It can be the difference between living free from financial worries or scraping by from paycheck to paycheck. But there are several money management myths floating around that can act as roadblocks on your way to financial security.
Fear not, however, because we’re here to guide you through these myths and help establish a financial plan that’s right for you.
5 Myths of Money Management
1.) Always use rewards credit cards for big purchases
This can potentially be a dangerous line of thinking. While these types of credit cards often have fantastic rewards, they also usually have higher interest rates. So while it may seem enticing to get the boatload of airline miles that would come with a $5,000 purchase, it could cost you a lot more money in the long run if you won’t be able to pay your balance in full at the end of the month.
Stick with low interest credit cards for bigger purchases that you plan to finance. They don’t have the same frills, but they’ll end up saving you money. Better yet, don't even make the big purchase until you have the cash to pay it off in full. Then you can choose whichever credit card reaps the greatest rewards.
2.) Credit cards are only for those who need to go into debt
We've heard this one a ton of times. Many people, especially younger folks, don’t believe they need a credit card because they're not making any purchases that require them to go into debt. Their theory is, “If my checking account is sufficient, why complicate things by opening a credit card?”
Unfortunately, this is not a very smart course of action. You see, having a credit card opened in your name and making a few monthly purchases actually builds your credit. It demonstrates to credit card companies that you can be trusted to pay your bills in the time frame given to you. By proving your trustworthiness to credit issuers early on, you’ll get a head start on being able to make bigger purchases (like cars and houses) down the road.
Even if you’re only charging something like $15 a month on your card and immediately paying the balance, you’ll be taking a great first step with your credit.
3.) Having multiple credit cards is a bad idea
Many people are scared of having multiple credit cards in their name. They fear they will become confused by having multiple accounts, or they believe that credit card companies will think they’re being irresponsible.
This is definitely a myth. As long as you are a responsible person, having multiple credit cards will only boost your credit score by demonstrating your ability to manage multiple accounts. It's also great to have a back-up credit card in case your primary one gets stolen or reissued. While you should only do what you can handle, having multiple credit cards is a great idea. Again, this is only for responsible people. And no, this doesn't mean you should have a dozen cards!
4.) Coupons are the best way to save
People sometimes go crazy for coupons. When the Sunday paper comes, there are always some fantastic coupons just waiting to be snipped out and saved for shopping.
But coupons also trick consumers into spending more money than they would have in the first place. Every time you clip out a coupon, ask yourself if this was a product you already planned on purchasing. Even if it’s a fantastic deal, if it entices you into buying something you wouldn’t have, then every cent you spend would be going outside your normal budget. Make sure you use discretion when clipping out your next coupons.
5.) Buy it as soon as you can afford it
Got your eye on a new car or some other large purchase that you’ve been saving up for? While it may be alluring to go through with the purchase as soon as your bank account can afford it, make sure you have enough financial security to fall back on. I always ask myself before making a big purchase, “If I buy this, and the engine falls out of my car tomorrow, will I still have enough money to fix it?”
You always want to have a financial cushion for those rainy days. So hold off on the big purchases until you can truly afford them and your emergency fund is fat and happy.
As long as you reject these myths of money management, you’ll be well on your way to establishing a smart system for your own money.