Many well-intentioned people think they are following sound financial advice when in reality, they’ve bought into some dangerous money management myths. This can lead to real financial trouble. If this sounds eerily familiar, then keep calm and read on. Here are some of the most common myths.
Myths and Reality
- Making minimum payments is the best way to manage your credit cards – False. Credit card interest rates are structured to earn money for the lender, not pay it off quickly. You need to attack credit card debt and get it paid off as soon as possible. Just because you can make monthly minimum payments, doesn't mean you should. Think of it like trying to fill the bathtub while you leave the drain wide open. It's possible to do that, too.
- If you act like you’re rich, you’ll become rich – This errant thinking leads many people to accumulate expensive clothing, cars, homes, and vacations that they simply cannot afford. Positive thinking alone doesn’t lead to the wealth required to buy costly things. Hard work and good planning do. Positive thinking won’t help you pay off high interest and debt that racks up, causing you to eventually lose the expensive items and everything else in the end.
- Big tax refunds are a good savings plan – This is a widespread myth based on a lack of confidence that you have what it takes to manage your money better than the government. While it seems nice to get money back from your taxes, it’s even nicer to keep the money you earned. By overestimating your tax contribution on your W-2 forms, essentially, you’re giving the government an interest-free loan out of your pocket and losing money. Instead of using that cash each month to pay down high-interest debt, reduce your fees, or earn from your investments, the government is earning off it and not sharing the dividends. If you want to pay for furniture or a vacation in April, do it by putting aside money from every paycheck.
- Bankruptcy is an easy solution to getting rid of debt – As a last resort, bankruptcy can take some pressure off of your finances, but this is an extreme course of action. There are also significant financial consequences to declaring bankruptcy that last for years. Remember, your debtors can also contest your filing, especially if you went on a spending spree before filing. Besides, unless you address the root of your money management problems, you’ll end up in bankruptcy court again or worse.
- I’ll save later, or I’m already too old to start now – These attitudes are the opposite sides of the same coin. It’s never too early or too late to create a good money management plan. Just get it done.
- Only business owners need financial advisors – A trusted financial advisor can only make your life easier, regardless of income, so why would that only apply to business owners? A good financial plan will cover the expenses of making the plan and help you get out of debt, avoid future debt, invest in the future, and provide for retirement. If you don’t intuitively know the best route to accomplish all that on your own, an advisor can help make that happen.
Have you fallen into the trap of these money management myths? If so, you may want guidance on how to overcome the effects of these decisions. It’s never too late to turn it around. Contact Myrick CPA for a free consultation to address financial challenges or plan for your financial future.