There’s a lot of information out there about money, but there are also a lot of myths and misconceptions. You might have even heard something about finances from your parents and grandparents growing up and just believed it to be true.
This can be dangerous as you might be making bad decisions about your future. Further, you can also be missing out on great opportunities to increase your wealth.
Whether we like it or not, money is important, so let’s take a look at 10 common misconceptions that people generally have about money.
1. Investing is a Rich Person’s Game
If you think investing is only for rich people, you’re totally wrong. You don’t need a million dollars to start investing, in fact, you don’t even need a $1000.
A couple of hundred bucks a month will suffice and if you continue this practice month after month, year after year, you can be closer to being financially secure.
2. A Bank is the Best Place for Your Money
Banks are a good place to keep your money safe; it’s definitely better than keeping it inside a shoe box in the closet.
But keeping your money in the bank isn’t going to help you put your money to work for you. As a result of terribly low-interest rates coupled with inflation, you’re going to lose rather get a return.
Although this has now become a misconception, there’s some truth to its origins. During our grandparents’ time, they did get a huge return on their investment. But those days are never going to come back.
3. Cookie-Cutter Mutual Fund Plans Don’t Work
Automating your investments will go a long way to help you achieve your financial goals. You don’t have to think about it, and there’s nothing for you to do on a monthly basis.
Day trading isn’t for everyone, and it takes a lot of knowledge and experience. Further, you’ll have to take on a lot of risks. So if you don’t want to burn through your savings, go with a low-cost mutual fund option or an Exchange-Traded Fund.
This doesn’t mean that you should never engage in trading, it just means the best idea here is to spread the risk.
4. Paying with Cash is Always a Better Option
By paying with your debit card or cash, you will be missing out on freebies and discounts offered by credit card companies. So if you pay off your credit balance every month, you stand to gain and not lose.
If you want to benefit of credit, make sure that you remain disciplined.
5. Debt is Always a Bad Thing
Debt is not straight-forward. The ones lacking knowledge may see it as free money or even a bad financial decision. But the best way to approach it as a tool that provides leverage.
But this doesn’t mean that you don’t need to be careful because you do. You just have to make informed decisions.
6. Always Invest in What You Know
It’s always good to understand what you’re putting your money in, but placing all your money in a portfolio that you’re very familiar with can also work against you.
Even if you work in the industry you’re investing in, it doesn’t mean that you will have all the knowledge about how the markets will move.
This, in turn, can significantly increase your risk as there’s a lack of diversification. So when investing, diversify and spread your investments across several countries and industries.
7. Your Financial Advisor Will Always Give You the Best Advice
My dad always swore by his financial advisor and then one-day things went wrong. What I understand and what he didn’t was the fact that it’s their job to sell products just like an insurance salesman. They’re focused on their bottom line first, and your interests may not even come second.
To get the best advice, partner with a financial planner who has already pledged to serve as a fiduciary. But don’t stop there, always make it a habit to do your homework.
8. Save Every Penny and You’ll be Wealthy
There’s this myth that hoarding money can make you wealthy. Perhaps it comes from the Great Depression when people faced significant hardships.
As good as it sounds, it’s just not true. To put away enough money, you’ll have to be making large chunks of it. Let’s face it, most of us are not making massive paychecks that are going to make us all multimillionaires.
As a result, the best way to accumulate wealth is to put your money to work for you through investments.
9. The Only Way Out of Debt is to Cut Spending
Sure it makes sense to cut your spending significantly and pay off your debts, but it’s close to impossible to live for a significant period without spending a lot.
Although we might have some discipline, most of us are not going to be immune to impulse purchases.
The best way to get out of debt while still living like a normal person is to try to earn more. But that doesn’t mean that you shouldn’t have a reasonable budget, you will have to reduce spending a little bit too. But you will have some money to spend as well. What can be better than that?
10. Real Estate is the Best Investment
Sure investing in a home can always pay off, but it also depends on luck. If you remember the recent recession, you’ll recall that things don’t always go according to plan.
Although your house will appreciate in value over time, it will also depend on maintenance and improvements that you make. So you can say that it’s all relative.
Your financial future and health are important aspects of your well-being. Knowing these common misconceptions about money will help you manage your money more wisely.
While debt may not always be a “bad” thing, every dollar of debt does increase risk. The leverage concept is certainly valid and many people have made a bunch of money borrowing to buy real estate or purchasing stocks on margin. These activities are *much* riskier though that investing with cash. Leverage often works both ways – escalating increases in a good market, but also escalating decreases when things go wrong. Buyer beware. 🙂
of course there’s a risk in every investment. although real estate is less riskier than stocks, one would argue. I have seen and read many real estate investors who did borrow to buy rental properties. They are doing great and would do well till there are renters in the markets and their properties are occupied.
On the other hand I did burn my fingers while buying stocks on margin. So yes, be aware of the risks and take calculated risk only the ones which you can withstand, if things go south.
I agree that debt isn’t always bad, depending on the motive of acquiring it, but it is always risky. We’ve been told for a while that mortgages and student loans are better than credit card debt, and I understand there’s a huge difference between the value that each one of these offers consumers, however, at the end of the day, people do go bankrupt because of mortgages as well as student loans, so yes, it’s nothing to take lightly.
Earlier I was a proponent of renting. but now after being a home owner for last 2 years, I’d recommend buying your home. Owning home has many perks, one of which is motivation to save more money to pay off your mortgage early. also, increasing home value is one of the biggest factors I’d consider from my own experience