5 Common Money Myths Debunked
- Money misconceptions and the lack of financial literacy can keep you rooted in debt.
- Although financial hardships can teach you valuable lessons about financial mistakes you can avoid next time around, it's better to learn about money before getting caught up in debt.
- If you do your research to understand how money works, the probability of it positively impacting your finances increases.
Being well aware of your money situation reduces the stress and anxiety in life when you have rainy days. More so, financial literacy means learning how to make money work for you and helps put to bed some of the money myths that we believed were true for most, if not all, of our lives.
Here are five money myths debunked to remove some of the economic fear you may have as you prepare for your money journey towards financial health.
1. “All Debt Is Bad.”
Debt is debt, but there is such a thing as good and bad debt, and it's important to know the difference.
Bad debt is anything that decreases your value which can, in turn, hurt your financial health. Bad debt also decreases your credit score, making it impossible to borrow money from banks and other financial institutions. The riskier you appear to a financial institution, the more likely you will be denied during the application process.
An example of bad debt would be revolving credit card debt that is accruing interest each month. Instead of using the credit card and paying it off in full each month, you have only been making the minimum payment. As a result, the balance on the credit card increases over time and could significantly hurt your credit score until it is paid in full.
Good debt serves as the opposite. It is anything that increases your value and positively impacts your financial situation.
Good credit can leverage your borrowing ability. As a result, you are less likely to appear risky to financial institutions, especially since banks like lending money to customers who show that they are responsible for their finances. Being responsible for your finances includes making on-time payments and living within your means.
An example of good debt is purchasing a rental property and using the equity from one rental to purchase the next rental. The method of reinvesting creates passive income for you as the landlord.
2. Revolving Credit Card Balances Can Decrease Your Credit Score
Credit card companies profit from interest rates, annual fees, and other miscellaneous charges such as late fees or cash advance fees.
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Paying your credit cards off in full each month increases your credit score. However, having a revolving balance puts money in the pockets of credit card companies. Like with financial institutions, you will appear riskier to credit card companies. In addition, revolving balances often drop your credit score.
Recommended Read: Should I Consolidate My Credit Card Debt?
3. Credit Cards Aren’t Emergency Funds
Credit cards are not meant to serve as an emergency fund. Instead, the purpose of a credit card is to make purchases with the intention to pay the card balance off in full at the end of the month.
Sometimes life may throw unexpected emergencies at you, and using your credit card every time an emergency pops up can cause you serious long-term financial hardship and debt. To avoid being in a situation where you need to use your credit card for an emergency, it's a must to have an emergency fund, and it should cover three to six months worth of expenses. Your emergency fund should only be used for emergencies you did not financially plan for, like having a flat tire, missing a few weeks of work to care for a family member, or an unexpected layoff.
If you use your credit card for a small emergency and don't pay it off in full at the end of the month, it will result in accrued interest. Therefore, if you can't pay your credit card off in full and on-time at the end of each month, it is wise to avoid using your credit card, as it will put you in debt. Overall, if you have to use your credit card, remember it is ideal to keep your credit card balance below 30% utilization.
4. Budgeting Means “I Can't Spend.”
Having a budget means that you are keeping up with how much money is coming in (income) and how much money is going out (expenses). Creating a budget does not mean that you can't spend funds on the things that you like or value. Instead, it just decreases your chances of overspending each month.
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A budget shouldn't be seen as restrictive. Instead, it should feel liberating knowing where your money is going and feeling good about your financial decisions.
In life, to be able to stay afloat, self-care is important. Budgeting should be a key part of your self-care journey. Self-care isn't selfish, and budgeting shouldn't be either.
A budget makes you conscious of your financial situation. It creates a sense of responsibility when it comes to your finances, and being responsible for your finances helps you stay prepared.
Recommended Read: Self Care On a Budget
5. “I Don't Make Enough Money.”
For most of us, all it takes is finding a way to cut back on unnecessary spending to see our sweet spot when it comes to saving. Whether it is monthly subscriptions or one too many trips to the nail shop, there is almost always a way to cut back so that you can save a few bucks. Saving as little as $5 per pay period is better than saving nothing at all.
A good first step is looking at your finances to see what you have spent money on within the past month. Of course, it will hurt cutting out items that you think you may have needed, but it is worth it. Financial awareness is a step in the right direction toward being financially stable and literate.
Although financial hardships can teach you valuable financial lessons, it's best to learn about money before getting caught up in debt. Take the time to do your research after receiving financial advice from family and friends. What you have believed to be true your whole life could be what is keeping you in debt.
What are some money myths you believed were true all of your life? Please share your thoughts with us in the comment section below.
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