There is a lot of advice about how to be financially responsible and improve your financial future. Much of that advice is delivered with broad strokes as absolutes. However, some money-saving beliefs overlook the fact that there are no absolutes. Missing that may end up hurting you in your savings goals and quest for financial betterment. The broad stroke money advice isn’t wrong, it’s just incomplete. It’s also easier to believe and maneuver through time-tested money rules that are black and white. The gray area money rules takes a bit more discipline. As with any gray area it takes awareness and a more strategic approach to stay on the right financial track.
Money-Saving Beliefs That Need Clarification
Avoid Debt At All Cost
While it is true that debt can kill financial goals it is actually a necessary evil. Responsible debt practices will help you save more money. The trick is to use debt to your advantage and never succumb to it’s easy access allure. Smart debt use is harder to explain so debt avoidance is preached and solidly part of our money-saving beliefs. Here is why smart debt is important to us.
The Importance of Having a Good Credit Score
Everyone knows having a bad credit score due to poor payment practices and having too much debt is bad news. It will cost you, but so will having no credit score. You have to borrow and establish good payment habits to create a decent credit score that will save you money. Not only for securing a lower interest rate for any needed debt but it’s important for many other things that touch our lives.
- Insurance – Auto insurance and property insurance companies generally offer lower rates to clients with a good credit score.
- Rent – Having a bad or nonexistent credit score may result in having to pay a higher deposit amount or being rejected.
- Jobs – Many employers run security checks for new and existing employees. Part of the check may include credit scores.
- Rewards – Many credit cards now offer rewards in cash or travel points to use their credit cards. Having debt discipline can actually pay you to responsibly use a debt instrument to buy what you need to buy anyway. In the absence of any other debt, using a credit card and paying the balance off every month will help your credit score.
Debt Associated To Income Producing Assets
Debt can be used effectively to generate income. I’m not talking about borrowing a bunch of money to make risky investments like bitcoin. Think something far more traditional.
- Rental Property – Debt leveraged by income producing rental properties is an effective money producing strategy for real estate savvy investors.
- Business Loans – Many profitable businesses can responsibly utilize debt to grow their business.
Always Shop For The Lowest Price
Looking for deals to save money on anything we need to buy is sound advice. But it shouldn’t be the only factor used in our purchases. Quality must also be considered for our purchase.
- Online Purchases – Everyone enjoys a good online deal. But the posted price is only one part of the equation. There may be shipping costs and even if there isn’t with the purchase there can be shipping costs on returns for a defective, non-fitting, or misrepresented products.
- Reliability – Paying a bit more for quality saves money in the long run. Costs to repair or replace cheap priced cheaply made items can add up. Always include some product quality research before buying.
Don’t Rent, Buy A Home
It is easily the first money lesson I was taught. Renting is paying to increase someone else’s net worth so buy your own home. Home ownership has always been touted as the main path to the middle class. Although this financial advice is true, this money-saving belief is not absolute. There are situations where buying your home may not be in your financial best interest.
There are many benefits to owning your own home. Bought right, you have an appreciating asset and a hedge on inflation. Rent is always going up. However, there are many considerations that must come with this money-saving belief.
Here are some of the home ownership money-saving pitfalls to be aware of:
- Buying More Home Than You Really Need – Just because the mortgage company says you can afford it doesn’t mean it will be smart debt use. A larger home can be sold later to downsize but while you live in it you pay higher utilities, higher property taxes, and have a lot more to maintain.
- Overlooking Mandatory Additional Costs – It’s easy to do a rent vs buy cost analysis on a property based on sales price and your likely loan interest rate. However, don’t forget to also include any HOA fees. These can be already high and/or climb even higher over time. In some extreme cases they may surpass your mortgage payment amount. Aside from HOA fees also consider insurance costs. With all the wildfires, storm damage from wind or hail, and flooding of late, insurance rates may be very high depending on where you buy your home. These are things often missed in rent vs buy calculations.
- Maintenance – Every property will require maintenance and needs to be budgeted for. If you have to hire most or all of that maintenance out then that is another high cost that must be considered.
- Mobility/Staying Put – In normal real estate markets, people who don’t stay in one place for at least 5 years may at best end up breaking-even when it comes time to move. Real estate sales cost and a less than stellar real estate appreciating market can cost you much. If your relocation is job related and your home doesn’t sell quickly you can be left making payments on an unused and empty home. Real estate doesn’t always go up. There will be cycles as with any investment. Reasons for depressed real estate gains is not only tied to economic trends but also location specific dynamics.
Should The Money-Saving Belief Be Considered a Yes, Maybe, or No?
These are just a few common money-saving beliefs that are slightly off if they are not fully clarified. Any broad stroke advice is a starting point. It is the money rule that easily gets our attention. Then as with anything, we need to slow down and look at all the variables. We have to research the money-saving advice and then wisely use it. A lot of money-saving beliefs are more a “maybe” than an “always” situation.