It’s not the things you don’t know, but rather the incorrect things you believe, that cause many of the real challenges in life. A few errors in your thinking can be a detriment to your finances. Enhancing your understanding of money and personal finances is an effective way to get on the path to prosperity.
Avoid these money myths:
1. Income equals wealth.
People that make more have a tendency to spend more. Lottery winners are notorious for losing everything. Many of the families that earn over $1 million per year manage to outspend their income. You can earn a very high income and still live paycheck to paycheck.
Wealth is what’s left over after you’re done spending. The more money you’re able to invest in appreciating and income-producing assets, the more you can expect your wealth to grow. A high income provides opportunity. It doesn’t provide a guarantee.
2. More money equals more happiness
Money has nothing to do with happiness. Studies have consistently shown that more income results in greater levels of happiness to a point. The break-even mark appears to be $75,000 per year.
If you’re earning less than $75,000, you can expect your feelings of happiness to increase with a greater income.
If you’re already earning that much or more, more money isn’t going to make you feel any better.
3. Wills are for rich people
Everyone with children or assets needs a will. Unless you want the courts to decide who will raise your children and receive your assets, you need a will. A simple will is only a few hundred dollars. You might even be able to do it yourself for less.
4. Owning is better than renting
From a financial viewpoint, it depends. Mortgage interest is deductible, but it’s still a significant expense. Home ownership also includes property taxes and maintenance. The upside is the potential for appreciation and a place to call your own. Crunch the numbers and decide for yourself.
Renting is generally advantageous in the short-term.
5. Quality and price go hand-in-hand
There are many examples of this statement being false. Generic drugs are identical to the brand name version and cost much less. Companies price goods and services in order to maximize profit. That means the perceived value affects pricing, not the actual value.
Many items are priced to accommodate expensive marketing campaigns. The Beats headphones so popular with teenagers are considered by experts to be only worth half the common retail price. In this case, you’re not paying extra for higher quality.
6. An index fund never wins
Over time, index funds outperform the majority of managed funds. More often than not, the lower expenses and turnover rate of an index fund are more important than a professional stock-picker. Take advantage of the ability to match market returns for very little expense.
7. You should never have a credit card
Credit cards are a wonderful invention if used properly. However, credit cards also provide a means to spend money you don’t have. This can be a challenge or a godsend, depending on the circumstances. Credit cards can also help (or damage) your credit.
Are your erroneous beliefs limiting your financial growth? Consider all of your money beliefs and question if they might be incorrect, too. Having accurate beliefs enhances decision-making and results. Avoid buying into the myths.