Financial advice is great – when it is the right type of advice. Don’t fall for these traps as they keep you broke and in debt.
I remember when I was younger, my mom told me that I had to get a credit card because it would be important for any emergencies which came my way. I followed her advice and got a credit card.
And, wouldn’t you know it, the first time I used it was for an emergency. Or, what I thought was an emergency.
I woke one snowy morning and someone had hit my car — and fled. No note on my windshield. Just a dented door with green paint.
I was devastated. I had worked so hard to afford that car. Now, here I was having to pay money to get it back to the condition it once was. Since I was broke, I followed my mom’s advice. I used my credit card.
I remember watching it go through the reader. I signed my name and I was done. When the bill came the following month, I paid that minimum payment.
I decided that credit cards were pretty slick! They were simple to use and it was the way to get what I wanted now and I could just pay for it later.
In hindsight, my mom would have been better to teach me the importance of saving. That way, I would have cash on hand to cover my emergencies and not rely upon plastic.
Sadly, this is the way many people live their financial life. The take the advice of friends and family and follow it rather than listening to financial experts. Here are some common financial advice myths.
1. Some debt is good to have.
I hear time and time again that you have to have debt in order to have a good credit score. That type of financial advice is pure nonsense.
There is no such thing as “good debt.” Debt is money you owe someone and it is never a good thing. It is, however, sometimes necessary in order to purchase a house or a vehicle. While not what one would call good debt, it may be debt you need to have in order to live.
The type of debt no one should have is credit card debt. Ever. There should never be any instance where you owe more on your credit card in any given month than money you have in the bank to pay it in full.
Continuing to accrue debt that you can not pay in full each month makes no sense at all.
2. You need a credit card for an emergency.
My story above is all too common for many. The opposite is true. You can have a credit card, but should not use it only for an emergency. However, if that is how you plan to pay for emergencies, you are setting yourself up for financial trouble.
We all know that emergencies will happen. There is nothing we can do to prevent them. However, the smart thing to do is to plan ahead for the unknown. This is why a full funded emergency account makes more sense than a credit card.
If you think about it, having to deal with the stress of the situation is bad enough. Add to it the thought of increasing your debt in order to deal with it just makes the situation a work. Now, you not only had to deal with the broken furnace, but now, you will have to find a way to pay for it as your monthly bills just went up.
Your emergency fund will come to your rescue when it is needed. Knowing the funds are there to help cover those expenses will instantly make you feel better when dealing with a stressful situation.
3. Leasing vehicles is better.
This is the one that makes me scratch my head. When you lease a vehicle, you never own it. Instead, you are stuck in perpetual car payments. How does that make any sense at all?
The common reason many say they lease is that they don’t have to worry about having an older vehicle. They know that they are driving a new vehicle every few years. The truth is, if you take care of your car, your vehicle can last you for years. I am driving a 12 year old mini van that works as well today as the day I drove it off of the lot.
If you lease a vehicle for 3 years at $300 a month, you will pay nearly $11,000 to drive the vehicle. At the end of 3 years, you give it back. You have nothing to show for it. You have just thrown away $11,000. Now, you have to either lease again or decide to purchase your vehicle. You are starting over on those payments.
However, had you purchased a vehicle that would offered you the same monthly payment of $300 for 3 (or even 4) years, you would own your car. You now have $300 a month income freed up to do with what you wish.
The smart move would be to save that $300 monthly amount so that in 8, 9 or even 10 years when you need a new car, you can pay for it in cash. This money will also more than cover some of the repairs that may be needed as your vehicle ages.
4. Renting is throwing your money away.
If you rent, you probably this financial advice frequently. It is common for people to feel that it makes more sense to buy a house as your money is going to build up equity in your property. And, truthfully, for some people renting is a waste of money.
But not for all.
There are situations where you do not have the funds for your down payment. It could also be a time in your life when you know there will be the potential for relocating to a new city or venturing down a new career path.
By renting, you also avoid the additional costs of home maintenance, insurance and other expenses which go with owing a home.
The best way to know this one is to look carefully at your own budget and personal situation. If renting works for you, then that is the path you should follow.
Getting financial advice from family and friends, be it solicited or not, can be helpful. However, just make sure that what they say makes sense and do your homework. Following what they say can often lead you down a path of increased debt and unhappiness.