We have all been subject to some form of superstition or myth in life that impacts our decisions. This is also the case when it comes to money matters.
You may be familiar with statements such as ‘Investing is risky, it is better to save’, or ‘Retirement planning can start at 40’, etc. But how many of these tips are actually true? Or are they doing more harm than good to your finances?
Here are 5 common money myths we have all heard – busted!
1. Savings are Better than Investments
Does saving money help you earn more than investing?
No, not if you understand the power of compounding!
While you do need to save (for a rainy day, to meet a goal, etc.), in the long run, the right investment is what makes you money.
Investment is also important as it combats inflation. Inflation is the reduction in the purchasing power of money. For example, if you could buy 5 chocolate bars with Rs. 100 in 2010, today you can only buy only one of them.
Yes, saving is safer but in the long run you are actually losing out on the money you could have made if you had invested in, say, a mutual fund . This is thanks to the power of compound interest.
Here’s an example to help you understand.
2. You Need To Be Rich to Invest
Most of us would have heard our family or friends tell us that investments are only for the rich and you can only invest if you have a large amount. But what if we told you that you can start investing even with Rs.500 per month?
There are a plethora of investment options available today. From RDs/FDs to mutual funds and stocks, you have multiple choices depending on your end goal as well as risk appetite.
The best part is that the minimum amount for many investment options is quite low. Considering the hefty returns these offer as compared to just saving (as illustrated above), it is definitely worth the investment.
3. Credit Cards are Great for Emergencies
Credit cards are a great financial product thanks to the ease of access as well as rewards. But the interest charged is quite high (25% to 30% or more). Therefore, credit card usage must be done with careful planning.
If you are unable to repay the amount borrowed within the interest-free grace period then you will end up having a huge debt to repay. While compound interest can help you earn more, your debts will also be just as hefty. Therefore, in case of emergencies, either break your emergency fund or better yet, avail an an instant personal loan with multiple repayment options.
4. Buying a Car is Necessary
It is almost every young professional’s dream to own a car. But will it actually help you financially over time?
That depends on a number of factors.
Note: You can use an EMI calculator to find out how much you will pay as EMI.
Another factor to be considered is that cars are depreciating assets and will require maintenance which will cost extra.
So should you never purchase a car? Not at all!
Buy a vehicle only if it adds to your quality of life and helps you save on time and effort. Don’t buy it just because you have been advised to.
5. Start Planning for Retirement After 40
It is never too early to start planning. Financial responsibilities only increase over time and with inflation, the value of money also decreases. Therefore, if your expenses are minimal, instead of splurging unnecessarily, start saving up for your retirement either through retirement schemes or low-risk investment options such as RD, FD etc.
As mentioned before, the magic of compounding allows you to earn more on your investments over time. So start saving or investing early and watch your money work for you.
When it comes to money matters, everyone has an opinion but not all opinions are facts. Myths regarding finances can be quite detrimental and can result in you losing money over time.
Everyone’s financial situations and goals are different so before following opinions, try to do your own research and understand the long-term implications of it.
There are many myths about money but the above are just 5 of the most common ones. What financial myths have you heard of or followed? Let us know in the comments below!