Financially illiterate people don’t have the skills or knowledge needed to make good personal financial decisions.
Changes in consumer habits, credit cards and online shopping are thought to be the main causes of financial illiteracy.
Everyone can overcome the effects of a lack of financial illiteracy with a little bit of know-how and determination to put into practice what you’ve learned.
We discuss the five most common mistakes and how to overcome them.
The 5 most common financial illiteracy mistakes
While some poor financial decisions may lead to a minor setback, others are more damaging and can jeopardize your financial security.
The 5 most common financial mistakes caused by financial illiteracy are:
- Excessive spending
- Living on borrowed money
- Not saving for your retirement
- Only making minimum payments on debt
- Not having a budget, emergency fund or savings plan
Now, let’s look at these common mistakes in more detail so you know how to avoid them.
Financial mistake no.1: excessive spending
Excessive spending is no.1 on our list because it’s the biggest personal financial mistake that you can make.
While spending a few extra bucks here and there doesn’t seem like a big deal, when you add up the amount of money that is being wasted every year it equals a lot. For example, if you eat out for $25 every week, it will cost you $1,300 per year.
Spending more than you can afford will ultimately result in debt.
Carrying a credit card balance and not contributing to your savings pot are typical signs that you are overspending.
Instead of buying that daily cup of coffee that you could make at home, or taking a car loan out on a new car that you don’t really need, add that money to a savings account and watch it build up.
Financial mistake no.2: living on borrowed money
Living on borrowed money will cost you more money in the long run thanks to interest rates and stop you from reaching your financial goals.
Spending money that’s not really yours can even stop you from owning your own home.
Personal loans may be an attractive option if you need to pay for home improvements or a wedding, but they are not always the best option.
If borrowing money is your only option, consider a home equity loan (if you have sufficient equity) or a credit card balance transfer to free up some of your money.
Next time you reach for your credit card or get tempted to apply for a personal loan, ask yourself if you really want to spend your future money paying for something that you’ve already used and don’t get much value from anymore.
Financial mistake no.3: not saving for your retirement
Almost half of Americans have less than $100,000 in retirement savings.
When you’re in your 20s or early 30s it’s easy to use the excuse that retirement feels like a lifetime away to justify not saving for it.
However, people who are nearing retirement will tell you that the years soon fly by, and saving when you’re young with hardly any responsibilities is much easier.
The earlier you start saving, the more money you will have in your pension pot when you reach the right age because of the amount of compound interest you would have accumulated.
Also, the longer you wait to start saving, the more money you will need to put away each money to build up enough funds.
Even if you can’t afford to contribute a significant amount to your pension pot today, it’s important to start, no matter how small. Your future self will thank you for it.
Financial mistake no.4: only making minimum payments on debt
There are several reasons why only making the minimum payment on credit cards and store cards can damage your financial health.
The minimum payment value is calculated based on a percentage of the total balance, which is normally 2-4% depending on your provider.
By only paying that figure you are barely covering the interest, let alone reducing your balance.
Only making minimum payments can also put your credit score at risk.
Your credit score takes into account the percentage of credit you’re using, therefore, you want this number to be as low as possible.
Small payments on your credit or store card will maintain your high balance, leaving you with less credit available.
Even slightly over paying the minimum payment can significantly reduce the amount of time it will take to clear your balance and be debt-free.
If you’re unable to pay more than the minimum amount each month and have a good credit score, consider a balance transfer deal.
Balance transfers offer no interest for up to 18 months, meaning you can focus on getting your total balance down instead of just paying the interest.
Financial mistake no.5: not having a budget, emergency fund or savings plan
To achieve financial independence you need to have a carefully planned budget, access to emergency funds and a savings plan.
Budgeting will ensure that you always have enough money available for the things you need, keeping you out of debt.
Budgeting is key to revealing your spending habits and will help you develop good financial habits by highlighting where you can cut unnecessary expenditure immediately and focus on your goals.
Having an emergency fund will help you pay for an emergency repair or an unexpected cost such as car repairs or a new washing machine.
It can also stop you from adding to your debt.
How to overcome financial illiteracy
Learning and understanding financial literacy terms are the best way to achieve financial success. Here are a few options to consider:
Read and read some more: financial literacy can be found in many forms, including books, magazines, podcasts and blogs.
Finding something that you enjoy reading or listening to will boost your learning.
Take a personal finance course: there are so many online courses available that it’s important to find one at the right level for you.
If you don’t fancy an electronic course, speak to your local college to see what they offer.
Ask what tools are available from your bank: most banks will provide their customers with money tracking tools such as apps or credit score tracking programs.
Research budgeting techniques: the best way to be financially confident is by finding a method that works for you.
Research the different types and find one that works for you.
What is the meaning of financial literacy?
Someone who is financially literate can understand and effectively use various financial skills, including personal financial management, budgeting and investing.
It is also believed that financially literate people are less likely to be subject to financial fraud.
Financial literacy examples include:
- Regularly increasing your retirement contributions every time you get a salary increase.
- Checking your credit report to make sure it is accurate and up to date.
- Taking advantage of balance transfer deals so you have more time to pay off debt without paying high levels of interest.
Adopting the above financial literacy education will help you save money in the long term and demonstrate a good level of personal finance knowledge, rectifying the consequences of financial illiteracy.
Start achieving financial success
We’ve focused on the most detrimental financial illiteracy mistakes you can make, however there are many more that could affect your personal financial situation.Get yourself well on the way to financial success by reading up on the latest personal finance knowledge on our blog.