The world is moving quickly. In 2023, you can pay bills from your mobile phone, trade stocks with the tap of your finger, and buy ‘land’ in the metaverse using cryptocurrency. With all of these technological advances, why are we still using the same outdated personal finance advice? Here are the top four money management myths you can officially kick to the curb this year.
Money management myth #1: Credit cards are good for emergencies
Reality: Credit cards are great for everyday purchases, but they shouldn’t be used unless you have the funds to pay them off.
Credit cards can help you access credit, earn rewards, and build your credit score when used responsibly. But standard interest rates sit around 19.99-22.99%, which can add up quickly if you get behind on your payments.
For example, let’s say your car broke down, costing you $1,000 to fix. You decide to use your credit card to pay for the expense, but you don’t have the cash to pay it off right away. It has a 20% interest rate, but you can only afford to put $25 each month toward your debt. In this example, it would take you almost six years to pay off your debt, and you’d pay $661.70 in interest.
It can be challenging to save for an emergency fund, but hypothetical situations like this can become very real very fast. That’s why it’s better to add what you can to an emergency fund – even just $50 a month – so you hopefully won’t need to use your credit card.
Money management myth #2: All debt is bad
Reality: Debt used to be considered shameful, but nowadays it’s a fact of life.
Debt in 2023 is unavoidable, which is why it’s so important to understand the difference between ‘good debt’ and ‘bad debt.’ Good debt can improve your financial position, whereas bad debt can put you in a worse one.
An example of good debt is a student loan. If you borrow money to pay for your post-secondary education, you’re increasing your job prospects, hopefully improving your financial position over time. Mortgages are also considered a form of good debt since your payments allow you to build equity in your home. But even good debt can turn into bad debt if you can’t keep up with your payments.
An example of bad debt is payday loans. This is because of the high-interest rates that make it difficult to get out of debt once you’re in it, and they don’t improve your financial situation. They should be avoided at all costs.
If you find yourself in a situation where your debt is too much to manage, a great solution is a Consumer Proposal. This solution is regulated by the Canadian Government and can only be submitted on your behalf by a Licensed Insolvency Trustee (LIT). It can reduce your debt by up to 80% of what you owe and can actually afford.
Money management myth #3: You don’t need to start thinking about saving for retirement yet
Reality: Pension plans are a thing of the past, and it’s never too early to start saving for retirement.
Life is expensive – especially in Canada, where Canadians are dealing with high-interest rates and record-high inflation. When you’re busy trying to make ends meet, the last thing you want to think about is saving for retirement. But you need to look out for yourself first and put a little bit aside for your future.
Enter a Registered Retirement Savings Plan (RRSP). An RRSP is a type of investment account that’s designed to help Canadians save money for retirement. When you contribute to your RRSP, you can deduct the contribution amount from your taxable income, which can lower the income tax you owe for that year.
Money management myth #4: Your credit score is the most important part of your financial well-being
Reality: If you’re paying back debt using a Consumer Proposal, it’s OK if your credit score takes a temporary hit.
Of course, your credit score is an important indicator of your financial health. But if you’ve applied for a consumer proposal and are actively focusing on paying off debt, keeping your credit score in good standing is less of a priority. This is because lenders use credit scores to determine your creditworthiness, i.e. whether they should lend you money. But if you’re working on getting out of debt, you shouldn’t need to qualify for any new credit for a while.
The bottom line
While much has changed within the last few years, it’s important to understand your current financial situation so you can differentiate myth from reality. That being said, we’re always here to listen and help you build a healthier relationship with your money.
For over 40 years, Farber Debt Solutions has helped people understand the difference between ‘good debt’ and ‘bad debt,’ and we can help you, too. Contact us today for a free consultation.