Money is a popular topic of discussion. Parents, friends, bosses and others are often forthcoming with a load of free financial advice. Unfortunately a lot of the touted wisdom being passed on so readily is oversimplified or just plain outdated. Many sensible ideas which were originally meant as broad guidelines have been twisted into exact rules of thumb. This article aims to highlight the idea that personal finance is meant to be personalized. It is an important enough subject to warrant ownership and deliberate thought.
Myth 1: It is too early to save
A lot of early career professionals think that they earn too little to save and that there will be plenty of time for financial planning ‘later’. This line of thought is dysfunctional for multiple reasons. First, savings accrue interest and grow over time, so sooner is actually better and no amount is too small to save. Second, saving is a habit. Your regular savings may start small and grow over time, but if you sow a habit of not saving then your future financial security is doubtful. Every little bit makes a difference. Small savings made early can compound to much more than bigger savings started later.
Myth 2: It is too late to plan
Mid career professionals without significant savings often tend to give up hope for a secure financial future. In truth there is a lot you can do even in your mid forties to ease your post retirement life. You can set a goal to pay off debts during the productive years you have left. Find a suitable health insurance plan and cultivate a healthy lifestyle to minimize your future healthcare expenses. Start your search for a more affordable home to move into. If you fail to take these measures now, you may still make a positive contribution to the domain of personal finance by becoming an example for posterity of what to avoid!
Myth 3: I’m not qualified to do personal finance
There are those who think that good financial planning is not possible without hiring a financial advisor. The truth is that personal finance is mostly a function of common sense and diligence. The vast majority of information about investments, taxes, savings and other aspects of personal finance is available freely from books and online sources.
Moreover financial advisors often have vested interests. In addition to taking part of your money as fee your investment advisor may be getting a commission from a third party to steer your money toward a particular investment. You may not fully understand the risk which that investment entails. Sadly many well educated people use financial advisors as an excuse to procrastinate. Worse, advisors are often unscrupulous. One does not need any specific qualifications to call oneself a financial advisor. You cannot establish the credibility of a financial advisor as easily as you can for a doctor or an architect.
It is much better to take some time to understand your investment options along with the risks, expected returns and long term outcomes. Remember that it is ultimately your money and your responsibility. By spending a little time regularly and systematically one can effectively manage personal finances without any help.
Myth 4: Owning is better than renting
For most people owning a home is a dream worth pursuing. However, if you take on a larger mortgage than you can pay while living comfortably, you may soon find yourself in need to transfer money from all your savings and other sources just to avoid foreclosure. Making large monthly payments on a mortgage can be a disconcerting financial burden. It can drain the quality of your life during your most productive years and leave you feeling stuck and helpless. Mortgage payments are significantly and consistently larger than rents. Renting, as opposed to a mortgage, allows you to have a higher disposable income while living in a larger space. Renting also gives you flexibility in terms of where you want to live and how often you want to move.
Myth 5: Low risk low return
Many of us grow up with the notion that the return on an investment must be proportional to the risk. Bank accounts are safe but offer low interest rates while stock markets are risky but can be wildly profitable. There is little reason to abandon this conventional wisdom altogether. At the same time the performance of many high return financial instruments has been dismal on average for several years. Meanwhile the current unpredictable economic climate is making guaranteed return investments look more attractive. It makes sense to update yourself about tax-free and delayed-tax long term savings instruments before investing.
Myth 6: Insurance is a waste of money
The primary reason why people skip on insurance payments is not lack of money; it is because they fail to see insurance for what it is – a safety net. If you are paying for health insurance and never get sick your insurance payments are not wasted. You are paying aptly for the safety net to be in place all this time to cushion you from the eventuality of massive hospital bills. Moreover you should be thankful for your good health and full productivity. The same applies to term life insurance and pretty much all pure insurance products. For this reason you should calculate the adequate amount of insurance cover you need for yourself and your dependents. What muddies the waters is the collection of combined insurance-investment products where it is hard to discern how much you paid for cover and how much of your money was invested for gain.
Myth 7: My credit card is my rainy day fund
Some people collect a bunch of credit cards thinking “the plastic will pay my bills in case I lose my job”. Anyone who believes this idea lacks a basic understanding of how credit cards work. In case of an unexpected loss of job it is normal to take a few months to find new employment. Credit cards allow for a limited credit period, usually a month or 45 days, before starting to charge you hefty interest. As your credit card bills go unpaid you start losing more money with interest building up. By the time you get a new job your credit card debt has piled high while your credit score is in shambles. This makes it impossible to secure any new credit just when you need it most. For these reasons credit cards are the worst rainy day funds imaginable. A proper emergency fund is a small but adequate corpus of savings set aside for specifically this purpose.
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