Common Misconceptions About Personal Finance, Corrected
Myths are persistent in any field and finance is no exception. You may have heard the excuse “I will start saving when I earn enough money”, but that is not the right mindset to begin your journey towards financial stability. Listed below are the most common misconceptions about how to handle your personal finance and the reasons why you should stop believing them:
I don’t earn enough money to start saving
Sure, barely having a few pennies left at the end of the month may make you think this way, but the issue might be hiding within your habits. Start with taking a closer look at your spending habits and see where all your money is going. Maybe you like to spend a bit more than you actually need and you could be cutting down some of your expenses to start saving for your future. Planning your budget is not that hard. On a notebook, split a page into two columns and write down your earnings on one and expenses on the other. After having all your expenses written down, check to see wheat you can cut, depending on your necessities. Follow the 50/30/20 rule for budgeting to make sure you spend your money the right way. The 50/30/20 rule states that you should direct 50% of your income towards utilities and necessities (rent, bills), 20% should be allocated to financial goals (debts, savings accounts) and 30% should go towards your wants (entertainment, dining out, hobbies). The percentage can slightly vary, depending on how much you are earning, but this should get you an idea of how you can prioritize your money.
It’s too early to start saving for retirement
Sure, when you’re in your early twenties, it might be hard to start thinking about retirement. You just started earning your own money and living the adult life, so you might be thinking you’ll have enough time to worry about this later. But if you do some research, you’ll quickly find out that even a few years can make a huge difference on your retirement plan. Besides the obvious benefits of having a bigger amount of money for your retirement, it will help you build up self-discipline regarding financial situations that you might be facing in the future and the sooner you start, the better you’ll be prepared. Ask any retirement financial advisers and they would tell you the same.
Bankruptcy is a good option to get out of debt
Bankruptcy can often be perceived as the only option to get out of deep financial issues. While it may seem like a good idea, it will certainly have a strong effect on your credit record and you will have to work from scratch to build up financial credibility, before succeeding to get another credit. If you are considering filing for bankruptcy, it may be better to consider other options. For example, an individual voluntary agreement (IVA) may be a better option than bankruptcy. IVA works by freezing your debts and allowing you to schedule a monthly payment, usually for a period of 5 to 6 years. To apply for an IVA, an Insolvency Practitioner will evaluate your monthly income, which has to be stable, and the debt amount and build up a payment plan for you. Unlike bankruptcy, an IVA debt will allow you to keep your assets and creditors won’t have the right to take further actions against you. IVA will work for almost all kinds of debts, except court fines, student loans or child support arrears. You can use this option to pay off credit cards and all sorts of unsecured loans.
Going bankrupt means you will not be able to keep your credit cards and your bank will be noticed regarding your status, while with an individual voluntary agreement, you are not obligated to inform it.
Investments are for wealthy people
Despite common belief, investing can truly be for anybody. You don’t have to be an investment genius to start investing in mutual funds. There are multiple platforms that allow you to invest little amounts and start earning money. Experts say that investing in index funds is the best way somebody with average income can start earning more money. Once you start earning more, you can increase your investments and start making real profit out of them.
Financial planners recommend investing 10%of your annual income towards various funds and increase the percentage as your earnings increase. Setting out a realistic goal, based on your current income, will help you stay on the right track.
Buying a house is better that renting
While this is not entirely false, it strongly depends on other aspects of your life. While after 30 you might want to settle down, have a family and buy a house, when you’re young, your priorities might switch quite often. You might be moving from one city to another or change jobs and consider moving to a closer area in your city so investing in a house is not the best option before being absolutely sure you want to settle down in one place. Owning a home is much more than paying mortgage or home loans. It requires quite a few substantial expenses every month, that you may not be able to handle before having a substantial income. When considering buying a home, experts advise that your monthly house payment should not exceed 30% of your total income. The rule can apply for renting as well. If your total house payment is bigger, you may want to consider moving to another place that suits your needs better.
People with average income don’t need financial planning
While some financial advisors only target rich people, there are a lot of planners who can provide you with valuable and affordable financial advice, regardless of your income. Thinking that only wealthy people turn to financial advice is a common misconception. In fact, anybody who wants to have their financial life in place and also set and achieve particular financial goals should turn to a financial planner. If you have a medical affection, you typically go to the doctor, right? The same should apply to financial advice. You would want a professional to handle your finances and give you advice on how to achieve financial stability.