There are tons of misconceptions that float around in the personal finance space.
It’s important to keep in mind that personal finance is, well, personal!
Your life and financial situation is unique, therefore what is going to work for you is unique!
However, there are some common misconceptions that I have seen in the personal finance space that just aren’t true (most of the time).
So here are the top money lies that are keeping you stuck in the paycheck to paycheck cycle.
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Throw Every Extra Penny You Have Toward Debt
There are numerous reasons why this advice puts you in a very vulnerable place.
If you’re putting any extra money that you have toward debt, that doesn’t leave you with much of a cushion in case something happens.
If you drain your savings and any spare cash that you have to throw toward debt, you may pay less in interest right now, but what happens if you need cash on hand for an emergency?
What if your car breaks down or there is an unexpected medical expense to come up?
There are so many unexpected things that happen in life, and because of this, you need to be financially prepared with cash on hand.
Another reason this isn’t the best idea is that it doesn’t save any room for other financial goals such as investing or saving for future spending goals.
Paying off debt is important. Especially if it’s high interest debt.
But that doesn’t mean that it’s the only thing your money should be put toward.
Not Investing Until You’re Debt Free
This is another large misconception that is spread around the personal finance space.
Time is your biggest asset when it comes to investing.
Therefore, there’s no better time to start investing than now!
Even if you have debt, getting in the habit of putting a little aside each month in a tax advantaged retirement account can make a huge difference in the long run.
Investing is a long term game, so it’s important to establish those investment habits as early as possible. Even if you’re in debt.
You can open a retirement account here through M1 Finance.
They walk you through the process step by step.
Only Having a $1,000 Emergency Fund
One of Dave Ramsey’s baby steps is establishing a $1,000 emergency fund until you’re debt free.
For the majority of people, this won’t even cover one month’s rent or mortgage.
And considering 80% of Americans are in debt, that is a lot of people that would be at risk of spiraling back into debt with that small of an emergency fund.
You should look into having around 3-6 months of expenses.
This can vary depending on your income situation, familial situation and risk tolerance.
To learn more about emergency funds and how to build one, check out this blog post!
All Debt Is Bad
This is just objectively not true.
There are ways to use debt to your advantage when you are able to use it to invest and make money money than you are paying in interest.
But besides the more complicated ways to use debt to your advantage, it’s just a huge misconception that all debt is bad and should be avoided at all costs.
Debt can award people the ability to access larger expenses such as housing and cars that they wouldn’t have the financial access to without debt.
It’s not realistic to expect everyone to be able to fund a house or car in cash.
If you work on building your credit score, then you can get better deals on these loans that you can use to access the things you need.
Speaking of credit scores…
Credit Scores Are Just an “I Love Debt” Score
This is just objectively false.
Credit scores can be used for things outside of racking of more debt.
This could include renting. When my partner and I rented an apartment, they ran a credit check to decide if we could apply to live there.
Aside from that, like we talked about before, being completely debt free isn’t possible or welcomed for everyone.
And giving people the advice that they shouldn’t care about their credit score can put them in a terrible situation if they need to access a line of credit.
To learn more about how to build your credit score, check out this blog post.
Money lies that are keeping you stuck in the paycheck to paycheck cycle.
