Financial Mistakes: Why Is Personal Financial Literacy Important?

With inflation running rampant, financial problems are common these days. However, the biggest financial mistakes I see most Americans making are due to a lack of personal financial literacy. Understanding how money works allows you to put your money to work for you and use it to make more money. Unfortunately, most people do not understand how that happens — or other important financial tools, like taking advantage of compounding to maximize their money's value.?

Personal Financial Literacy in America?

There is a broad lack of personal financial literacy in America, partly because we don't emphasize the importance of financial education in school curriculum. In the long run, we need an effort to introduce proper financial techniques into the school systems for younger Americans.?

As of 2020 nearly half of U.S. states incorporate personal financial literacy education in their curricula. However, it takes time to show results from this coursework, and it's not uniformly designed. The Council for Economic Education has produced a set of national personal finance standards for K–12 students. Adopting this level of standards nationwide will have a big impact on our national level of financial literacy.?

Without a broad base of financial education, many people don't even know that how they approach personal money management is a problem. Bad financial planning can be difficult to address. People often aren't aware they are making some of the worst money mistakes. Sadly, the real financial woes won't show up until the future — when it may be too late to address money problems.?

Here are some of the most common financial mistakes to avoid.?

Biggest Money Mistakes To Avoid?

The following financial pitfalls can lead to a host of money issues, but they won't all show up in the near term. If you fall into some of these traps, you might not realize the problem until you're in or near retirement. At that point you may struggle to address your financial trouble.?

Do yourself a favor and learn to avoid these finance problems so you can avoid some serious financial struggles down the road.?

Delaying Savings?

The first mistake many people make is not starting to save early in their working lives. Compounding interest is amazing; if people start saving when they are young (regardless of the amount) they will see big benefits from that early start.?

Saving money is a habit, but unfortunately most of us learn to spend first and save second — again showcasing the need for greater personal financial literacy education.?

Not Prioritizing Your Financial Future?

The second mistake is not paying yourself first (this goes back to saving). Think about how you pay your monthly bills. Those are financial responsibilities that (should) get taken care of first, when your paycheck comes in and before you allocate money for discretionary spending.?

Cultivate the mindset that your savings or retirement accounts should get the same treatment. Many Americans pay for eating out, entertainment, streaming services, and more before putting money away for savings. We need to change the mindset.?

Your savings and retirement accounts are equally important as your fixed monthly expenses, but usually people only pay themselves with what is left over. We should think about our future is as important as our bills.?

Overusing Credit?

The third big financial mistake people make revolves around credit cards and charge cards.?

Recent data from LendingTree shows that consumers in the U.S. carry a significant amount of credit card debt — $841 billion as of June 2022. While the averages vary by state, the national average credit card debt per cardholder is just over $6,500, and over 50% of all credit cards carrying a balance from month to month.?

Not only do many Americans rely on credit too much, there is also a lack of knowledge of the way interest accrues on credit card debt. Only making minimum payments can be incredibly detrimental, with credit cards having some of the highest consumer interest rates available.?

Ignoring a Company Match?

A final mistake many Americans make is not contributing to a company-sponsored retirement plan.?

Not everyone has access to this benefit, but many company-sponsored retirement plans offer a matching 401K contribution. In this situation, an employer uses its own money to match (up to a certain percentage) the money you contribute to its sponsored retirement plan. When you take advantage of this type of benefit, you are effectively receiving free money. Additionally, most people don’t understand that the money you invest pretax into a company-sponsored plan also reduces your taxable income for that year.?

How Can You Recover From Bad Financial Decisions??

Everybody makes money mistakes — that’s life. To bounce back from a major money mistake is to make baby steps in the right direction.?

1. Start small and grow from there — just start saving what you can and treat it like a game. Take a look at your finances and ask yourself how much you can save (or pay off) on a regular basis. Even if it is only five extra dollars a week, it's important to make a habit of either saving or paying down debt.?As your savings grow, you may find yourself increasingly excited to watch your money grow. This can lead to creating strategies that will allow you to save more. Debt repayment is very similar; make a game out of watching the debt decrease. ?
2. Consult with a financial professional. We all need help and an objective opinion. Be honest with yourself about your own knowledge (or lack thereof). Seek out a professional whom you trust and sit down and create a plan.?Think of a financial professional like a doctor; get a diagnosis and a plan to either increase savings or decrease debt or both. You aren't limited to just do one or the other; you can both save and pay off debt simultaneously. ?
3. Learn to use your money to create money. Learn about the different products that can assist people in saving money (banks and credit union savings accounts, stock market products, insurance products, retirement accounts).?

Personal Money Management Tips?

To close, I'll leave you with five quick-hit tips to support healthy personal money management.?

1. Don’t use credit and take on debt for unnecessary purchases. If you don’t have the money to pay for something, wait to buy it until you've saved for it specifically.?
2. Pay yourself first and don't mortgage your financial future for the sake of overspending in the present.?
3. Start saving as early as possible, even if it means forgoing the fancy car and daily coffee shop coffee.?
4. Prioritize paying off high-interest loans and credit cards first.?
5. Create an emergency fund that contains approximately 6 months of salary/pay.?