Managing your personal finances can be difficult so its normal to ask people for advice.
Often you will receive the same advice from a number of different people.
That is usually a good thing but in terms of your personal finances it might not be.
There are several common misconceptions out there when it comes to personal financial management.
Some of the advice you may receive about how to better manage your personal finances may end up costing you money.
Help is at hand.
This short article will outline to you some of the common personal financial myths out there and help you to make much more sense of them.
It will take you through some of the biggest potential pitfalls out there and try to help you avoid them.
Here we go.
The Big Decisions
- Buying a property is better than renting
This is something you always here. It seems like something that makes sense, but it might not in all cases. In an inflated property market, the cost of renting a property can sometimes be lower than buying it.
This does not take into consideration the higher costs associated with home ownership such as additional maintenance and insurance. Remember a property is a long-term debt so this could end up affecting you for a long time.
When buying a property, you need to ask is buying actually going to work out cheaper than renting? Yes, you will have an asset at the end but if your rent is lower than your mortgage repayments you could also have higher savings if you just rent! With none of the long-term responsibility.
In addition, if you buy you are committing to staying in a place for a long period of time. Does that feel right for you given your current personal life and work commitments? If not renting may again be the better option.
- You have to have money to make money
Investing is not just for rich people. There is a huge amount of investment options out there for those on modest incomes.
The most obvious strategy is called ‘dollar cost averaging’ whereby you invest a modest fixed amount, say $100, every month in a low cost mutual fund.
This is a strategy which is open to almost everyone. This option allows you to gain exposure to stock market growth without having to put up a large amount of money right at the beginning.
For some of these, like saving for a college education, investing any money in the stock market may be more risk than you are willing to take on.
- Managing a credit card balance helps your credit score
This is simply not true. Clearing your credit card balance at the end of every month helps your credit score.
Think about it
If you have a balance on your credit card this means that your income in at least the last month was not enough to meet your expenses. How will that look to lenders? Obviously, it would be a cause for concern.
If you have an outstanding balance on your credit card you need to clear it as quickly as possible, this is not only because it hurts your credit score but also because short term debt like credit card debt can be expensive.
Having high interest debt is never a good idea.
- I don’t have any money to save
You probably hear every day that the reason many people don’t save is that they already have so many monthly payments to make, everything from car payments to medical insurance.
In most major cities housing costs are at record highs and transport costs show no signs of decreasing. Everything from gym membership to the price of a cup of coffee seems to be rising.
One more payment probably won’t make much difference so make sure you always pay yourself first!
Set up a direct debit into a savings account and make you the first person that gets paid every month. A savings account which requires as much notice as possible before you can make a withdrawal is the best option.
Doing it this way will ensure that you will build up savings over time and not be tempted to empty it on impulse for an unexpected weekend break or new item you don’t really want. This may seem impossible but try it. If you have less money to spend because you have paid yourself first you will basically force yourself to save.
- You must invest in this
From time to time there will be some new investment trend that people will encourage you to invest in. At present that may be something like Bitcoin, in recent years it probably would have been gold.
Its important to remember that while these things may offer an investment opportunity they also may come with a high degree of risk or very limited return.
When you are deciding whether to partake in the latest investment trend you need to ask yourself are you comfortable will losing all the money you invest. Also, are you happy that these investments may pay no dividends or interest, but others might.
Investment decisions are very personal, there is no one size fits all approach and an investment that is right for someone else may not be right for you.
Think long and hard about it!
The Potential Big Mistakes
- A professional manages my money, so I don’t need to worry
This is potentially a big mistake. There are thousands of excellent financial services professionals out there. Remember, they are there to make money though too, so their goals may not always be aligned with yours.
It is always really important to ensure that you are comfortable with the level of fees you are paying investment professionals, where they are investing your money and what they are investing it.
It is great to have the assistance of an expert but that does not mean you can just sit on the fence when it comes to your personal finances.
If you are in a relationship it can be particularly important to know who is managing your money. You make have a different Risk Appetite to your partner and even different investment goals.
Open communication is important in all the cases outline above. Your personal finances are not something that can be totally outsourced to someone else no matter how good they are.
- Only use cash
Traditionally this would have been a great idea. However, in a world with increased online shopping this may not always make sense and you may need a credit card.
If you make a large online purchase and agree to pay by bank transfer you have very little recourse if things go wrong. If you pa be credit card you at least have some chance of getting your money back with the assistance of the credit card company.
In addition, in some cases your credit card may come with insurance benefits.
Also carrying around a large amount of cash is never a good idea from a security perspective. At least if you are subject to a theft on your credit card you have some chance to cancel the transaction and prevent any theft.
- My emergency fund needs to beat inflation
An increasingly common myth out there in this low interest rate environment. Many people have their emergency fund in a savings account, probably paying about 1% interest.
If inflation is 3% am I not losing money? Stop right there. This is an emergency fund that you need to be able to access quickly in an emergency. Investing it and risking it in an equity-based fund that may have penalty fees for early withdrawal may not be the best option.
If your emergency fund is the right size it hopefully wont form all of your total investment portfolio. If it does then it’s probably the case that you definitely should not risk any of it.
If you are totally dependent on it investing it in something that could go to zero when the economy tanks, when you will be most likely to need it! Is definitely not a good idea.
This can be a difficult one to accept but remember an emergency fund is just that, for an emergency. It will most likely be in a period of unexpected financial stress when you will need access to it very quickly. Don’t lock it away for five years!
- Both parents working always makes sense
It seems obvious. If both parents work, then the family has a bigger income, and everyone is better off. It’s that simple right?
When working out how much child care will cost you may conclude that it is cheaper for one parent to stay at home.
This is a difficult decision to make but it may be sensible financially. In the short term it involves understanding whether the cost of the childcare payments plus the cost of commuting to work and other expenses is greater than both salaries being earned.
This choice may seem like a good idea today, but it may not make sense in the long term. Leaving the workforce now can in some cases affect your long-term earnings.
When making this decision it is important to look at long term earning power. Given how your career is going how much could you be earning in two to five years. Ask yourself would the decision still make sense then? If not, it may not be the right option for you.
But its not as straight forward a choice as other people may make it out to be.
- I must save for a college education
In the past this would have been a no brainer. Your income over your life time would have been higher, you would have more stable work and likely get a job with better benefits.
However, times are changing. A college degree is no longer a guarantee of a solid job with great benefits and a career structure. Graduate unemployment can be quite high in a lot of jurisdictions.
At present there is a shortage of construction workers that is likely to get worse over the next 10 years as the baby boomer generation retires.
Wages in construction are now at an all time high and remember, when you train in a construction related trade you get paid to learn. You come out with no debt at the end and earn straight away.
A college education is no longer right for everybody. It may have been the case in the past but there is much more to consider now. The number of people enrolled in colleges all over the world has skyrocketed over the past 20 years, there is a huge supply of college graduates on the market.
In addition, college graduate type jobs are easily outsourced, if you have a leak you cannot call a plumber in a call centre overseas to come help you!
Think about it, it may make sense for you or your children to take a different path.
Hopefully this article has helped you to get a better understanding of some of the most common financial tips you will receive. Its not that this advice is always wrong, its just that its not always the right advice for everybody.
You really need to consider your own individual personal financial circumstances when making decisions about your own personal finances. There is wisdom out there that you can leverage but you need to analyse it.
Break each part of the advice down into small parts and make sure that each part suits you and fits in with your long term financial goals.
If you manage to do this successfully, you are on the road to a better personal financial world.