You’ve heard that knowledge is power, right?
Being knowledgeable about your finances not only helps you to make the right decisions with your money, but it can also help you to separate fact from fiction.
“There are a lot of money myths out there that just aren’t true. If you don’t know the difference because you haven’t had the experience or taken the time to learn about your finances, you are at risk of making bad decisions or missing out on financial opportunities because you are misled. Learning about your finances puts you in the driver’s seat,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
One of the benefits of working with a credit counsellor is that you have ongoing support and access to financial literacy resources to help you learn as much as you can. It’s also an important step in keeping your debt down. To learn more, call one of our trained credit counsellors at 1-888-294-3130 or check out our free online debt analysis.
Here is the truth behind some of the most common money myths:
It’s better to own a home than rent a home
While owning a home is a great way to build wealth, it doesn’t always make sense financially to own a home. Owning a home comes with a lot of other costs, like taxes and maintenance. Furthermore, if owning a home means that you need to take on substantial debt through a mortgage putting a strain on your cash flow, it’s not a good idea. Renting would be more financially responsible.
You also have to consider your lifestyle. Do you plan to stay put for a number of years, or do you anticipate having to move sooner? It takes a few years before you begin to realize a return on your home investment, as moving, buying and selling are costly. Make sure your longer-term goals align with your homeownership tenure.
Student debt is just part of post-secondary education
With the high cost of post-secondary education, it is true that many need to take out student debt to cover expenses, but you shouldn’t necessarily resign yourself graduating with debt as an inevitable situation.
You can reduce the amount of debt that you graduate with by working part-time during school. Consider living at home to save on rent or deferring school for a year to work and save up your money.
I don’t have enough money to put into savings
Truly, something is better than nothing when it comes to savings. It is all about establishing the habit. It may seem like directing money away from your debt repayment doesn’t make a lot of sense, but putting even a little bit in savings every month is necessary.
Think of water dripping in a pail. It doesn’t seem like much when it is coming out, but over time those drops accumulate.
My spouse manages my money, so it’s not something I really need to think about
It’s ok to let one spouse manage the money, but both spouses need to be engaged and aware of how their finances work. You are more likely to achieve your financial goals and keep your debt low if you work together. Furthermore, if something were to happen to your spouse, you are much better equipped to manage any financial trouble if you have been involved all along.
If I have an emergency, I’ll use my credit cards
Big mistake. You need to have cash on hand to cover your expenses in the event of an emergency. Emergency expenses can be substantial and far outside your budget to repay if you rely on credit. Many people run into debt trouble using this exact philosophy.
I’m just starting my career. Why bother with retirement savings when I’m not retiring for years?
Even if retirement is years away, there is no time like the present to start saving. As we mentioned above, successful saving has a lot to do with establishing habits.
Your money will grow more when invested for a longer time horizon. Additionally, you are able to use retirement savings to achieve other goals, like using your RRSP as a down payment for a house. You can achieve your short-term and long-term goals at the same time.
I can improve my credit score if I have a balance on my credit cards
Actually, depending on how much you owe on your cards, carrying a balance month to month is going to lower your credit score. If you are at or near your limit, your credit score will come down.
The best way to improve your credit score is to concentrate on making timely payments (this is the biggest factor in influencing your credit score). At the same time, work on reducing your credit card balance, which will increase your cash flow and help with your credit score at the same time.
It’s not just about your credit score either. Carrying a balance means paying more costly interest, which is another reason to pay your debt down.
Good debt can’t hurt my credit
Yes. There is good debt and bad debt. However, “good” debt quickly becomes “bad” debt when you spend beyond your means and can’t afford payments.
Good debt is typically classified as a debt that is taken out in order to improve your overall wealth. This can pertain to student debt (because it increases your earning potential) and house purchases/renovations. In some cases borrowing to invest is ok as well (i.e. a small balance RRSP loan).
“In order to keep good debt on the good side of your finances, only take out as much as you can afford to reasonably pay back in as quick a timeline as possible. Don’t max out your debt, justifying it under the “good” category. If you fall behind in payments, no matter what the debt was taken out for in the first place, it is just as damaging to your credit,” says Schwartz.