Navigating personal finances can prove to be daunting, particularly when individuals are inundated with conflicting and often misleading information, especially through social media platforms.
Embracing prevalent misconceptions about financial management can be detrimental, potentially hampering one’s financial well-being.
During a recent interview with Finance Newso Business, personal finance expert Jonathan Kim, who serves as the head of finance at the online savings platform Raisin, addressed several common myths. These included the notion that saving isn’t worthwhile unless one can set aside a substantial amount, the belief that “buy now, pay later” services are effective budgeting tools, and the misleading idea that a high salary equates to financial success.
Kim also challenged the idea that savings accounts are unnecessary, asserting that saving should not be postponed until all debts are cleared.
“There are widespread beliefs that one must eliminate debt before beginning to save and a lack of understanding of why having savings can be crucial, along with the fact that some debt isn’t necessarily detrimental,” Kim explained.
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One prevalent misconception Kim highlighted was the idea that “it’s just not worth saving right now unless you can put away a lot.” He noted this perspective may be fueled by social media discussions.
“It’s easy to fall into the trap of thinking, ‘If I can’t save a specific percentage or dollar amount, then my efforts are futile,’ which is too focused on the outcome,” Kim remarked.
Kim emphasized the importance of consistent saving, proposing that even a small amount, like $10 a week, can be foundational for developing financial resilience and cultivating a sustainable saving habit.
Addressing the common presumption that a high income signifies robust financial health, Kim described it as “mythical propaganda.” He emphasized that true financial stability hinges on effective money management rather than merely earning a high salary.
“Receiving a large paycheck can be fantastic, but it’s essential to recognize lifestyle creep is a very real phenomenon,” he warned. “Without financial discipline and mindful spending habits, one could easily find oneself financially troubled after a raise or new job.”
According to Kim, budgeting proves invaluable in curbing lifestyle inflation but clarified that it doesn’t need to be flawless to be effective.
“A basic understanding of your income and expenditures can kick-start your budgeting efforts,” he stated. “Analyzing your spending over time can reveal trends and areas for improvement.”
He also remarked that effective budgeting allows individuals to “spend intentionally” without sacrificing all joyful experiences in pursuit of financial prudence.
Discussing the growing popularity of “buy now, pay later” services, Kim provided insight into whether they are beneficial for budgeting.
Kim cautioned, “If you’re relying on buy now, pay later services because you can’t afford a purchase upfront, then it’s clear you can’t afford it. This method can incentivize overspending, potentially leading to debt accumulation—and, as a result, interest payments that contribute to poor financial habits.”
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Kim added that this belief is often linked to another common misconception regarding the necessity of paying off all debts before starting to save money.
“Those with high-interest debts, like credit card or variable mortgage debts, should prioritize getting rid of those, but for others who secured low mortgage rates, it may not be as critical to pay off that debt immediately,” he explained.
Simultaneously managing savings and debt repayments can yield significant advantages.
Kim emphasized the importance of a financial strategy that accommodates debt repayment while establishing an emergency fund. “This will help you avoid accruing more debt and interest if unexpected situations arise,” he advised.
Moreover, he remarked on the benefits of having a dedicated savings account over merely using a checking account.
Keeping funds exclusively in a checking account can lead to easier spending and difficulty in tracking savings goals, according to Kim.
Constancies in the balance of checking accounts can fluctuate with spending and income, complicating savings tracking. Furthermore, checking accounts typically offer minimal or no interest on deposits, resulting in unproductive funds, Kim explained.
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A dedicated savings account can create a clear separation for funds, allowing individuals to observe their savings grow over time, which fosters a sense of accomplishment and motivation as the balance increases. Kim noted that such accounts can also provide higher interest rates, contributing to passive growth of funds over time.
