Money myths and how to shake them off

How many times have you wanted to do something and then convinced yourself you can’t? How many times has self-doubt stopped you from taking action? Probably more times than you want to admit. But when it comes to money, that attitude can - literally - cost you. 

Today we hope that - by setting the record straight - you’ll feel able to tackle money issues head-on and lose less sleep worrying about money.

Myth 1: I don’t need an emergency fund; I have credit cards!

Having access to an emergency fund to cover three to 12 months of your expenses is essential for peace of mind.

There are always surprises and things that catch us off guard, so knowing there’s a pot of money that’s instantly accessible means you can better focus on the emergency - rather than adding money worries on top. 

If you find yourself facing an emergency and you only have credit cards to fall back on, you will soon realise that - while you can access money quickly - it will cause you additional worry during an already difficult time. If you rely on a credit card, you’ll have to pay it back quickly to avoid paying interest, or could find yourself stuck repaying high interest rates. 

Myth 2: Debt is always bad

According to The Money Charity, the average household in the UK has £2,009  in credit card debt. So there’s no question that there’s an issue with debt in the UK, and that it can be a nightmare. But it would be wrong to assume that debt is always a bad thing, or something you have to avoid.

There are occasions where it can make sense to make use of credit – for example, if you make a big purchase on a new kitchen, you could use a 0% purchase credit card. Using credit in this way could help you to avoid any interest but also spread the cost over a more achievable timeframe so you don’t need to pay a lump sum up front or use your savings.

Another example is borrowing money to learn a new skill or gain a qualification. When considering your own ability to earn more money, sometimes you may need to make an investment. If you know that it will allow you to earn more in the future, it may justify the debt in the short-term.

Debt in itself isn’t a bad thing – borrowing without the means, or a plan for how to pay it back is the real problem.

Myth 3: Only rich people save and invest - I can’t afford to!

Are you sure about that? A survey by The Share Centre found that people on average waste around £70 a year on clothes that never get worn or are only worn once. And 30% of people buy one new item of clothing every month.

If you don’t have an emergency fund - or you don’t consider yourself able to start investing - it’s time to rethink your ‘essential’ spending.

When it comes to investing you really don’t need as much as you may think - many investment funds accept smaller monthly deposits, such as £10. 

If you start thinking about saving and investing as another essential expense, automate it, and have a meaningful goal to work towards (go big, what about ‘my retirement home in Italy’?) you may find that you can not only afford to do it, but enjoy it!

Myth 4: Saving and investing are the same thing

This just isn’t the case. While both saving and investing involve putting money away for the future, that’s where the similarities end. 

Put simply, saving is money put aside with a bank or building society that earns a stated amount of interest each month. Whereas investing is taking some of your money and trying to make it grow by buying things you think will increase in value. 

There is little to no risk in savings accounts, but the interest rates are usually low. Unfortunately, since The Bank of England cut interest rates in March 2020, they are even lower than normal, which will have a detrimental impact on savings interest rates.

With investing, the rewards can be much higher, but so is the risk. So, why invest? With saving interest rates as low as they are, it’s likely that investing would make you more money. Ultimately the smartest way to manage your finances is to utilise both savings and investments – a savings account for life’s ups and downs, and investments for future stability and long-term goals.

If you are thinking about investing, it may be worth seeking independent advice to make sure you’re choosing the right thing for your circumstances. You can find a financial advisor online here.

Myth 5: I don’t need to pay into a pension, I’ll be able to rely on the government!

We are lucky that there is a State Pension in the UK, but in reality, the State Pension alone will not ensure a comfortable retirement. Even if you qualify for the full new State Pension, it’s worth around £175 a week at the moment, which isn’t a huge amount.

What this means is, if you want to make sure you have some money at your disposal when you retire, you need to have some form of personal savings in place. That could be a formal pension, a Lifetime ISA, investments or a combination.

Thinking about retirement is not something you tend to do when you are young, but the earlier you start planning for your money needs in later life, the better off you’ll be.

If you’re still not sure why you need to start planning for life after work now, check out this blog.