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“Financially literate individuals 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% of public school kids now have access to financial literacy courses.” This lack of financial education may be one of the primary reasons many Americans find themselves in financial straights.
A Federal Reserve study found that many Americans would have difficulty coming up with $400 to cover an unplanned expense. Additionally. 15% of adults roll over $2,500 or more 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:
1. Spending More Than You Earn
Signs that you are spending more than you earn include living paycheck to paycheck, credit card debt you are unable to pay off each month, and little or no money in savings. If this sounds like your current situation, there is still time to gain control over your finances.
A budget is a critical tool for understanding and monitoring your spending. Online budgeting tools will provide a clear picture of where your money is going. Once you understand your current spending habits, you can identify areas to cut back.
2. Not Having an Emergency Fund
An emergency fund is vital to financial stability. Ideally, it should cover 3-6 months of living expenses in case of job loss or other unforeseen circumstances. However, even a few hundred dollars can help cover unexpected expenses without going into debt. Start putting a small amount into a savings account monthly and watch your emergency fund grow.
3. Taking Loans You Cannot Repay
Another financial pitfall is taking loans you don’t have the means to pay back. Education Data Initiative reports that “42.8 million borrowers have federal student loan debt” and “the average federal student loan debt balance is $37,787 while the total average balance (including private loan debt) may be as high as $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 jumping into home ownership, make sure that your current debt is manageable, your employment situation is stable, and you have money for a down payment and maintenance costs. When that is the case, be cautious about taking on a mortgage that doesn’t allow you to save for other important financial goals.
4. Not Monitoring Your Credit Score
A low credit score could prevent you from gaining access to credit in the future. Your credit card and loan options will be limited, and interest rates will be higher. It may even make renting an apartment more challenging. Take steps to build a strong credit score while avoiding the mistakes that can lower it.
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5. Not Having a Debt Repayment Plan
A debt repayment plan guides the steps to get out of debt and improve your financial situation. Without a plan, it is easy to get discouraged and give up. Decide whether you will decrease spending, bring in more money, or a bit of both to make larger monthly payments. Start with paying off high-interest debt first and as quickly as possible to save on interest and free up more money for other purposes.
6. Not Investing for the Future
Investing early and often can help you reach your financial goals sooner. Retirement and college for your children may seem like a long way off, but it’s never too early to start saving. Talk with a financial professional about how to start investing and options for making your investment automatic and most advantageous for your current situation.
7. Not Taking Advantage of Employment Opportunities and Funds
One of the best ways to build your retirement fund is by taking advantage of employment-based programs. Even if it is only a minimal amount initially, participate in any employer-sponsored retirement funds and stock options.
8. Not Investing in Yourself
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 wellness now could prevent or delay future expensive health issues.
9. Not Protecting Your Assets
Unfortunately, we won’t live forever. Life insurance provides a security net to pay for funeral expenses and support family members when you are no longer producing income. Meanwhile, a will ensures the distribution of your assets according to your wishes.
10. Not Financially Educating Yourself
Financial literacy is about understanding the critical components of financial success. It is also about using that knowledge to make wise choices to avoid common mistakes that jeopardize your financial well-being. Educate yourself with reputable financial education books and classes. 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 ensuring you don’t make them!