Money Myths That Could Be Ruining Your Personal Finances

There are so many myths or simply ideas that are presented as sound advice when it comes to personal finance. Here are some of the ones I hear most, and why you need to examine them if you’re currently using them to make financial decisions.

You Need to Take on Debt to Improve Your Credit Score

This is one I’ve addressed before, but I still hear people using credit score building as an excuse to take on unnecessary debt. There are other ways to build your credit score that don’t involve jeopardizing your financial future.

If you want to show that you’re good at paying off debt there are very simple ways to do this without taking on any long-term debt and without ever paying any interest. A credit-builder card can be used to put small, regular purchases on and the balance can then be paid off in full each month. You’ll never pay interest, you won’t owe large amounts, and your credit report will show a perfect payment history.

You Don’t Need to Worry About Estate Planning Unless You’re Wealthy

It doesn’t matter how small your net worth is. It’s still worth having a plan for the future, and that should include what you want to happen in the event of your death.

Getting your paperwork in order in this area allows you to think about things like guardianship of any dependents, whether you need life insurance, who you’d like to have power of attorney if you’re incapacitated, and how you’d like your assets distributed, however inconsequential they may be right now.

Credit Card Hacking Is Easy

Credit card hacking can allow you to profit from your credit cards by using things like points, perks, and loyalty schemes. However, it can be pretty complex, especially once you start really ‘hacking’ which may involve actions that can end up tripping you up. There are people who make an art out of this, signing up for (and using) new cards just to access welcome bonuses such as large amounts of points, air miles or other perks.

Think things through carefully before trying any of these more complex strategies. They’re not necessarily easy, and they’re certainly not necessary. If you don’t trust yourself with credit cards, don’t use them. If you do, but want to really keep things simple, just get one points-earning card, use it responsibly, pay it off every month and enjoy your points.

Entrepreneurship Is the Only (or Best) Road to Wealth

It’s true that many ultra-high net worth individuals have gotten to where they are through running their own businesses (or inherited wealth). However, it’s definitely possible to build a high net worth as an employee, especially if you’re well-paid and take advantage of all the benefits your employer offers, such as a matched 401k, health insurance, employee assistant programs, parental leave, and paid time off.

High earners — and even moderate earners — who live within their means, budget, save, and invest can enjoy more financial stability than many of the entrepreneurs out there who are bragging about their high 6-figure income.

Remember that income is often inconsistent, and the self-employed also have to spend out on their business, fund their own retirement savings, and cover their own costs when it comes to things like healthcare and leave.

You Should Pay Off All Your Debt Before Saving for Other Things

While it often makes sense to pay off debt before saving, that’s not always the case. Balancing debt repayment against things like building an emergency fund, or saving for important and inevitable upcoming expenses, can help you avoid falling deeper into debt when those expenses hit.

Debt is simply a fact of life for most people, for at least part of their adult life, so it’s important to think in terms of debt management rather than simply ‘paying off debt’. Having a plan to pay down debt allows you to continue to live life in spite of the inevitable negative net worth that comes with things like student loans and other things you may need to take on debt for.

You Should Always Pay Off High Interest Debt First

This is known as the avalanche method and it works for lots of people. However, for some, the snowball method works better. This involves clearing your smallest debt completely, then moving on to the next smallest one. While this can work out more expensive, it can also be highly motivating to see those debts disappearing completely, so it’s really just a case of what works best for you, psychologically speaking.

Also keep in mind that your highest interest debt is often credit card and charge card debt, and it is, sometimes, possible to shift to a no-interest card via a balance transfer. Much like credit card hacking, balance transfers can be complex and definitely aren’t advisable for everyone, but they can help turn a high interest debt into a no-interest debt in the short-term, potentially allowing you to pay it off quicker.

There Are Financial Rules We Should All Follow

The issue with rules is that if you can’t abide by them you might ignore them rather than adapting them. Heard there’s a rule you should save 15% of your income for retirement but can’t possibly manage that? Don’t ignore retirement saving. Just break the rule. Save 5% or even 1% if that’s all you can manage. Psychologically most of us are more likely to increase our savings rate when we can, if we already have a regular savings habit.

If you’re currently using any of these myths to justify your current decisions, maybe it’s time to reassess things. You may be better off making changes, or you might not. Always take professional advice if you’re not sure. Some of these decisions are a lot more complicated than they seem at first sight.