5 Money Management Myths That Can Upset Your Financial Well-Being

When you initially embark on your journey of earning income, or even in general, individuals in your immediate circle will offer you guidance and suggestions regarding personal finances. You might have already received much advice about do's and don'ts with your finances. This builds up several financial myths that may influence your financial decisions and affect your financial well-being.

The spread of financial literacy has made lay investors savvier than before, but some misplaced beliefs still persist. Planning your finances may be like navigating a minefield of money myths. Most personal financial misconceptions arise from random nuggets of advice, such as those published on social media handles. Well, such popular money misconceptions, on the other hand, must be avoided at all costs since they eat up your intellectual faculties and impair your financial judgements.

As a result, such money management fallacies must be debunked with appropriate knowledge, and you can get rid of them with a simple understanding of financial planning. In this article, we will tackle 5 misconceptions about money that, if ignored, can jeopardise your finances.

Here are some common money myths which we must debunk at the earliest for effective personal finance management. Unfortunately, these myths can be significant roadblocks for people who are just beginning to get control of their financial situations. Some popular personal finance myths include:

1. You need a huge corpus in hand to begin investing

How many times have we heard people saying, 'I will start investing as soon as I have enough money.' Since no amount of money is ever judged sufficient when it comes to earning or saving, the notion of 'enough' in this context is subjective. If this is your reason for not saving, you should know that it is one of the most common personal finance myths. Your capacity to save and invest is unrelated to the size of your income. You must save at least 10% of whatever you make each month.

Some individuals fail to understand that they must not wait for the money to accumulate before making their first investment. Investing is important, even if they may invest as low as Rs 500 a month. As we all know, investments in SIPs can be started for as little as Rs 500 every month. So start saving and investing today, irrespective of your income.

This misconception of saving enough or large amounts of money to invest has prompted many people to start late, depriving them of the compounding effect on money when invested over a long period of time. Remember that anyone with a tiny amount of money stashed away may obtain a footing in the market. A sound investing strategy might be the most effective method to begin accumulating money and putting you on the path to create your financial journey.

2. Having a credit card improves your credit score

There is some truth to this; owning a credit card helps boost your credit rating, but only if you pay off all your bills on time every month. Only then may credit cards be utilised to boost your credit rating. If you have a credit card and are unable to pay your payments on time or make the minimum payment, your credit score will suffer considerably. Having a credit card alone will not boost your credit score.

Moreover, some may also treat their credit card as a source of emergency funds. However, depending on credit cards to get you through a financial emergency is the perfect way to dig yourself into a deep pit of debt. Bear in mind that you will be paying back a lot more than you spend. Thus, credit cards should not be relied upon for a real financial emergency; instead, it is best to build an emergency fund of 6 to 12 months' worth of living expenses, including loan EMI, to cover yourself for unforeseen circumstances.

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3. Your expenses will decrease in retirement

It is not certain to believe that expenses will drop during your retirement years. However, it may happen that a few expenses may indeed reduce or completely go away while other expenses may creep into your budget, such as expenses for medical treatments. Maintaining your health in your golden years is a crucial task, and skyrocketing medical expenses can make it more challenging. How much money each of us would need for our retirement also depends on our personal lifestyle choices. Retirement planning is about saving and investing to ensure financial security in the golden years.

Individuals in their 20s and 30s, on the other hand, may believe it is too early to plan for retirement. Who can think about retiring when it's so far away because they're just beginning their career? Besides, who can afford to prepare for retirement when they have other pressing needs, such as paying for a house and sending their children to college? However, there is no better time than now to begin planning and saving for retirement. The earlier you begin saving for retirement, the less you'll have to contribute each month, and the more you'll have saved by the time you're ready to retire.

Waiting until 40 years of age can cause a person to miss taking advantage of their highest earning years. Plus, you need to consider the rising inflation cost while investing towards your retirement goals. Thus, it's prudent to begin planning for your sunset years as early as possible.

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4. Investment in market-linked avenues involves high risk

Not everyone understands the significance of putting their money into worthwhile financial tools such as mutual funds. Fear of the unknown also prevents individuals from investing in securities such as shares, equities, debt funds, gold, real estate, and others. Lack of financial knowledge also plays a significant part in many individuals being unable to invest their funds in suitable investment avenues for wealth creation.

Whether you invest your money or not, the amount of 'risk' stays the same. In fact, not investing your money puts you at a greater risk of not allowing it to grow. If your money is sitting idly in your savings account, it will not be able to beat the rising cost of inflation. It is the risk factor that allows your hard-earned money to generate more money by earning decent returns from your investments. This helps in building your wealth in order to achieve your various financial goals like buying a house or car, financing your child's education or wedding expenses, retirement etc.

Taking necessary risks is important; its quantum defines rewards. Nothing comes for free; you pay the price for everything. When it comes to investing, price is the amount you invest and the risk you are willing to undertake. Investment in market-linked avenues does involve risk; however, you may consider investing only in suitable investment options based on your risk tolerance level, investment horizon, and objectives.

5. No need for insurance coverage If you are healthy

The objective is to have adequate life insurance and health cover that indemnifies the risk to life and covers the cost of medical treatments and healthcare for you and your family. Life can be very uncertain, and the recent pandemic crisis has exhibited the significance of insurance coverage for any individual. Even if you are healthy or make diligent efforts to maintain your health, given the uncertainties in the world (environmental concerns, virus transmission, etc.), it is essential to protect yourself with proper insurance coverage.

Unexpected medical emergencies or conditions can leave you looking foolish if you do not have adequate life and health insurance cover. An insurance cover will help your family and loved ones to fulfil any financial requirements in your absence. Thus, you must purchase a suitable insurance plan that covers your financial needs and ensure the terms and conditions applicable as it will help to have an easier claim.

To conclude...

These money myths are widespread and are believed by a large number of individuals. And you, too, have believed in them at some time in your life. Well, not anymore!

As intriguing as it may sound, personal finance is riddled with fallacies that make it look unwantedly complicated. However, it is your responsibility to grasp your finances better to avoid believing in money management myths. You should preserve your money for the future and invest in options where you see the potential for growth.

Furthermore, you should arm yourself with financial knowledge, which will help you comprehend the nitty gritty of financial planning, be financially alert to avoid believing in any misconceptions and make informed financial decisions to maintain your financial well-being.

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.