Have you been going along without realizing you’re following misguided information? If you want to strengthen your foundation for making sound financial decisions, don’t assume what you’ve been told in the past is always true. There are numerous money myths and misconceptions that people hold onto and can work against them. Here are a few common ones to consider:
1. Money and happiness aren’t correlated.
Actually, a study done at Princeton University showed that there is a correlation between income and happiness, to a point. Happiness and emotional well-being improve with an increase in salary, up to $75,000. Beyond that, however, further increases did not provide additional improvements in attitude. Other research shows that money is a factor in happiness, but it’s not the most important factor. The level of respect and social influence a person receives is the most important factor. Of course, money has some influence on these two items.
2. There is no way ‘I’ can become wealthy.
It’s not a coincidence that a disproportionate number of extremely successful people come from poor backgrounds. It’s staggering how many highly successful people never finished high school. Average people tend to get average results. If you struggle to fit into the ‘norm’, you might be destined for greatness, although it is likely to be challenging.
3. There is only one formula for calculating a credit score.
This simply isn’t true. You have numerous credit scores. The most widely used credit score is the FICO credit score. However, the credit bureaus have their own formulas, and many financial institutions use their own scoring system. All scoring systems usually result in similar scores most of the time, but there can be variations.
4. We’ll have time to catch up with our savings later.
Many of us put off saving for retirement or our children’s education until a later date. We’re under the impression that things will be easier in the future. They might be easier and they might not. But will there be enough time for your savings plan to be successful? Probably not.
5. More education means more money.
In most cases, a higher degree does mean a higher income. Statistically, those with a college degree earn more over a lifetime than those with a high school education.However, in many fields, those with a degree do not earn more. Furthermore, the supply and demand for certain graduates can change quickly over time. Do your research before starting a program or going into student loan debt. Consider the long-term marketability and adaptability of the degree, as well.
6. Budgeting for a major purchase is the best way to save money.
A household budget is a great idea, but a budget for a single item turns out to be a bad idea. Studies have shown that people shopping for a single, large-ticket item often spend 50% more than is necessary when they used a budget. If you base your purchase on a budget number, you’re likely to come up with the highest number you can afford. Therefore, you’re better to research the various products and get exactly what you need based on the product benefits rather than randomly shopping with a budget number as your guidepost.
7. It takes money to make money.
I hear this way too many times from small business owners as an excuse to spend money and the next shiny object in hopes it will pay off for them. Yes, spending money to run and grow a business is necessary, but how much should that amount be? To get to that figure requires a simple review of the business performance and projections. From there, you can determine how much should be spent overall and then you can prioritize spending by the things that will give you the biggest return. It can’t be a shoot-from-the-hip guess, yet that is what I see happening all of the time. Heck, I even did it when I was starting out and it was not a good situation to be in. If you see yourself in this mindset trap, I highly encourage you to read the book:
It will change the way you run your business.
8. You need to make a certain amount of money before saving is possible.
Wrong again. Start paying yourself today, even if you feel things are too tight. Set up an automatic savings account and have funds automatically transferred to get money out of your direct control. A great amount to start with is somewhere between 2% and 10% of your take home pay.This is the primary concept that is featured in the book, Profit First. While the book is written for business owners, the reasoning works just as well for personal finance. As I have often heard the author mention, when you have the money easily available, you are more likely to use it.This is based on Parkinson’s Law — not the disease, but rather the concept that “work expands so as to fill the time available for its completion.” As this concept correlates to money, you can think of it as “spending expands so as to use all of the money available to spend.” Therefore, by directing money to a secondary out of the way account, you are controlling your access and ability to overspend and you begin to change your behavior to stay within the amount that is available.