6 Biggest Money Misconceptions

Personal Finance,

There are so many inspiring stories about people who never earned a high salary but achieved their financial goals, such as retiring before the age of 40. If you’re strategic with the amount you earn, invest and save wisely, for example, you can certainly live comfortably on $30,000. 

Take this 28-year-old who built up $250,000 in savings and plans to retire by age 37. He was lucky enough to learn how to save from his grandfather, who raised five kids and never made more than low five-figures. Despite his modest income, his grandfather managed to save more than a $1 million due to compound interest, which causes your wealth to accumulate over time.

So, get ready to shift your money mindset. Here are six misconceptions that may be holding you back from believing what you can and can’t do with your money.

1. More money will make me happier

The link between happiness and having more money is a misconception. A study showed that people making a six-figure salary of $105,000 weren’t any happier than those whose incomes were higher. Once basic human needs are met, more money doesn’t equate to more happiness. Earnings beyond that amount actually coincided with lower levels of happiness and well-being, according to the study.

In fact, helping others is scientifically proven to increase positivity and overall happiness. There’s actually a name for it, Helper’s High, a euphoria that happens when you do something charitable. Think altruistically and consider what is meaningful to you and how you can use your money to help others and live a truly good life.

2. A bigger income will keep me debt free

Catherine Sanderson, a psychology professor at Amherst College, tells TIME,  “We always think if we just had a little bit more money, we’d be happier, but when we get there, we’re not.” 

The problem with earning more is that you may end up wanting more, simply because you can afford it. Spontaneous trips, luxury cars, and dining at restaurants more frequently are some ways you can quickly adjust to your new wealth. 

Earning more may make you happier in the short term, but chances are, you’ll adjust quickly to your new wealth. The shiny new toys and gadgets may be exciting at first, but as humans, we constantly walk the hedonic treadmill, which means you adapt quickly to your new environment and spending habits. If you’re not careful, you can still end up in debt. 

3. Investing is only effective if you have money

The word investing may sound intimidating, especially if you don’t understand long-term investing and the power of compound interest. Investing your money is a strategy to make your money grow, no matter how much you earn. 

Generally speaking, the stock market for long-term investing will yield you an 8-10 percent return over time. 

There are simple ways to start investing, including starting with your company’s 401(k) or an IRA account. Technology has made it easy for anyone to invest their money, even if money is tight. Smartphone apps allow you to automatically microinvest your money. Some will allow you to start investing for as little as $5. 

Figure out how much you can reasonably invest and approach the stock market with a long-term outlook. 

4. A budget will restrict my spending

A budget is a plan based on your unique financial situation that helps you control your spending and saving. It means you know how much money is coming in and going out each month. You don’t necessarily have to restrict your spending or save every penny you earn. 

Starting with these basics sets the foundation for how you will reach your money goals. If you don’t have any goals, a budget can help you figure that out. 

For example, if you have $5,000 in credit card debt to pay, you may start there and create a plan to increase your monthly payments. After that, maybe you decide to dump more money into your emergency fund.

5. You need 3-6 months’ worth of living expenses in your emergency fund

This one is a half-misconception. Building up your emergency fund is a good thing and having this cushion is important in the event of an emergency or job layoff. Consider saving enough to cover your expenses while you find a new job. While this timeframe isn’t clear, it’s safer to have at least 6-9 months’ worth of expenses. 

6. Only rich people need financial advisors

Having a professional to help you get your money in order has nothing to do with how much you earn. It’s about learning how much to keep so you can live comfortably.

A financial advisor can help you figure out how much you should save, invest, and budget in order to meet your money goals. This is especially helpful if you don’t earn a lot right now but have the potential to earn more in the future. A financial roadmap for what to do as you earn more can help you make better decisions and set you up for success. 

Create your own future

You create your own reality and as you plan your financial future, think about how you can build your wealth right now, regardless of how much you earn. The more you learn and understand how to grow your money through investing and saving, the easier it may be to create a more financially stable and comfortable life. 

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