There is no shortage of financial advice out there, whether it’s on the internet, in the media or coming from well meaning relatives. Unfortunately, not all of it is good advice, and there is not a single piece of advice out there that is one-size-fits-all. There are also some pieces of advice that are just terrible, like carrying a balance on your credit card to improve your credit score (don’t do it, it’s never a good idea!).
It’s never easy to work out what financial advice is worth listing to and what advice should be ignored. Here are 5 pieces of money advice you should ignore.
You should carry a balance on your credit card to improve your credit score
There are not too many good reasons to carry a balance on your credit card, and carrying a balance just ti improve your credit score is definitely not one of them.
Carrying a balance on your card is not going to improve your credit score, paying it off every month will! Carrying a balance also comes with the side effect of paying interest on the balance every month, which is just crazy! Credit cards should only be used if you can pay off the balance religiously every month, otherwise you are better off with a debit card connected to your bank account.
Even if you do pay off the balance every month, using a credit card instead of cash can encourage some people to spend more than they otherwise would. That’s because there is such a time lag between making a transaction and having to pay for that transaction with your own money. It’s so easy to spend money thinking that you can just worry about paying for it later.
Use your credit card responsibly, be sure to pay it off every month and your credit score will be just fine.
You should consolidate your car and personal loans into your home loan
This is such a common piece of advice for people that have multiple loans in addition to their mortgage, but it’s not as good as it first sounds.
Sure, consolidating car and personal loans into your mortgage could mean you are shifting your personal loans from a higher interest rate to a lower home loan rate, but it has a lesser known side effect.
Consolidating other loans into your mortgage means you will then be paying those car and personal loans over a much longer term, which is the term of your mortgage. This might mean that instead of paying off your car in 5 years, you are now paying it off over 30 years, which adds up to a huge amount of interest.
If you are going to consolidate your loans into your mortgage, the best thing you can do is to continue to repay the amount you were paying per month off your car or personal loans. This means you will be making additional repayments above your minimum mortgage payment, which is only ever a good thing.
You should ‘invest’ in home improvements
Contrary to what some people believe, you won’t always get back what you spend on home improvements when it comes time to sell. It’s extremely easy to over capitalise on your home and end up spending more on your home than you could get back if you sold. Not only can you end up in this situation by spending too much on home improvements, but also by spending to much when building a home relative to the area you are building in.
It might seem like a good idea to spend $40,000 adding something like a pool to your home, but it doesn’t mean that potential buyers will be willing to spend $40,000 more if they were to purchase your home, given that not everyone wants a pool. It might be a case of being sure any potential home improvements are done because it’s an addition you will make use of, rather than making improvements with the hope it will increase your home’s value.
You must buy a house rather than rent
This is mentality is so ingrained in our society that it’s hard to go against the crowd without everyone criticising you for doing so. Contrary to what everyone tells you, you don’t have to buy a house. Buying a home is not for everyone, and it’s especially not something you should do if the circumstances aren’t yet right.
Gone are the days of buying a house and being certain it will double in value every 7 years. There are many people who have purchased homes within the past 5 or so years for top dollar, and now have a home worth less than the mortgage on the home.
For this reason, it’s often a good idea to save up a 20% deposit before taking the leap, to make sure you have that buffer should house prices fall and you need to sell for whatever reason. If owning a home is not yet for you, be proud that you are smart enough to not rush such a big decision, and don’t let anyone tell you otherwise.
You’re too young to worry about retirement
It’s so easy to push retirement to the back of your mind when you are young, yet now is the best time to start putting something away for retirement, not matter how small or large of an amount. It doesn’t necessarily have to be making extra contributions to your super fund, but could also be buying shares or investing in managed funds.
The reason it pays to start saving now is because you have time on your side. Starting early means every dollar is going to compound so much more than it would if you waited another 20 years to start thinking about your retirement. That’s a whole lot of money you could miss out on if you leave it too late.