Money Myths - Saving Money

[jeffrey]

When it comes to money, there are many myths out there that can cost you a lot of money if you fall into them. Most of them have a grain of truth to them, but have been simplified to such a degree that most people who follow the myth end up losing money in the process of trying to save money. Here are a few of the money myths that are associated with saving money and why they don't always work as intended:

I have a savings account so I'm saving money: While having money in a savings account means that you have some money that is quickly accessible in the case of an emergency, having money in a savings account doesn't necessarily mean that you're saving money. There are a couple of issues to consider. First, if you have debts such as credit cards or student loans, the interest rate is likely much higher than the rate you are receiving from your savings account. This in effect means that you are losing money. Secondly, with interest rates on savings currently so low, the inflation rate is likely higher than the amount of interest you are earning. That also means that the money in your savings account is losing money.

If I buy something on sale, I'm saving money: If you purchase something on sale, you are paying less than if you purchased the same item when it was not on sale. This does not automatically equate to saving money. In order for the savings to take place, the item that you purchased on sale must be something that you would have purchased at some point at full price. Then the savings from the sale purchase must not be spent on something else. Since this is rarely the case except for those who have a system set up where the savings from sale items goes into a specified savings account, in most cases purchasing something on sale doesn't equate to saving money.




If I refinance my house at a lower rate, I'm saving money: When you refinance your house at a lower interest rate, you will likely pay smaller monthly payments, but this does not mean you will be saving money. The problem that arises here is that most people that refinance do so for a 30 year term again. That means that if you had previously paid 5 years toward your mortgage before the refinance, you have extended the previous 30 year loan to 35 years. Since the first years of the loan are when you are paying almost all interest, even with the lower interest rate and lower monthly payments, you'll likely pay more over the long term.

If I have a 0% or a cash back credit card, I'm saving money: If you have a credit card that has 0% interest you can be saving money if you already have the money to pay for the items purchased and are keeping that money in an interest bearing account. If you don't - and especially if you don't have the money to pay off the credit card when the 0% interest term is over - you're not saving money. You are merely delaying payment on the items.

If you have a credit card that gives cash back, you can be saving money if you pay off the balance each and every month and there is no yearly fee for the card. If you carry a balance, you lose any savings from the cash back to interest charges.

If I made more money, it would be easy to save money: Merely making more money than you currently do does not equate into more savings. If you make more money and you don't increase your consumption after the raise, then you have the opportunity to save money. The truth is, however, that most people quickly increase their consumption with an increase in pay, not their savings. To increase your savings, you need to have a money saving plan already in place before the next raise occurs.

It's important to know the details when taking action with your money since not doing so may leave you with much less money when you thought that you'd be saving it.

[dagobah_19]

A good rule of thumb I've always found to be true - you're not saving money if you're spending it. You can either spend it or save it. If you save money on an item that's on sale, you're actually losing money, because you're still buying it....no wonder i wear clothing from 1995 still...

[nixuzer]

Originally Posted by jeffrey

If I have a 0% or a cash back credit card, I'm saving money: If you have a credit card that has 0% interest you can be saving money if you already have the money to pay for the items purchased and are keeping that money in an interest bearing account. If you don't - and especially if you don't have the money to pay off the credit card when the 0% interest term is over - you're not saving money. You are merely delaying payment on the items.

If you have a credit card that gives cash back, you can be saving money if you pay off the balance each and every month and there is no yearly fee for the card. If you carry a balance, you lose any savings from the cash back to interest charges.

Some credit card statistics people should be aware of when talking about their 0% interest or cash back cards.

- The amount the average American family pays annually in credit card interest: $1,100
- Credit card industry revenue generated by late fees in 2002: $7,300,000,000

Do you really think McDonald's started accepting credit cards (and the additional fees they incur) because it was more convienent for their customers? C'mon now, you're smarter than that
- People using credit cards in fast food restaurants spend up to 50 percent more than when they pay cash

[jmjj215]

Do you really think McDonald's started accepting credit cards (and the additional fees they incur) because it was more convienent for their customers? C'mon now, you're smarter than that
- People using credit cards in fast food restaurants spend up to 50 percent more than when they pay cash

I think if you're operating on a written budget that you've made before the month begins, that you can stick with using a cashback credit card and not fall into that "spend more b/c it's plastic" category. I started using a cashback cc 6 months ago and have noticed no uptick in my spending. It's because my wife and I have a plan at the beginning of the month on where the money is going and we stick to that plan.

[nixuzer]

Originally Posted by jmjj215

I think if you're operating on a written budget that you've made before the month begins, that you can stick with using a cashback credit card and not fall into that "spend more b/c it's plastic" category. I started using a cashback cc 6 months ago and have noticed no uptick in my spending. It's because my wife and I have a plan at the beginning of the month on where the money is going and we stick to that plan.

In your case that is probably very true however the statistics show something different (I could offer many more but just threw a few in for conversation sake). Your case is an indicator that they can be a great tool for people that already have good budgeting and spending habits however that is not the norm. I've seen this same thing with debt consolidation loans, people get them with the intent of becoming better with their money but over the 6-12 months after getting them tend to fall back into their old spending habits and soon have the debt consolidation loans as well as new credit card debt.

As usual the people that most likely need to hear that message are probably not the people that would be a part of this forum.

Originally Posted by jmjj215

Personal Budget System

Also, noticed your PBS signature link and took a quick look, do you mind me asking where you got the Debt Snowball term from?

[acezz4e_tish]

i saw on the news a lady who saved all her change in a jar, forgot how long it was, but she had it rolled and used it for a vacation in hawaii.

[acezz4e_tish]

when cleaning my moms house too, i also got to have her bottles on top of the money she paid me which was about an extra ten dollars each time. they only drink from 2 ltrs, and they are a dime each in taking them in.

[Firefly]

Good info!

[The Budget Man]

I am astounded how easy it is to tell half a story and be believed.

People often tell me that they are saving money because they have consolidated their credit card debt, car loan and store cards onto their home loan. Now they have a lower repyment!

It's only half the story!

You see.... What often happens is that short term debt such as credit cards is actually turned into long term debt on the house loan.

The bite is in the tail. If you do not pay off short term debt quickly you become incredibly expensive.

Yes it looks good to turn a 15% loan into a 5- 8% loan. But if you then take 25 years to pay it off then you have paid a huge amount of interest for a very long period of time.

Debt Consolidation is a great strategy if you pay off the amount you consolidated quickly.... otherwise you are ruining your future lifestyle.

So is Debt Consolidation a myth or a good idea? The answer is in the way you repay it.

[Aleta]

Another myth is that by waiting to pay off an item saves you money by allowing the money to earn interest in the bank. There are times when you can pay something off, but you hesitate because you're earning interest on your savings. Meanwhile, that savings is going to be taxed at your tax rate at the end of the year, thereby losing for instance, 15% if you're in that bracket. By using your credit card and paying the balance off, you're receiving points for that purchase and you can put the money back monthly. This is if you have the money to back you up and you will pay that off at the end of the month. It's better to borrow from yourself and pay it back the same way that you would have paid it originally.

This may seem like a little item to save on, but it's not. It's usually all of the smaller day to day items that costs us. Also, not transfering money to a saving account before 2:00PM on Friday and instead waiting until Monday loses you 3 days in interest.