Don’t be fooled by money myths

Managing money can get complicated. There’s so much conflicting information out there that it can get difficult to sift truth from fiction.

But there are a number of money untruths that financial advisors agree on. Here are four myths that you should especially steer clear of.

1. Buy your home, don’t rent it

We’ve become socialised to imagine that owning a house is the one true mark of financial achievement. But while freeing yourself from the shackles of a landlord who raises rent prices on a whim would be great, it shouldn’t come at too high a cost.

Too many people sink millions of shillings into home ownership that they could have better used on growing a business that would take care of their costs in the long term.

And for those just starting out on their careers, a mortgage on a relatively small income can lead to torment. It makes them vulnerable to a variety of financial risks when life inevitably happens.

According to Faith Muema, a financial advisor at UAP, people ought to take advantage of their income by living a simple and affordable lifestyle, while making investments and saving to buy a home. There’s no shame in delaying the dream until it makes financial sense.

2. Put your savings in a bank to keep your money safe

In some ways, yes, it’s safer to keep your money in a bank than it is to hide it in a savings jar in your house.

However, your money isn’t safe in a bank if you leave it in a current account or a savings account that earns less interest than the rate of inflation. You’d just be losing money.

Look at it this way. In December, it may cost you Sh100 to buy a packet of milk and bread; in February, the cost of these same products may rise to Sh105. This means the Sh100 you may have stored in your bank account in February has less value than it did a month ago.

What you want is an investment that keeps up with the rate of inflation, which averaged 8.02 per cent last year. The interest on savings accounts, on the other hand, averaged a 7 per cent.

So, rather than falling for the myth that savings accounts are the be all and end all, look into investments like fixed deposits or Treasury Bills. Keep in mind the inflation rate and find something that beats it.

3. A shilling you’ve saved is a shilling you have earned

This is related to the previous myth, but it additionally perpetuates the idea that savings alone can make you rich.

As life progresses, so will your responsibilities, which means it will be difficult to rely solely on savings. The wiser thing to do is find ways to grow your income.

Steve Siebold authored the book How Rich People Think, after studying the thought processes of high-achievers over a period of 26 years.

One of his key findings is that while the masses focus on hoarding money in the face of an uncertain future, “world-class thinkers” focus on “accumulating wealth through serving people and solving problems”.

Siebold’s not saying that you shouldn’t save and invest – even the rich do it – just that you need to keep in mind that, “The real key (to wealth) is earning.”

4. Cutting back on luxuries will increase your savings

Chances are that if you’re already working with a limited income, cutting back on takeout and coffees won’t make that large of an impact on your savings at the end of the year. It’s the shortage of income that gets you in trouble. So don’t just cut back on expenses and relax. Find ways to earn more.

hustle@standardmedia.co.ke