Did you know that what you believe can become a self-fulfilling prophecy?
When it comes to financial beliefs, this can mean the difference between easily reaching your financial goals or struggling to keep a positive balance in your checking account. The words you use to describe money might be tied to negative associations which ultimately stand between you and the changes you need to make to improve your financial health.
Financial self-sabotage is real, but fortunately, you can do something about it. The first step is identifying your beliefs surrounding money. Do you recognize the belief statements presented below?
Belief #1: Saving money means I can’t have fun.
One of the most common reasons for avoiding financial planning is the fear of a dull, boring, and deprived existence that might occur with limited spending. You’re supposed to enjoy life, right?
A realistic spending plan can and should include fun money. While you work on achieving your financial goals, you should still enjoy life. The key is balance and planning for fun activities. Designating a small portion of your income each month to fun activities will help you stay on track and feel less deprived.
Belief #2: Financial goals are for people who make a lot of money.
If you have an income, you should have goals for that income. To attain financial security, you need to be proactive instead of reactive. For example, a proactive way to improve your financial health is to establish an emergency fund savings account.
When an unexpected expense such as a medical bill or job loss occurs, you’ll be better prepared to bounce back from the blow to your finances. Otherwise, you may be forced to use credit cards to pay your bills. This may set the foundation for a never-ending debt cycle that is hard to escape.
Belief #3: It’s okay to rely on my credit card for emergencies.
Credit cards can be used for emergencies, but should they? If your financial crisis depletes the amount you have set aside in your emergency fund savings account, then you might be left with limited options. These might include borrowing from family, applying for a payday loan, taking a cash advance on your credit card or selling household items to come up with the cash.
It’s the reliance on credit cards for emergencies that can lead to problems. If you have an available credit limit of $20,000, you might feel confident that you would be okay if you were hit with an unexpected financial blow. In the short term, this might be true.
The problem is that the debt must be paid along with the interest charges. The cash advance interest rate on a credit card is often set at a higher rate than the one for everyday purchases. Add these costs to the potential daily compounding interest on the debt and your emergency just got a whole lot more expensive.
The more time it takes to pay off debt, the less money you’re able to put toward your other financial goals. Build an emergency fund equal to three months of living expenses. Set a long-term goal to increase your emergency fund to equal six months of living expenses. Rely on your emergency fund for emergencies instead of credit cards.
Belief #4: I have to keep a balance on my credit cards to maintain good credit.
The best way to maintain good credit is to make on-time payments and avoid maxing out your credit cards. Experian, a major credit reporting bureau, recommends paying off your credit card in full each month. Maintaining a credit card balance does not improve your credit score. If you’re unable to pay off your card each month, then keep your account balance below 50% of your available credit.
Belief #5: Debt is a part of life.
Mortgage loans make it possible for many people to own their first home. For many, a college degree would be out of reach without access to student loans. Mortgage and student loan debt are incurred for a specific purpose. In both scenarios, the debt is expected to pay for itself eventually and then some. For example, the value of your home may increase over time with an expectation of increased equity. Your college education may increase your earning power over your lifetime by opening the door to career opportunities with competitive pay.
It’s the other kinds of debt that can keep you in a financial rut. Credit card debt tops the list. When you only make the minimum required payment each month, debt becomes a part of your life in a harmful way. Depending on your balance and interest rate charged, it can take years to pay off your debt. Money spent to make these types of debt payments is money not used to reach your financial goals.
Identifying faulty beliefs about money is the first step to changing them. Financial education is one of the quickest ways to combat inaccurate financial beliefs. Learn as much as you can about how to improve your financial health. Take action as a result of what you learn by setting financial goals, and you’ll soon find yourself on your way to the financial life of your dreams.