The United States adult financial literacy level is only at about 57%. This means that even the Americans that think they know everything about finances may not have it all correct.
The fact of the matter is that financial literacy correlates to financial success. If you don't know what you're doing wrong, you also don't know how to make changes to fix the problem.
Are you concerned about financial mistakes you've made or are making right now? If you want to find out whether or not you're making some of the common personal financial planning mistakes, keep reading to find out what they are and how you can fix them.
Not Planning for the Future
A common financial mistake that can be a huge problem is failing to plan for future expenses. If you don't have a plan in place for when you will be spending money or even emergency situations, you are setting yourself up for potential financial hardship later on.
Knowing how you are spending money, as well as where your money is coming from, is a basic money management skill. You should also plan for unforeseen situations by having an emergency savings or contingency plan in place.
Try to create a budget for yourself that focuses on yearly planning if possible. If that seems too daunting to start with, create a weekly or monthly budget and go from there.
Once you have a budget established, work with a professional to start planning for retirement. While it's better to start this process when you're in your 20s or 30s because you'll have more time to save, you can begin this process at any time.
So, don't think about how you wish you had started saving years ago; instead, realize that if you start saving now, it'll be better than if you start saving tomorrow or next week.
Not Reviewing Your Monthly Payments
It's likely that there are some payments you have that you've been paying for years without a second thought. However, you should look at the things that you pay for regularly to see if they are still necessary.
You may have payments for different items, such as streaming services or subscription boxes that you don't enjoy anymore. In addition to that, you could be paying for old gym memberships or dues for activities that you no longer participate in.
Another approach is to figure out if any of your monthly or weekly payments can be switched out for a cheaper alternative. For instance, switching from a premium subscription to a basic subscription could save some extra cash.
Talk with others in your household to see what they think as well. You may think that your family uses a monthly service that, in reality, has been abandoned a while ago.
By taking a look at the things that you are paying for and seeing where you could cut costs, you could save money in the long haul. These savings could add up to more than you may think by the end of the year.
Spending Too Much on a House or Car
If you rent or buy your home, you may be spending more than you should on your monthly payments. Many traditional experts agree that you should only be spending about one-third of your income on your housing, especially if you rent.
If you own your home, however, you have many other factors that you need to take into account as well, such as maintenance expenses or emergency costs related to home repairs.
When you are choosing where to live, consider how big you need the space to be and remember that size will impact the cost of utilities home insurance, and other factors.
Similarly, it’s important to make smart financial decisions when it comes to buying a car. Be sure to compare rates and secure an auto loan within your budget. This could mean choosing a car model that’s fuel-efficient or has low monthly payments.
Not Investing Money Wisely
You should invest some of your money in the markets or other income-producing avenues in order to make money later in life. In fact, did you know that planning for retirement counts as an investment? Making a regular contribution to these types of accounts could lead to a more enjoyable retirement.
Think about how much time it takes for an investment to grow. It is much better to start putting your additional income into investments than spending it for immediate satisfaction. Because of the time investments can take, you will have to consider the risk as well, especially if you are playing in the stock market.
With that being said, you don't want to start throwing your money at any type of investment that seems interesting or fun in the moment. This is dangerous territory that can lead to serious loss and may create an even more dire financial situation for your future self.
Consult with a financial advisor to determine what type of investments are best for you and how much you can afford to invest at a time. Creating these goals will help you see what type of financial situation you are in, but it also helps you plan for future financial opportunities.
Excessively Spending Your Paychecks
It's easy to lose track of your money if it is going toward frivolous spending every month. It might not seem like a big deal if you're ordering take out, renting a movie, or buying a new pair of shoes every week, however, these costs add up.
This is one of the issues that often arise with individuals that are not budgeting their spending correctly (or at all). Spending just $40 extra every week on unneeded items is an extra $2,080 per year. Think of all of the investments or savings opportunities that you could have had with that much money!
If you're going through a financial hardship, financial mistakes like not accounting for big-ticket purchases can be detrimental, as every dollar counts. Of course, spending money on things you enjoy with your paycheck is not always a bad thing. Just be sure to budget accordingly and factor in leisure spending to ensure you are not overspending.
Not Paying Down Debts or Credit Card Balances
It's no secret that Americans struggle with debt at all ages. Debt can weigh you down financially and is something that you'll carry with you everywhere you go. Debt impacts your financial abilities, but it could also create stress, affect budgeting, and impact personal relationships.
A small amount of debt is healthy for a good credit score, but too much debt can dip into your savings. Develop a plan to pay your debts, especially one that allows you to pay more than the minimum amount due each month. And if you’re in a better financial standing than you were, you could be eligible to refinance your auto or mortgage loans and secure a lower interest rate. So, have a plan of action that allows you to pay down your debts and get your savings back on
track to avoid debt in the future.
Making Financial Decisions on an Impulse
In any situation where you have to make a big choice, it's almost always a bad idea to act on impulse, pressure or fear. If you're making financial decisions without thinking them through, you may be creating bigger problems for yourself later.
An impulsive choice means following through with a decision before thinking about the consequences. Taking a step back to look at the entire financial picture is a wise choice if you are heavily weighing several options or if you're going to take a big step, such as investing in a mortgage or getting married.
Pressuring yourself into making a choice before you're ready will not benefit you in the long run, so take the time to look over all options and create a plan for yourself before you make a financial decision.
How to Correct Past Financial Mistakes
If you've already found yourself making some of these mistakes and are ready to move on, the good news is that it is possible. You can get yourself back on the path toward meeting your financial goals, whatever those may be. The bad news, however, is that it can take some time. You won't be able to undo a big financial mistake overnight because growing your money may take years.
Depending on the severity and type of financial mistake you've made, you could be looking at a difficult objective. There is no time like the present to start changing your bad habits, so look toward the future to determine what you should do next.
To learn from your previous financial planning mistakes, you can:
- Investigate your current financial picture
- Determine what your short-term and long-term goals are
- Develop a plan to reach your financial goals
- Create a budget based on your income
- Identify behaviors or patterns in your spending
- Utilize technology to track finances or organize budgets
- Consider planning and saving for an emergency fund
With the help of a trusted financial advisor, you have the opportunity to ensure you don't continue to make financial blunders. If you're ready to talk with an expert today, feel free to reach out to us for help.
Take Control of Your Finances
Now that you better understand some of the most common financial mistakes, it's time to assess your own financial situation. Whether you feel like it looks good or bad, there is always going to be room for improvement!
If you want to gain more financial literacy skills, check out the services offered on our website. We have a Financial Wellness Center with self-assessments, online courses, and personal credit counseling agents to help you reach your financial goals. Join iTHINK Financial today to utilize all of the benefits, services, and resources we have to offer.