MONEY TIPS

7 Money “Truths” Debunked

1. Talking about money is taboo

This is a dangerous myth.

How is anyone supposed to improve their financial knowledge and reach their monetary goals if they can’t even talk about finances?

When I was a teenager, I was curious about money. I had always been a saver, but money wasn’t talked about much in my household, so I didn’t know a lot about my options when it came to saving or investing. I’m sure if I had asked more questions I would have been met with answers, but I didn’t think I could ask.

It wasn’t until a grade 12 math class that the cogs started to turn in my mind. Three of the nine units we studied in that class had to do with money: mainly interests, loans, and debt.

It was incredibly helpful and every day you could see the lights going off in students’ brains as they uncovered more and more about the elusivity of money. And many of us quickly found ourselves more engaged and interested in attending classes and soaking up everything we could because, finally, someone was talking about something we all wanted: money.

It was from there that I got my first credit card and started poking around in the world of investing (though it was another few years before I invested my first dollar).

You see, understanding money at a young age is so crucial; banks prey on vulnerable, often ill-informed young people in hopes of making money. If we never talk about money, we will never escape the greedy grasp of the financial world.

2. Only high-earners can be affluent

This is another common mindset I see often, especially in young people. I have a number of newly graduated friends that are completely overwhelmed in student loan debt and feel helpless. Coupled with their lack of work or low-paying entry-level positions, they’re worried they won’t ever be debt-free and financially stable.

This is honestly devastating to see — and it’s also a harmful attitude towards money.

If you give up before you’ve even started, how do you expect to improve?

That’s like deciding not to study for a test because you’re convinced you’re already going to fail. But maybe if you studied, even just a little bit, you’ll have better results. Well, it’s the same with money. If you save, even just a little bit, you’ll have better results.

My advice here is to push those negative thoughts to the side and start a savings plan. There are so many resources out there to help you put together a budget, whether you’re making $10/hour or $300/hour (my personal favourite is the YNAB method). Because, if you’re convinced you’ve already failed, it doesn’t hurt to try, right?

3. All debt is bad

Of course, you don’t want to be sloppy with your finances and find yourself drowning in debt if you can avoid it, but there are some forms of debt that are actually financially savvy.

Buying a house is a great example. Most people don’t have a spare $500K to drop on a home, and if you do, then I’m surprised you’re reading this article.

Nevertheless, taking out a mortgage to buy a home that is within your means isn’t something to worry about. The key here is that any loan you take out should be, as stated, within your financial means to pay back.

But what does “within your means” even look like?

Well, the common guideline to follow is the 28/36 rule of financing a home.

This is a rule commonly used by lenders to determine how much money you will be approved for, but it’s also an invaluable tool in calculating how much debt you can afford.

The breakdown is simple:

1. Your total monthly household expenses (principal, interest, taxes, insurance or PITI) should not exceed 28% of your gross monthly income.

2. Your total household debt should not exceed 36% of your gross monthly income.

Let’s say you have a gross monthly income of $3,200. Following the 28% rule, the maximum you should spend in monthly mortgage payments is $896.

3,200 x 0.28 = 896

Similarly, to calculate your total household debt, you need to include any other debt you’re also paying. Following the 36% rule, the maximum you should pay in total debt monthly is $1,152.

3,200 x 0.36 = 1,152

If you want a simple way to calculate these numbers for yourself, I suggest this calculator from Omni.

The 28/36 rule is key in helping you avoid becoming house poor. Additionally, if you ever take a pay cut, lose your job, or suffer some other financial burden without following this rule, you may find yourself unable to continue paying off your home.

So, as long as you’re smart about it, debt shouldn’t be a scary thing.

4. You’re too young to worry about retirement

I don’t believe there’s any reason not to start saving for retirement, regardless of your age. The beauty of compounding interest is that the longer it is stashed away, the more money it accumulates.

Let’s assume you start saving at age 25 with no principal investment, but an annual savings of $5,000. You do this for 40 years until retiring at 65. Now, you’ve put in $200,000 of your own money, but assuming an annual return of 5% and a monthly compound period, that $200,000 has grown into over $621,000.

Alternatively, let’s say you have the exact same savings plan, but you don’t start saving until age 35. All of a sudden, that roughly $621,000 nearly halves to approximately $338,000. While you may have put in $50,000 less of your own money, you’ve lost close to $300,000 in interest.

Pretty crazy, right? If you’re interested in trying out some calculation for yourself, this tool is a great place to start.

5. You’re too old to worry about retirement

Even though saving at a young age can yield incredible results, you shouldn’t despair if you’re approaching retirement and don’t yet have a nest egg built up.

Similar to the myth that you can’t be financially independent without a hefty paycheque, you’ll never get anywhere if you don’t at least try.

Saving for retirement can start at any age. Besides, you’re not going to need your entire retirement fund the second the clock hits midnight on your 65th birthday; you can still find success investing money now, even just a little bit, and your older self will thank you for it.

6. Carrying a balance on a credit card improves your credit score

This myth is just that, a myth.

Actually, the exact opposite is true; paying off your balance in full and on time every month is a sure-fire way to bump up your credit rating.

Other ways to increase your credit score include using less of your available monthly limit, keeping unused credit cards open, and disputing any inaccuracies on your credit reports.

7. If you want to save, you have to stop buying expensive coffee and eating avocado toast

This advice comes from Australian millionaire Tim Gurner, and it’s just plain frustrating. If you want to start your days with a $5 coffee and eat delicious — and healthy — avocado toast on the regular, more power to you!

When you break it down, what matters most is that you’re happy with the way you spend your money and have a budget that allows you to live and save comfortably. How you spend your pennies — that’s up to you.