When you don’t have any money, it’s hard to know how to manage it properly. It makes sense – when you don’t have experience and training, why should you be an expert in something?
Unfortunately, this means that when we deal with money, we often have to base our actions on suggestions and experiences of others. While such people often have good intentions, they often feed us some outdated truths about money, ideas that might have worked in the past, but are no longer valid. The sad thing is that having such misconceptions about money will end up meaning you never really have any of it, because you aren’t thinking of it the right way. Here are five misconceptions you need to get rid of right away.
1. A penny saved is a penny earned
We’ve all heard this saying, right? The old wisdom goes that if you’re able to save your money and keep it to one side, you are essentially earning money for your future. If you don’t spend it now, you’re putting it aside for later.
Sadly, this isn’t exactly true. When you have money saved up, it can disappear in an instant, through an emergency with your home or a family member who needs help. It’s hard to save up enough money over time, even if you’re living frugally, to really make a difference to your status. Instead of just putting money aside, what you need to do is invest what you have saved and try to multiply it. This will give you more of a nest egg or emergency fund to fall back on, and could even help you to transform your life completely.
2. Having a good job means you’re financially stable
Too often, people rely on the fact that they have a good salary and believe that this will keep them financially stable for a long time. The people who believe this simply aren’t looking far enough ahead or thinking about emergencies.
What happens if your car breaks down? What if you get injured in an accident and can’t work for a while? Or ever again? Even if nothing so serious happens with your health, being fired without any previous notice is not unheard of in today unstable economy. Who will pay for all necessities before you can find another job?
You need to start thinking about these things now. That means actively seeking additional sources of income, setting up a pension, putting some money into savings, and putting a plan together for what you will do if everything goes wrong. Don’t let one source of income, no matter how big, fool you into believing that you are financially stable. One source of income is just that – one source. Should it go dry, you will find yourself in a financial crisis.
3. Debt is fine if you can make the monthly payments
You sign up for another payment plan. You take out a short-term loan to get that new car. You raise the mortgage to cover a new house. It’s all fine, so long as you can afford the monthly payments, right?
No – it’s not. You need to decrease your debt as much as possible – pay everything off early if you can, and avoid getting into payment plans unless it’s absolutely necessary. Why? Because every payment you make on a monthly basis is money that you’ll never see again. You can’t effectively save or create a nest egg if you’re still paying off debt.
4. A budget will save you money
If you take the time to set up a budget, counting your incomings and outgoings, then you’re going to be able to save yourself a lot of money. It’s a great way to manage your household finances.
Except it only actually helps if you act on what you see! If you just add everything up and ignore it, you’re still going to be in a worse position financially than you could be.
5. Earning more means spending more
Ever wonder why you don’t seem to have much disposable income, even though you’re earning more? Earning more doesn’t mean you should be immediately spending more. You don’t need to upgrade your car, get a bigger house, or indulge in a shopping spree to celebrate a promotion. Of course, it’s absolutely OK to raise the standard of your life with your additional money. However, what you should be aiming at is more financial freedom which you can only achieve if you don’t spend money on trivialities.
Think of your salary increase or overtime payment as a reward in itself. You don’t have to buy something with it – just save it up and invest it.
Overall, the biggest thing you need to do is start saving money immediately. As for the rest, it’s all about good budgeting and investment! The better you manage your money, the more of it you are going to have.
About the author:
Alana Downer is a personal finance blogger and a staunch advocate of achieving financial freedom. Currently working as a part of the team behind Learn to Trade, Alana might often be found online, participating in online financial discussions where she shares her tips and ideas. Feel free to reach out to her on @alanadownerLTT.