Personal Finance is a matter so widely discussed today that everyone has a judgment call of their own. People dwell in self-made personal finance myths, hypotheses, and assumptions, and others swim with the tide. But are these myths educated guesses? Or are they just another fallacy that needs a fresher perspective? Read the article to enlighten yourself as we bust these popular finance myths and, more importantly, throw light upon the right thing to do.
Three popular personal finance misconceptions:
1. Buy a house, don’t rent one
The buy-rent analogy is a matter of dilemma for several people out there. However, the weighing scale bends towards the number of people having a misguided belief that buying a house is better than renting one. Should you listen to Robert Kiyosaki’s ‘house is a liability theory’, or should you give in to those lucrative home-loan notifications that your bank keeps sending? The truth is that the correct answer differs from person to person. To boil it down, one must buy a house considering these thumb rules:
- House Value > 5 times your post-tax income.
- Loan tenure < 20 years
- EMI < 40% of your post-tax income
- Total EMI(house, car, etc) < 50% post-tax income
2. Credit cards lead to high debt
Many people fear using credit cards because of the heavy debt burden. While their fear is valid, looking at high-interest charges levied upon non-payment, credit cards can still work wonders for the credit history if used well. Credit cards can do more than pay for your purchases. Cashbacks, rewards, and fraud protection are only a few of the many perks. The bottom line is the proper usage of credit cards can work to your advantage. Here are some handy tips to keep in mind while using credit cards.
- Do not use more than 30% of your credit limit
- Pay your dues on time
- Never exceed the card limit
- Avoid applying for multiple cards simultaneously to avoid hard inquiries
3. A healthy person does not need a health insurance
People often assume that if they are healthy at present, they’re likely to stay healthy in the future. This psychology is called “Normalcy bias”, which leads people to minimize the threat warnings in the brain. It is only natural to think in that manner, but such fallacious perspectives deprive one of preparing for the future. Hence, investing in health insurance is a necessary expense regardless of the age or health of a person.
Other common myths
- Buying Gold jewellery is an investment
- Investing is for the rich
- It is too early to save for retirement
- If my employer provides health insurance, I don’t need a separate one
- I do not need an emergency fund
Ignorance in personal finance is not a bliss; one must be responsible enough to take charge and unlearn their misbeliefs to take a step ahead in their financial literacy journey.
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