Many people go through life constantly hearing conflicting stories about what is considered good and bad for their financial health. A news report on TV may tell you that it's a bad idea to rent an apartment, while another newspaper article will tell you that you can only have a successful financial life with a budget. Although I tout many of the same financial 'rules' in my articles on GradMoney, I never call them 'rules' but rather they are tried and true 'suggestions' that lead to financial well-being.
I was inspired by an article on Business Insider that highlighted several items that many people THINK are bad for their finances but actually aren't that bad. In any financial situation, the idea is to be smart and think about the action you want to take and its consequences. This way you can ignore all the talking heads who want to tell you that you are making terrible mistakes when you're, in fact, not at all. Here are 7 things that you were told were terrible financial behaviors, but actually aren't.
1. Paying off smaller debts first
Conventional wisdom says you must pay down your high-interest debt first in order to avoid paying more money in interest over time. However, this tends to backfire as individuals become discouraged when all debt levels appear to stay the same or don't drop as fast as they want them to. However, a series of behavioral experiments from the Harvard Business Review noted that individuals are more motivated and empowered when they see small balances disappear first. In turn, they are driven to pay down the next debt, and so on. Many advisors are now suggesting that their clients pay down their credit cards from the lowest balance to the highest and ignore the interest rates altogether. In the end, the motivation usually helps to cancel out any excessive interest payments.
2. Keeping finances separate from your spouse or partner
The decision to keep finances separate from your partner should be a matter of personal preference; there is nothing that says marriage means merging all of your monetary accounts and debts into one. For many, they end up doing this only to find out that they both have an excessive amount of debt that they are now both entirely responsible to pay. Deciding who will pay what bills is perfectly fine, but keeping your bank accounts separate, so long as you are not hiding anything from your partner, is not a crime.
3. Renting rather than Buying your home
Some have equated renting an apartment to "wasting money" when in reality I don't see how paying for a roof over your head is a "waste" given that it is a basic need for survival. Additionally, is it really a "waste" to avoid paying property taxes and for home maintenance when you are busy trying to build up savings and wealth. Not to mention you can always up and leave if you are offered a new and better job in another city, state or country.
4. Accruing debt
No one enjoys owing money to someone else. However, there is such a thing as good debt. Unless you're independently wealthy, it is unlikely that you can afford to pay for higher education, a house, or a car without taking on some kind of debt. In the end, having debt - AND paying it off - shows creditors that you are responsible. Debt is fine, so long as you can (and do) pay it.
5. Having more than one credit card A wallet full of credit cards may look like someone is being financially reckless, but it's actually a smart idea. Having just one credit card can ruin your credit utilization ratio. It is generally wise to use anywhere from 10% to 50% of your available credit at any time, but if you only have one credit card, that amount could be higher. And that's 'no bueno'.
6. Avoiding a Budget
Contrary to what I have written in the past regarding a budget, it is not a necessity to all people. Most people who feel obligated to make a budget start it and then give up after a month or two because it's just too much of a hassle when they fail to meet their goals. Instead, I recommend just making sure you have enough money to cover all the major expenses and obligations, then try to ensure there's 'something' left at the end of the month.
7. Investing when you don't know what you're doing
Here at GradMoney, we believe in empowering investors to take charge of their portfolios and not to worry about how much they actually understand about investing. If you're totally clueless about investing, simply invest in companies that you know well and where you consistently spend your money. In a way, you're just getting your money back ;)
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