Letting Go of Deeply Ingrained Financial Concepts

There are times you hold onto beliefs so tightly, Gollum and the ring kind of clutching, that it can take many conversations and years of time for you to relinquish your stronghold. This obsessive nature is quite common when it comes to money. You may have been told something as a child or young adult that just burrowed into your brain, keeping you from living a fuller and freer financial life. Today we’re going to try and help you debunk four of these deeply ingrained beliefs. Are you ready for the challenge?

Belief 1: Just focus on debt and forget about saving until later

 You’re looking at your credit card statements and student loan bills and thinking, “why would I possibly want to put any money in savings when I’m contending with all this debt?” Some people may even tell you it’s a waste to put anything in savings while you’re paying down debt and that it would be better for your financial life to just put every penny towards eliminating debt.

Here’s the issue with this line of thinking: the unexpected happens. Eschewing saving entirely sets you up to be in a situation to just incur more debt when something goes wrong and – as Murphy’s Law accurately predicts – it will.

Personal finance folklore is littered with tales of people just a paycheck away from finishing off debt repayment and then exiting a store to see their car has been side swiped without a note left, or breaking an arm with a high-deductible insurance policy, or getting laid off, or their dog swallowing half a tennis ball and needing an operation. It just takes one event to blow your rigid budget and sink you deeper into debt, probably financed on a credit card at a moderately high interest rate.

Having a buffer can help offset those emergencies will prevent you from sinking right back into the debt hole. For example, let’s say your car is your primary mode of transportation. No car means you can’t get to work, which means you can’t earn a living. Now, let’s say you run over some debris in the road and blow out a tire. Your car now needs to get towed and have the tire replaced. This ends up costing you $350, which you must pay because you have to be able to get to work.

 Belief 2: A balance transfer is just a scam to “move debt around”

 The hesitation to use a balance transfer offer or refinance debt makes sense. It does feel a lot like just shifting debt from point A to point B. Well, that is what you’re doing. However, you’re moving the debt with a purpose: to get a lower interest rate.

A balance transfer is using a new credit card to pay off an old one. That does sound completely sketchy at first. But the point of doing this is to move your debt on Credit Card #1, which is probably accumulating 15% to 25% APR to a 0% interest rate on Credit Card #2. Many balance transfer offers do come with a fee, often around 3% of the total balance moved. That may scare you off at first, but do the math on your current debt.

Leanne has $5,000 of debt at 15% APR on her credit card. She pays $200 a month towards the bill. It would take Leanne 31 months and cost $1,032 in interest to pay that off. Leanne decides to move her debt to a credit card offering 0% APR for 24 months with a 3% fee that goes up to 10% APR after the 24 months. Leanne would spend $150 in fees and then $3 interest by the time she paid off her card 26 months later.

There is one big caveat. Only do a balance transfer if you trust yourself to put that new credit card in a locked boxed, under your bed, where you won’t spend a dime on it. Balance transfer cards are not for making new purchases and incurring more credit card debt. You also need to do the math on how much should get paid per month in order to get debt free within the 0% offer. The credit card company will tell you minimum due, but you need to take your total and divide it by the number of months on the offer. Let’s say you have a $3,000 balance and an 18 month 0% offer. $3000/18 months = $166.67 per month. If you fail to pay it off the balance in time, the remaining debt will be charged at the regular interest rate of probably 15% to 20% APR.

You may be wondering why credit card companies would offer such a good deal. Well, it’s because a lot of folks screw up and use the balance transfer credit card to make purchases and just add on more credit card debt. The credit card company is willing to take the gamble that you’ll be one of those people. Resist the urge to add more debt and you’ve got an excellent tool to pay off your credit card debt quickly.

 Belief 3: Credit score!

 That header barely needs any explanation. We, in America, have come obsessed with our credit scores. How to get access to our credit scores. What our credit scores mean. Whether our credit scores are better than our partners/parents/siblings/friends/neighbor’s. And most of all, we’ve become fanatic about deciphering how our credit score is determined.

Before your neck becomes sore from nodding enthusiastically with everything you just read, take a deep breath. Your credit score, while important, is not the end-all-be-all of your financial life.

First off, the credit score is the less important factor with your credit report being what really matters. Your credit score is based off the report, so be sure to check your credit report at least once a year (it’s free and available to you under Federal law via annualcreditreport.com) to be sure there aren’t any inaccuracies or outstanding bills you never knew you owed.

Second, the two key factors you need to remember to have a strong score are:

Pay your bills on time every month (35% of your credit score).

Don’t spend more than 30% of your total available credit limit aka keep your credit utilization low (30% of your credit score).

Those two factors make up 65% of how your credit score is determined. The other three factors are: length of credit history (15%), types of credit (10%), and new credit (10%).

Ultimately, it’s better to think of a credit score as an insurance policy on your financial life. You don’t want to borrow money, but good credit history and therefore a strong score (700+) opens up access to better financial products and lower interest rates.

 Belief 4: It’s safer to put your money in a well-known brick-and-mortar bank than an Internet-only bank

 This one is easy to rebuke. If the Internet-only bank is FDIC insured, then it’s just as safe as your local bank branch. FDIC insurance protects your money in savings and checking up to $250,000 in the unfortunate (and probably unlikely) event that your bank goes under. The other thing to realize is that your physical bank isn’t holding your money in a vault at the branch where you deposited it. At any bank, physical or Internet, your money is being used to make loans or repay other customers. And let’s be honest, most of your currency is managed electronically and was probably direct deposited or you took a picture of a check with an app on your phone. You’re not depositing cash at a local branch. Plus, wouldn’t it make sense that an Internet-only bank probably has better, newer tech security than the older banks? Just a thought!

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