Sometimes, someone’s financial situation isn’t what’s holding them back from success. Instead, it’s following misinformation and myths around their money. Whether you believe cutting spending is the only path to wealth, high earners are always wealthier, that debt is always bad, or something else, these myths can hamper your ability by dissuading you from smart money moves. This article debunks some prominent myths, helping you make smarter financial decisions.
1. “Cutting spending is the only way to build savings”
Cutting spending is a good start because it strengthens good financial habits while freeing up funds for savings. However, there is a “floor” to cutting. You can’t live without necessities like food and housing. Plus, you may still want some discretionary or “fun” spending in your budget. Instead, raising your income works well once you have established reasonable, regular monthly spending. More income means more funds left to save each month. You can raise your income by:
- Negotiating a raise
- Landing a new job
- Freelancing on the side
- Establishing secondary income streams
2. “A high income means more savings”
A high income doesn’t necessarily mean more savings, either. It’s common for people to increase their spending alongside their income, a process called “lifestyle inflation.” Someone with a high income but many debts and expenses could save less than someone with an average income but with lower expenses and debts. One approach to prevent lifestyle inflation is saving at least a fixed percentage of your income, so that your savings increase with your income. Some lifestyle enhancements are fine if you continue to hit your targets. You may also expand that savings percentage if you don’t raise your expenses, allowing you to hit your goals faster.
3. “Debt is always bad”
Debt isn’t necessarily bad. It can be a useful tool. It’s about the type of debt and how it’s used. For instance, a personal loan can help you refinance and consolidate existing high-interest credit card debt. This saves you monthly on interest, potentially lowers your monthly payment, and gives you one lender to repay and focus on.
Another distinction is whether or not your debt helps you acquire something that offers a return in some form. For instance, a mortgage helps you buy a home. Mortgages tend to have lower interest rates than other debts, and they help you build equity in a valuable asset. You can use that equity to your advantage in the future. Student loans are another example. These can help you get an education that could translate into higher-paying jobs.
4. “You must be rich to invest”
Investing is not just for the rich. Anybody can invest their money and build wealth over time with the right plan and regular review. It’s crucial to take a measured approach. Start small and build your funds slowly, investing a little bit each month. Educating yourself on the basics of markets and investment accounts can help. Plus, the Internet and mobile apps make opening an account and investing easier than ever.
All that said, consider meeting with a financial advisor. They can help you iron out investment goals and select investments that balance risk and reward optimally for those goals.
5. “Social Security and Medicare are enough for retirement”
Social Security is not designed to cover your retirement expenses fully, but only a portion. Plus, inflation and rising healthcare costs may reduce your Social Security’s purchasing power. That means you’ll need to include other forms of saving and investing in your retirement planning. In general, you should start with your workplace retirement account. These offer pretax contributions, and employers often provide matching contributions, which are free money. You can also explore external retirement accounts like Traditional or Roth IRAs to further your savings.
On the Medicare side, Medicare won’t necessarily cover all your unique health needs. You may consider saving in a Health Savings Account (HSAs) for its tax benefits or purchasing additional health insurance in retirement.
The bottom line
Financial capability is not necessarily the reason people don’t reach their goals. They may just believe money myths that hold them back. By learning the basics of personal financial management and the truth of common money myths, you can confidently take control of your situation and build a bright financial future.
