if you earn $500 a week now, that’d be $50 into savings.
It’s never to late to start saving money and the sooner you do, the more wealth you will create.
4. Buying is Better than Renting
This myth has been hanging around for many generations. It stems back to when the housing market was in very different shape and it often was the case that buying a home was a good investment.
In reality, people do not factor in all the additional costs to home ownership such as interest payments, repair costs, legal fees, rates and insurances, the list goes on.
Renting on the other hand, puts all that responsibility on the land lord and the person renting the house simply has to worry about paying the rent.
If you don’t like the house or the area anymore, you can simply up and move in a relatively short time frame. Selling a house can take a minimum of 30 days up to many months, if you can’t find a buyer.
Your monthly rent is also often much cheaper than the monthly mortgage payment for the same house. This allows you to use that saved money to put into better investments.
5. You have to be Rich to Invest
Only wealthy people invest in stocks or own investment properties right? Wrong.
Anyone can invest their money and you can start with a relatively small amount too. Often the first and best place to start, is investing in a whole market instead of a single stock.
This allows you to spread your risk and over the long term, usually beats a savings account interest rate. This can be done by purchasing shares in an ETF (Exchange Traded Funds), there is a fantastic guide here on ETF’s.
Like saving money, investing is a habit. As you form your good savings habit, you can easily move into investing as well.
Watching your money grow overtime is very exciting and even if you are only growing $100 you will still get great satisfaction out of watching it grow bigger!