Both individuals and society as a whole have a set of ideas and assumptions about personal finance, but the truth in some cases just might surprise you. Behavioral finance combines economics and human psychology to offer insights into common beliefs and erroneous perceptions people have. Consider fact vs. myth in these four areas, and take steps to ensure that your financial life is informed and empowered:
1. The Truth About Credit Scores
While we place a premium on a high or perfect credit score, the truth is somewhat more nuanced; yes, a high credit score is positive, but it's not the ultimate benchmark in all cases. Some lenders can be more flexible than many realize. There's actually no magical number that works with all lenders; other factors can be just as important, such as your income level and the amount of down payment you can afford. Some lenders weight these things just as much as the credit score—or even more.
2. Dual-Income Household vs. One Breadwinner
While both partners in a household may work due to a very real financial need, the net gain of two employed partners isn't always as substantial as couples would like it to be. After expenses such as a second car, insurance, child care, taxes, a wardrobe for work, and other items are paid for, the dual-income household often has much less in their coffers than the partnership might have hoped.
3. Is Buying a Home Always Better Than Renting?
A big motive for buying a home is to have "something to show for" all those monthly housing payments. However, the truth is that interest payments on a large mortgage, property taxes, and annual home maintenance expenditures can add up substantially. (The exception might be if a home can be bought outright in cash or paid off within a brief time frame.) Renting and buying both have financial pros and cons, and it's up to the individual to determine which is truly a better fit for their circumstances. Factors such as your age, income, savings, and career and financial goals can all determine whether buying or renting is best for you. A financial consultant can help to crunch the numbers and offer insights when making this important decision.
4. The "Saving Money Is Hard" Perception
You hear those "money gurus" advocating that you set aside several months' salary in case of emergency; the better approach is actually to cultivate the discipline to save a percentage of your monthly income consistently, no matter how much you make. The longer your time horizon, the more compound interest on saved money can work its magic. That said, it's never too late to start saving. Take advantage of setting an automated savings deposit each month, and opt for higher-interest online savings or money market accounts.
Ongoing financial health requires discipline, positive saving, and good spending habits, as well as an examination of possible erroneous perceptions. Use these four behavioral finance revelations to question your own money assumptions and make the most informed financial decisions possible. You can also meet with a financial consultant, such as from Vaillancourt & Pescatore Group LLC.