TOP 10 PERSONAL FINANCE MYTHS THAT ARE HOLDING YOU BACK
Overview
We have a tendency to accept often repeated phrases as truth just because they are often repeated. This is especially true concerning topics we are already less knowledgable about or intimidated by. And that brings me to this list of personal finance myths that, for whatever reason, we have all collectively and unquestioningly accepted as truth.
Ten personal finance myths that are holding you back are:
- Personal Finance Is Only For The Wealthy
- Personal Finance Is Complicated
- A Budget Is A Constraint
- You Can’t Become Wealthy
- You Need A Lot Of Money To Start Investing
- Retirement Saving Only Matters Later In Life
- Debt Is A Wealth Building Tool
- You Can’t Earn Enough To Avoid Debt
- A Good Credit Score Is An Absolute Necessity
- Credit Card Rewards Are A Good Deal
Let’s take a closer look at why each of these generally accepted statements are, in fact, personal finance myths.
#1: Personal Finance Is Only For The Wealthy
If you want to have money, you’ve got to understand money. That means that regardless of your current financial situation, you need to get a handle on exactly what is going on with your income and spending. At the end of the day, that’s basically what personal finance is.
Everyone, and I mean everyone, should at the very least have a budget that helps them understand their finances at the most basic level. But, truthfully, that is just the starting point.
Savings, investing, and long term financial planning are not just for the currently wealthy. Those are the things that allow everyday people to become wealthy. But those are also the things that scare people away from personal finance.
Instead of throwing your hands up because you don’t understand investment strategies and long term planning, start learning. Check out our Top 5 Personal Finance Books article for starters. Then, get yourself a good advisor or coach who will teach you and guide you in your wealth building journey.
#2: Personal Finance Is Complicated
Speaking of saving, investing, and planning….it’s really not all that complicated. Or maybe it’s better to say that it doesn’t need to be.
See, you could get into day trading, single stocks, flipping houses, or any number of risky, short term investments. And, truthfully, you could make some real money doing it. But I wouldn’t recommend it. It’s risky, and it’s more complicated than it’s worth.
Instead, a simple, safe path to wealth in the long run is to use your established income to invest regularly in things you understand, preferably in some sort of retirement account. Again, a good financial advisor can help you structure all of this and ensure you understand where your money is going and why. Then, it’s just a matter of setting up that monthly paycheck deduction and checking the accounts periodically.
Want definitions and explanations? Check out these articles:
#3: A Budget Is A Constraint
I’ve addressed this many times before, but it always bears mentioning as it’s such a common belief. Budgets don’t hold you back, budgets set you free.
With a budget, you can decide exactly how much money you want to put toward each of your financial goals and obligations each month. Then, anything left can be set aside for discretionary spending. AKA: whatever’s left is what you have to blow on whatever you want to without guilt or worry that you’re running out of money.
For a detailed discussion of this point, check out this article:
#4: You Can’t Become Wealthy
I’m not sure why we think everyone who’s wealthy just inherited it. Maybe it’s because that’s the lie the media tends to push, or maybe it’s just because the extravagant wealth we see from some individuals seems so unobtainable. But, here’s the truth, you can become wealthy.
Just think about this, Amazon started in the 90s. Jeff Bezos built that company from nothing in a couple of decades.
Financial expert Dave Ramsey went completely bankrupt in the 90s, and now owns and runs a multimillion dollar company that helps others turn their financial lives around and build wealth. He also built this in a matter of decades.
And, of course there are many more less extreme examples. Probably living on your street. Read Chris Hogan’s “Everyday Millionaires” or Thomas Stanley’s “The Millionaire Next Door.” All the stats are there.
You can become wealthy. The key? Time, patience, a plan, and discipline.
#5: You Need A Lot Of Money To Start Investing
This one really doesn’t even make sense if you think about it. I mean, the point of investing is to build wealth, so why would you already need to have wealth to get started? But, again, somehow we’ve convinced ourselves that if we don’t already have money, we can’t get into the investing world.
My grandfather spent his entire career working for the railroad. He earned enough to support his family and give abundantly to his church, but his income was never anything to write home about. Still, before he passed he was able to gift me a significant number of stocks. Tens of thousands of dollars worth. My sister as well. And now my grandmother (his wife) is able to live comfortably in one of the best senior living facilities in our area without worrying about running out of money. This is all because my grandfather didn’t wait until he already had wealth to start investing. He built wealth through investing in the stock market and real estate over time.
Don’t wait until you’re already wealthy to start investing, or you may never actually become wealthy. Use investing as a tool to get there no matter what your income is.
#6: Retirement Saving Only Matters Later In Life
Two words come to mind here: compound interest.
