When it comes to managing your money, you’ve likely heard a lot of rules and advice.
“Spend less than you earn.” “Start saving early for retirement.” “Stick to a budget.”
But there are also a lot of misconceptions out there.
All debt is bad
Debt gets a bad rap, and we’re often told that it should be avoided at all costs.
But there is such a thing as “good debt” — debt that carries a low interest rate and can help build wealth over time.
The idea behind good debt is that it will bring future value, like taking out a mortgage or college loans.
But “bad debt” — like credit cards that carry high interest rates — can quickly put you in a financial hole.
“Credit card debt is one of the most dangerous things… way worse than investing poorly or saving money in the mattress,” said Michael Resnick, a certified financial planner and senior wealth management advisor at GCG Financial.
And even with good debt, you don’t want to overextend yourself: It can still become a problem if you can’t afford the payments.
Debt plays a role in determining your credit score, which lenders use to assess your credit risk and what interest rate you will be charged. The higher the score, the better the terms, which saves you money on interest.
Renting is like throwing your money away
Buying a home can help build wealth as you hopefully build equity over time.
But becoming a homeowner doesn’t always make financial sense.
“Buying a home can be a great investment in the long term, but it’s not necessarily right for everyone,” said Trina Patel, a financial advice manager at money management app Albert.
The homebuying process comes with many upfront costs, including the down payment and closing costs, as well as expenses beyond the mortgage like homeowners association fees, property taxes, insurance and any repairs.
For people who are only planning on living in an area for a few years, renting could make more financial sense.
“Why take the risk of actually losing money on the property in the short-term, not to mention the transaction costs of buying and selling?” said Resnick.
You’ll spend less money in retirement
You know all those things that you keep adding to your “things I’ll do when I retire” list?
They’ll likely cost money.
There’s a general rule of thumb that you should aim to have around 80% of your annual pre-retirement salary. The idea is that you won’t need to save anymore, your mortgage will be paid off, or you’ll spend less if you’re not going to work everyday, or so the thinking goes.
But for some, their retirement lifestyle could be even more expensive than their working years.
“We have several clients who spend more money in retirement because they finally have the time to travel or want to buy a home or want to help grandchildren’s college funding,” said Chad Chase, managing principal, client services, at Garrett Investment Advisors.
It’s rude to talk about money
For some, talking about money is considered taboo.
But talking honestly about money with your partner can help establish spending and saving expectations.
“And if you have kids, keep them in the loop and teach them as early as you can about how to manage money,” said Patel.
Money talks among your peers at work and your friends can also be beneficial.
Sharing your salary (or a range if you aren’t totally comfortable giving an exact number) can help identify pay discrepancies and empower others to make sure they are getting paid their worth.
Talking about budgeting and savings tips among friends can help make the process seem less intimidating and shed light on tools and tricks to help everyone bolster their financial footing.
“There is a lot we can learn from each other once we start talking about money. When you have it all guarded, you don’t know what you don’t know or what else you could be doing,” said Patel.