Have you ever received financial advice without asking for it? This is probably one question that is bound to get an affirmative reply from most people. There is so much financial advice available today, that it is impossible to determine which ones to follow. How to manage your money seems to be the most favorite topic of finance-related websites and blogs. With so much information floating around, we thought that it was time we spoke about some money myths that you have been hearing about.
Myth #1: Credit Cards are bad for your financial health
There are no bad financial products – only consumers who don’t know how to use them optimally. Credit cards are at the top of that list. Before credit cards were a part of the financial system, availing credit was a lengthy process. Credit cards have made it simpler. Today, you can make payments for almost everything using a credit card. The reason why they have received a bad rap is that while people use credit cards, they do not understand the implications of not repaying the debt on time. Credit cards can be effective tools in your arsenal provided you use them carefully and repay the debt within the interest-free period.
Myth #2: Rich people invest – the rest only save money
We were as surprised as you are when we discovered this belief. A lot of people still feel that investments are for the rich – the ones who can afford to invest and forget or lose money and not be bothered. Salaried individuals can barely meet their living costs and even if they do manage to save a small amount, they need it for emergency purposes. Hence, the question of investing doesn’t arise.
The fact is that investments are as much for the rich as for the rest of us. In fact, salaried individuals must look at investing whatever little they can, to work their way towards financial independence later in life.
Myth #3: I am very young – I don’t need to think about retirement!
When you start working in your early twenties, retirement is a long way from home. Also, as a youngster, you are still planning your expenses for buying a house, having a destination wedding, raising children, etc. It is logical to feel that retirement planning can wait.
The fact is that post-retirement, you will not have any source of income. Also, with the costs of living increasing every year, you will need a substantial amount saved up in your golden years. Add to it the medical and healthcare costs that are synonymous with old age and you will realize that there can be no better time to start planning for retirement than today. The sooner you start, the lesser you will have to invest and the more you will benefit from compounding.
Myth #4: I earn well and manage my expenses. I don’t need to budget.
Budgeting is neither about being able to manage your expenses nor about releasing funds for investing. Budgeting is about rationalizing your expenses. Without a budget in place, regardless of your salary, you can find yourself falling short every month. If you don’t control your expenses, then your salary will soon not be enough to cover your expenses and you will head towards debt.
Myth #5: Past performance of an investment instrument is the best indicator of its potential to generate good returns
We haven’t come across a more widely accepted but illogical money myth. When people plan their investments, they need to know whether the stock or mutual fund or any other instrument that they plan to invest in will generate good returns. Hence, they turn to the past performance of the instrument and base their decision on whether it has performed well in the past or not. While the historical performance can help you understand how the instrument has performed during a certain market condition, it cannot predict future performance. You need to understand the fundamentals of the stock or mutual fund before investing.
Myth #6: Stock investments are for investors who have a high-risk tolerance
Equity investments have always been associated with high risks. When we compare them with bonds or other debt instruments, the higher risk definition makes sense. However, there are many large-cap or blue-chip stocks that are not as risky as they seem. In fact, they are safe investments with a better potential for growth as compared to most fixed-income options. Every investment has an associated risk – even bonds and other debt instruments. And, there is no assurance that low risk means that you are completely safe. Here is an example:
If you invest in a bank fixed deposit assuming it to be a low-risk investment and the bank declares insolvency, then your investment will be stuck until the regulators can figure out a way to release the depositor’s funds. Although this has a low probability, if it happens, your money can be stuck for a long time without earning interest. On the other hand, if you buy a stock of a good company, then even if its market price drops, it will recover eventually and earn good returns – the key lies in buying stocks of companies with strong fundamentals.
Myth #7: A Credit Card is the perfect emergency fund
No, it is not! A credit card is a pre-approved loan, NOT a saved-up fund. An emergency fund is something that can help you get through exigencies. When such situations arise, using your credit card will be the last thing on your mind. If you miss the repayment dates, then interest will rise quickly leading to huge debt and a bad credit score. Getting out of that debt will require a lot more effort than creating an emergency fund, to begin with. Credit cards are good to use when your finances are stable and you want to benefit from the benefits offered by them like cashbacks, rewards, etc.
There are many myths surrounding money and finances today. While we are not saying that all these are incorrect, but blindly following them without considering their applicability to you can be dangerous. For some people, a credit card is a strict no-no, while for some others it works like a charm. Before you believe any money-related suggestion (even the ones mentioned in this article), pause to think if it applies to you. Understand your financial personality – how you deal with money, savings, investments, etc. That will help you make sense of the plethora of financial advice available online.