I talked about this in my article explaining what it means to invest, but here’s the bottom line: The sooner you put your money to work, the longer it has to grow. Then, the growth can also grow. Then the growth from the growth can also grow. And all this growth continues to build even as you continue to invest. This is how investing should work.
Here’s how I explained it in the above mentioned article:
“Basically, you buy some stock at a given price, say $1,000. Over the next year, the value goes up by 10%, so without buying any more stock, your investment is now worth $1100. Already winning. Say you don’t buy any more, and the next year the value goes up 10% again. Well, 10% of $1100 is more than 10% of $1000. See, now your interest is gaining interest for a total value of $1,210. Another year, another 10% and you’re up to $1,321. The interest is compounding.
You can see how, with a larger investment value, if you continued to invest on top of this compounding interest you could get to a point where you could generate a good income from the interest alone without touching the principle balance.“
Start early, and get compound interest to work for you!
#7: Debt Is A Wealth Building Tool
I’m not a fan of any type of debt. I don’t even really like my mortgage, and my wife and I are plowing through it as quickly as we can. Why? Because debt=risk.
With that in mind, I don’t think that debt is a very good tool for building wealth. Is it possible to use debt to generate a cash flow that outpaces the interest rate on the debt? Well sure. You can read all about creative ways to use debt in Robert Kiyosaki’s “Rich Dad, Poor Dad.” And I think you should. That way you can make your own decision about how you will or won’t use debt in your finances.
If you want my personal opinion, debt creates risk, and I don’t want to rely on risk as a means to get ahead when I can avoid it and still have success.
Check out this article for a deep dive on the topic of “Good Debt:”
#8: You Can’t Earn Enough To Avoid Debt
This is a tricky one to address because there are so many variable at play. But the short version is that yes, you can certainly live without debt. At any income.
Maybe you feel your income is too low. In that case, it may be time to look for a new job. No career level jobs open in your area right now? Maybe you need to look into some side gigs until something opens up. I’m certainly not saying the job changing, extra income earning process will be easy or fun. Only that it is possible.
Or, maybe, like me, you’re in a job that does pay okay, but just not great. My wife and I are both teachers. Not the highest paying gig in the world. Still, it’s enough to live on comfortably. For people like us, living debt free isn’t so much about a career change or earning extra income. For people in our shoes, it’s more about accepting the lifestyle you can afford and not trying to keep up with the Jones’s, as they say.
So, can you live debt free? Absolutely! It’s just a matter of finding a decently paying career or supplementing your income and then living within your means.
#9: A Good Credit Score Is An Absolute Necessity
So what is a credit score? There are several factors at play, but at the end of the day it’s basically a way to relate your relationship with debt. And this is no different than any other relationship.
If you don’t speak to your significant other, don’t give them a hug when they ask, or don’t even interact with them at all, you’d get a pretty bad “Partner Score.” Same with your credit score.
As long as you are going to keep debt as a part of your finances, then yes, you want to keep your score up by making your payments on time and having some open accounts.
But, if you’re going to go debt free, eventually you won’t even have a credit score. Because you won’t have a relationship with debt to base it on. And guess what? You’ll be fine.
In fact, what do you usually need a credit score for? To get a loan. But if you aren’t going to take out any more loans… See what I mean?
#10: Credit Card Rewards Are A Good Deal
Can you get “free” flights with a credit card? I guess, depending on how you look at it. Can you get some cash back with credit cards? Sure. But, are these programs really a good deal…?
Let me put it to you another way. Do you really think that you are going to outmaneuver a multibillion dollar industry who has spent money learning your spending habits and how their product effects them than you’ll ever have in your lifetime?
I don’t.
Don’t fall for the hype. Like I’ve already mentioned under the previous few headings, debt of any kind (even paid off monthly) is risk. And these gimmicks are just designed to put you in debt to the companies that created them.
Conclusion
So, what were our myths again?
- Personal Finance Is Only For The Wealthy
- Personal Finance Is Complicated
- A Budget Is A Constraint
- You Can’t Become Wealthy
- You Need A Lot Of Money To Start Investing
- Retirement Saving Only Matters Later In Life
- Debt Is A Wealth Building Tool
- You Can’t Earn Enough To Avoid Debt
- A Good Credit Score Is An Absolute Necessity
- Credit Card Rewards Are A Good Deal
Don’t fall for these myths! Take control of your finances through a budget and through educating yourself and start building some wealth today!
Want help?
And as always, regardless of your money goals, you can “Bank on a Budget” to get you from where you are to where you want to be!
Don’t fall for these myths! Take control of your finances through a budget and through educating yourself and start building some wealth today!
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Have you fallen victim to any of these myths?