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“Financialally educated people use financial knowledge to make better financial decisions.” Unfortunately, most of us don’t learn financial literacy in school. John Pelletier, director of the Center for Financial Literacy at Champlain College in Vermont, estimates that only “30 percent of public school kids now have access to financial literacy classes.” This lack of financial education may be one of the main reasons many Americans find themselves in financial trouble.
A study by the Federal Reserve found that many Americans would have a hard time coming up with $400 to cover an unplanned expense. Furthermore. 15% of adults rack up more than $2,500 in credit card debt each month. The good news is that you can avoid these financial mistakes and set yourself up for financial success instead of jeopardizing your financial future.
Here are the top financial pitfalls to avoid:
Signs you’re spending more than you earn include paycheck to paycheck, credit card debt you’re unable to pay off each month, and little or no money in savings. If this sounds like your current situation, there’s still time to gain control over your finances.
A budget is a vital tool for understanding and tracking your spending. Online budgeting tools will give you a clear picture of where your money is going. Once you understand your current spending habits, you can identify areas to reduce.
An emergency fund is vital to financial stability. Ideally, it should cover 3-6 months of living expenses in the event of job loss or other unforeseen circumstances. However, even a few hundred dollars can help cover unexpected expenses without getting into debt. Start putting a small amount into a savings account each month and watch your emergency fund grow.
Another financial pitfall is taking out loans that you don’t have the means to repay. The Education Data Initiative reports that “42.8 million borrowers have federal student loan debt” and “the median balance of federal student loan debt is $37,787, while the median total balance (including private loan debt) can go up to $40,780”. While student loans are an investment in your future, research and apply for scholarships and financial aid, and consider costs when selecting which college to attend.
Mortgages are another type of loan that can lead to dire financial consequences. Before you move into home ownership, make sure your current debt is manageable, your employment situation is stable, and you have the money for a down payment and maintenance costs. If so, be wary of taking a mortgage that doesn’t allow you to save for other important financial goals.
A low credit score could prevent you from accessing credit in the future. Your credit card and loan options will be limited and interest rates will be higher. It could even make renting an apartment more challenging. Take steps to build a strong credit score by avoiding the mistakes that can bring it down.
A debt repayment plan guides you through the steps to get out of debt and improve your financial situation. Without a plan, it’s easy to get discouraged and give up. Decide whether to cut back on spending, bring more cash, or a little of both to make bigger monthly payments. Start by paying off high-interest debt first and as quickly as possible to save on interest and free up more money for other purposes.
Investing early and often can help you reach your financial goals sooner. Retirement and college for your kids may seem a long way off, but it’s never too early to start saving. Talk to a financial professional about getting started investing and options to make your investing automatic and more beneficial to your current situation.
One of the best ways to build your retirement fund is to take advantage of employment-based programs. Even if it’s only a minimal amount initially, participate in any employer-sponsored retirement funds and stock options.
Investing in yourself is one of the best things you can do for your future. Time and money spent on your education, career, and health often improve your financial situation. This could mean pursuing an advanced degree or taking classes to learn a specific skill to increase your earning potential. Taking care of your health and well-being now could prevent or delay future costly health problems.
Unfortunately, we won’t live forever. Life insurance provides a safety net to pay for funeral expenses and support family members when you are no longer producing income. Meanwhile, a will guarantees the distribution of your assets according to your wishes.
Financial literacy is about understanding the critical components of financial success. It’s also about using that knowledge to make wise choices to avoid common mistakes that jeopardize your financial well-being. Educate yourself with reliable financial education books and lessons. Then, partner with a certified financial advisor to start planning for your financially secure future.
Knowing the most common financial mistakes is the first step to making sure you don’t make them!