Financial fallacies are common but inaccurate beliefs about money.
They’re often ideas that are fed to you by others and left unquestioned, and they can be held to quite strongly – meaning that it’s difficult to break the bad financial habits that come as a result. Once you’re aware of the fallacies that you believe, you can start challenging yourself to overcome them before they wreak havoc on your bank balance.
All debt is bad
Getting into debt that you can’t manage is bad: that much is true. But the fear of high interest payments and negative credit ratings can become so strong that people move too far in the opposite direction, obstinately refusing to take out any credit because “debt is bad”. The truth is that debt is a useful financial tool which can help you manage your finances if you handle it responsibly.
After-all, mortgages and car loans are extremely common and considered completely culturally acceptable or even desirable. The key is that you need to be able to comfortably afford the repayments – when calculating this, consider if you would still be able to afford them after an unexpected expense – and that you should generally only use credit for something you genuinely need.
With those criteria met, it can be a really good way to spread the cost of a bigger item. A new phone, for instance, is often cheaper bought on a low interest credit card than by spreading the cost with a phone contract.
It’s always good to take advantage of a sale
Would you have bought the item at full price? If the answer is no, then ask yourself how much you are really saving by buying it at sale price. The truth is that you’re not ‘taking advantage’ of a sale unless you’re either using it to save money on a purchase that you were going to make anyway, or to buy something that you truly need but couldn’t have otherwise afforded.
There’s no point trying to understand complicated financial jargon
Known as the ‘fear fallacy’, this is what happens when people feel as though finance is simply too complicated for them to understand. Of course, some elements of economics are quite tricky to grasp – but these aren’t the things that you need to be aware of if you’re simply looking to take control of your own spending. The key is not to be put off by financial jargon. A lot of the complicated financial terms you hear are describing concepts that can easily be understood if somebody breaks it down clearly. A blog like this is a great place to start, but speaking to a money-minded friend is even better.
Cash is safer than investment
This stems from the idea that putting money into a cash savings account protects it from the turbulence of investment. Technically true, but this fails to account for the effect of inflation. Money sitting in a savings account growing by a tiny percentage each year is probably doing little to keep up with rising costs of living. After just a few years you might find that, although you savings account has technically grown, it has less purchasing power than it did when you started. So, although investing does have risk attached, it is usually better for your money in the long run.