3 common money myths debunked: Budgeting, investing and credit scores

Myth 1: Does budgeting mean giving up the things you enjoy?

The word ‘budget’ can spark a dash of fear as people picture super complicated excel sheets that trigger sadness because it won’t let them get their favourite coffee on a Saturday morning.

Budgeting can be difficult at times but it shouldn’t be the hardest part of your existence and it plays a vital role in helping you achieve all of your financial dreams. Most importantly, it should work for you and your lifestyle. This can mean carving out some spare cash for the little treats that bring you joy in life without worrying about how you’ll pay rent each time you buy your favourite fancy coffee.

What makes a good budget you can actually stick to?

A good budget usually has a few key things:

Your own figures - Many budget templates online may have other people’s information already slotted in. It’s important to replace these with your own figures and customize it to your lifestyle. For example, if you’re a gamer and the template hasn’t considered monthly game subscriptions.

A realistic and specific goal - Saving £100 a week when you only earn £150 isn’t going to happen, and if you’re saving money for no reason you may be less likely to stick to a budget.

Flexibility - Some people overwork their budgets to allocate every penny and spiral or give up when something doesn’t go to plan, but having some wiggle room can help account for the unpredictable nature of life.

An emergency plan - Having an emergency fund is key to many budgeting strategies and can help keep you on track when life hits hardest.

Awareness - It can be difficult to talk to friends or family about your finances, but just letting them know you’re on a budget can take some of the strain off and you may even find a ‘budget buddy’ to do it with.

Bad budgeting can cost you real money by spending or in the wrong places and splurging after being unnecessarily restricted.

Myth 2: Do you need to be rich to start investing?

Investing is often talked about as the way rich people get richer, but you don’t need millions in the bank to start. All you need is a few spare pounds and a bit of research.

You can start investing on most platforms with just £1.

The core premise of investing is the higher risk, the higher the potential reward. This does mean you could potentially lose every pound you invest, so it’s not wise to use money you may need for bills or necessities. There’s also different types of investments depending on how much risk you want to take on, with some types being safer than others but offering lower rewards.

Over time, investments tend to have higher returns than normal savings accounts. So if you have a spare few pounds that aren’t going to necessities or an emergency fund, putting it into an investment for a few years may have better results than using a savings account.

Waiting until you’re rich to start investing can mean you lose years where your money could have been multiplying, but it’s usually never worth investing money you’re relying on at the moment.

Myth 3: Does carrying credit card debt improve your credit score?

Some people are desperately trying to escape credit card debt, with many households falling behind on repayments, while others purposely kept their cards in the negative believing its good for their credit score.

How can you use a credit card to improve your credit score?

Here’s the truth:

Credit cards only improve your credit score if you use it responsibly. This includes making payments on time, using only a small amount of available credit and having a credit card for a long time.

However, the longer it takes you to pay off amounts on your credit card, the more interest you will end up paying. Even if you’re paying the minimum amount each month, this might not be enough to get ahead of the interest charges and could leave you essentially just paying off the interest endlessly without making a dent on the actual debt.

If the interest builds up, you also risk making your credit score worse by using too much of your credit limit. Missing just one payment deadline can also have a major impact on your credit score, as well as adding late fees, losing promotional and having more interest added onto your debt.

Money can be a complicated thing to navigate, but understanding how to use simple tools you already have can make a world of difference. For the tools you don’t yet understand, there’s always a money guru online claiming to know how you should use it, just make sure you aren’t falling for another myth!

3 money challenges to kick-start your budgeting from our consumer expert Vix Leyton

Sometimes the best way to change your relationship with money is to challenge everything you think you know about it. Forget impossible savings targets and giving up everything you enjoy. These three simple challenges could help you build better money habits without making yourself miserable in the process.

1. The guilt-free fiver challenge: Make room for joy in your budget

The myth: A good budget means cutting out everything fun.

For the next four weeks, challenge yourself to set aside £5 a week for something that makes you happy. That's £20 over the month, just for you.

It might be a coffee, a second-hand book or a little treat you've been eyeing up. The only rule is that it needs to fit within the money you actually have available after your essentials are covered.

If £5 is too much, make it £1. This isn't about spending more money, it's about giving yourself permission to enjoy some of the money you've already budgeted.

A budget that makes you miserable is a budget you're going to want to escape from. Think of this as practising financial balance rather than financial punishment.

2. The £1 future millionaire challenge: Start thinking like an investor

The myth: You need to be wealthy before you can start investing.

Here's a challenge that costs absolutely nothing to begin with.

Take £1, at least in theory, and spend 30 days learning what you could do with it. Look at beginner-friendly investment platforms, research Stocks and Shares ISAs and explore how compound growth works.

You can even follow a pretend £1 investment to see how its value might change without risking any actual money.

The point isn't to turn £1 into a fortune overnight. It's to get comfortable with the idea that investing isn't exclusively for people with six-figure salaries and financial advisers on speed dial.

If you're financially ready, you could consider investing a small amount for real, but make sure your bills, expensive debts and emergency savings are taken care of first. Investments can fall as well as rise, so only use money you won't need for at least five years and could afford to lose.

3. The interest-free challenge: Stop paying to borrow your own money

The myth: Keeping credit card debt helps build your credit score.

For your next credit card statement, challenge yourself to find out exactly how much interest you're being charged.

Then set yourself a goal to reduce that figure. If you normally only make the minimum repayment, see whether your budget allows you to pay a little extra. Even a small additional repayment could help reduce the interest you pay over time.

If you already pay your balance in full each month, congratulations, you're already winning this challenge.

You don't need to pay interest to prove you're responsible with money. Credit scores reward responsible borrowing behaviour, not how much money you hand over to lenders.

And unlike most savings challenges, this one could leave you better off without requiring you to put money into a savings account.