People like to make a lot of proclamations about what to “always” or “never” do with your money. However, these are quite often total financial myths. And, when it’s coming from a source you trust, you tend to take these financial myths at face value rather than exploring the truth of the situation for yourself.
These five financial myths can negatively impact your mental wellbeing as well as that of your budget and financial security. So let’s play MythBusters and talk through some of the things we always hear about finances and the reality of the matter instead.
The Reality: This is a very costly (and not always assured) way to cover emergencies.
This is one of the financial myths that always gets me going! There are so many things that could get you into trouble around credit cards and the way people use them is one of them.
The reality is that you may have credit today, but not tomorrow. Credit card companies don't have to extend you credit or a cash advance, so you’re really taking a gamble in an emergency situation that you would be able to “rely” on a credit card if something came up. (I hesitate to say rely as it really isn’t reliable.)
And it is costly from an interest rate standpoint. You will have to pay back the initial amount of the emergency plus your card’s interest rate if you can’t pay it all off in one billing cycle.
Further, what’s to say you could pay the balance on your card in an emergency (or that your emergency falls within your credit limit boundaries)? Quite often, emergencies happen when you are least prepared - that’s the very state of “an emergency.”
You could lose your job or something else may happen where the income isn’t there anymore. Then, you don’t have a way to pay off your debts. It’s playing very fast and loose with your credit score, which could then hurt you and leave you in an even-more compromised situation for the future as well.
The Reality: Having a credit card will improve your credit score - as long as you’re using it wisely.
Since we’re on the topic of credit cards, here’s another financial myth that needs to be busted wide open. Some people will encourage you not to use a credit card at all. I have a feeling it’s because they themselves aren’t confident in their budget or they at one point got into trouble with a credit card.
We all do risky and unwise things in our younger years, so if that’s you, it’s okay! It happens!
The fact of the matter is that using a credit card will actually help your credit score. It won’t hurt you or get you into trouble as long as you make timely payments and keep your balance low. For a review of Credit Score 101 and some other tips on being a responsible credit card user, read Understanding Your Credit Score.
The Reality: Things will vary based on your personal set of financials and unique needs. Talk to a financial expert first to help you sort through it all.
We hear lots of things about the whole process of buying a car. Never buy a new car. Never lease a car. Always take your car to the dealer for service. Never take your car to the dealer for service. Take the extended warranty. An extended warranty is a rip-off.
I see people who make terrible car-buying decisions. At the end of the day, the dealers make money with financing, but it’s also where they confuse people. Often, they’re just changing the length of the financing to play with the numbers for you.
For example, one of my clients came to me after buying a car so we could adjust her budget. Her car payment is larger than my mortgage because of the way the dealer worked out the financials. All I could think while she was sitting there was, “Why didn’t you talk to me!”
When it comes to the financial myths about buying cars, there are things to look out for that you may not have considered (or have always thought were true based on what others have said). Things like financing options outside of the dealer (credit unions usually have great rates!), whether an auto loan or personal loan is better for your specific financial goals and risk level, the interest you’ll accrue in 60 months versus 48 months, and so on.
You have to consider your cash flow, the value of any trade-ins you have, and private financing prior to visiting a dealer. If you’re buying a car, it can be better to buy new with financing and warranty options than used, especially if you’re not paying cash.
The bottom line: know your personal financial situation before making a purchase like a new vehicle and talk to a financial planner if you need help! You’ll probably end up saving thousands in interest expense.
The Reality: This is not accurate for a variety of reasons! Talk to an expert about what you need.
Like unique circumstances around purchasing a car, life insurance will vary based on the policyholder and terms of the policy, so there really isn’t a “one size fits all” set of advice when it comes to life insurance.
For example: If you get laid off, you lose your life insurance. If you change jobs, you lose your life insurance. Yes, it’s portable, but you don't pay the group rate when you port it and it’s very expensive to port a group life insurance policy as an individual.
If you have specific questions about your life insurance, schedule a Clarity Session so we can talk about all the options available to you and what makes the most sense for your unique needs.
The Reality: You can do both. Contribute to your emergency fund and invest what’s left over.
Back to emergency funds for a moment. I can’t not scream about how important it is to have an emergency fund. If something happens, it will help you out so much. So, you must take steps to fund any emergency savings. That said, you can absolutely contribute to a few places at once, particularly if they provide financial security, which a retirement fund will.
Especially if your employer is matching 401(k) contributions at 100%, but even if they’re matching anything, take advantage of that matching and contribute to your retirement savings. You’ll be able to fund your retirement plan faster and leave you more to put toward other budget areas, like your emergency fund.
Even if your employer isn’t matching (often, not much is matched right now), look at your spending plan and contribute what you can to areas that are important to you. It’s okay if it takes you a little bit to fully fund things. Progress toward financial goals matters more than having a set number in the bank if you’re just starting your savings funds.
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