There is a lot of good information out there regarding your personal finances. But with all the good there is also a lot of bad. To gain control of your finances you should avoid falling for these money myths.
Buying in bulk saves money
Purchasing items in bulk is typically cheaper per unit which can save you money, but you are going to pay more for the initial purchase. This only makes sense if you know you are going to use all of it. This makes sense for non-perishable items, like canned foods, or if you have a large family that will drink the 4 gallons of milk that week. If you are only buying for two people though, you probably won’t be able to eat the 24 apples before they go bad. You probably would have been better off buying 10 apples at a slightly higher unit price and spend less overall.
Also, if you plan to buy bulk at a membership store (like Costco or Sam’s Club), make sure to also factor in the yearly membership fee. If all you are planning on buying there is canned food, you might not be able to offset the fee. You would then end up spending more!
Cash and debit is always better than credit
Cash and Debit are typically preferable for day to day expenses. They can help you control your spending and keep on track with your budget. For big purchases though, credit cards may be the better option. Credit cards offer benefits that cash and debit cards do not. Including extended warranties, additional insurance, and fraud protection. Credit cards also offer rewards for their use that you can use in the future towards other purchases.
Be careful to not use credit cards to finance a lifestyle you could not afford otherwise. Be sure to pay off whatever you accumulate on the card ASAP. Interest rates on credit cards are typically high and can quickly increase your debt to a level you can’t afford.
Savings accounts are the best place for your money
Savings accounts now are likely going to make you lose money. The typical savings
account pays less than 0.1% annually on the amount in the account. Inflation has been running about 3% a year though. Which means the money in your savings account is losing value! Each year the money in your account will be worth less than it was the year before. Instead, keep about 1 month’s worth emergency funds in your local savings account and put the rest of your emergency saving in a money market account. This type of account will provide you the liquidity you need for emergency savings and typically have a return of about 1%. This won’t outpace inflation but is doing 10 times better than your local savings account.
Carrying a balance on my credit card will improve my credit rating
Carrying a balance does nothing to improve or hurt your credit rating. What matters is your credit utilization ratio (which you should keep under 20%). If you have a card with a limit of $5,000, make sure to limit spending on the card to under $1,000 and pay off the card in full when the bill comes each month. Interest rates on credit cards are the highest and carrying a balance force you to pay interest on whatever amount you don’t pay. Money that you unnecessarily put toward interest is money that you should be saving instead.
I don’t need an emergency fund
Not having an emergency fund is something you won’t regret until something goes wrong. Say you lose your job and it takes you 3 months to find a new one. Without an emergency savings, you will quickly run out of cash on hand and you can only get so far paying for things with your credit card. Additionally, all that you charged to your credit card will be accumulating interest the entire time you aren’t employed. The situation can quickly get out of hand but could have been avoided with a decent emergency fund.
Avoid falling for these money myths and others! What sounds like it makes sense in passing may not when you pay attention to the details. If you spend some time researching common financial habits, you may find that there are better options out there.