The Importance of Financial Literacy: Avoid These 18 Money Mistakes
To live a life of financial dignity, becoming financially educated would be a key step. Today, you have multiple avenues or channels to select from. On YouTube alone, you will learn from thousands of videos, and complement them with personal finance and self help books. There are free editions as well as others that cost as little as $1 on Amazon. Another common money mistakes to avoid.
Here, I dissect 18 common money mistakes to avoid that arise from the lack of financial literacy. These are basic ideas and tips. They will ensure your victory over the course of your financial freedom journey. They will also aid your self mastery aspirations.
Money Mistakes #1: Overspending Your Budget
Over spending is one of the common money mistakes to avoid. This is common among many households. They claim that the income or paycheck is never enough to meet the current expenses. So they go overboard with a bank overdraft or a loan. Borrowing sometimes from family and friends is often the case.
Sage Tip: What Would It Take To Consider Yourself Rich?
Money Mistakes #2: Ignoring Retirement Savings
While this is also a clear financial blunder, you’ll end up robbing yourself. You’re are depriving yourself from a dignified life in your ripe old age. All your years of work should be a burden free life of living off of your passive income streams. This nest egg can be well placed in diversified investments.
Money Mistakes #3: Absence of an Emergency Fund
Your emergency fund is an essential financial cushion. It is useful for bailing yourself out of unforeseen financial setbacks. It is the socking away of a portion of your income in an easily accessible investment account. The fund should have a good long-term yield advantage.
An important common money mistakes to avoid is going without this fund. This safety net will pay out monthly cash flows in the event of a loss of primary income. So if you do not have a 6 month living expenses savings in place, you’ll be hit hard in the event of economic downturns.
Money Mistakes #4: Taking Loans You Cannot Repay
When you have access to large amounts of credit, it seems like a wonderful privilege. But what happens when you bite more than you can chew? That credit card has now suddenly inverted the law of compounding against you. You will end up working for money, instead of money working for you.
Money Mistakes #5: Not Taking Advantage of Compounding Returns
Compound interest is the 8th wonder of the world, proclaimed Albert Einstein. This is the interest on your investments that are also bearing interests. This keeps on growing while your position remains unsold.
There are exponential growth opportunities if you combine this with regular deposits. You can continue adding to the outstanding amount. Not taking advantage of the power of compounding will make you lose out on higher yields. Your savings must compound year on year for financial freedom.
Money Mistakes #6: Not Investing in Yourself
The biggest common money mistakes to avoid is ignoring to invest in yourself. This is because you’re your biggest investment. The more mental and intellectual investment you acquire, the better. This financial literacy would eventually become the key driver. It will aid your personal financial decisions and success.
Money Mistakes #7: Not Protecting Your Wealth from Losses
Your investment nest egg requires a lot of care over time. This is because neglecting to monitor or manage them could result in a loss. Wealth in the form of financial assets needs adequate diversification. So that the movement in price in any one or two securities would have a limited portfolio impact.
It is also paramount to do due diligence even before you buy into that investment position in the first place. The quality of your research will show through stable returns. You will have fewer shocks and surprises.
Sage Tip: When should you start an emergency fund?
Money Mistakes #8: Not Growing Your Income Streams
Growing your income streams will open up wealth avenues for you. You will nurture the multiple streams and have diversified sources. When one or two of your money lines dry up, the others will sustain you.
The tendency to scale up your consumption may rise with each increase in cash flow. Curtail this lifestyle creep urge and double down of long-term investment assets.
Money Mistakes #9: Not Monitoring Your Credit Score
Always keep a keen eye on your credit score. Monitor them over the course of your working and investing lifetime. You are essentially entitled to a free copy of your credit report each year via 3 nationwide credit bureaus. Visit www.annualcreditreports.com for further details.
Money Mistakes #10: Not Having a Debt Repayment Plan
If you’re currently in debt, paying the minimums on your debt is not a plan. You’ll need to perform the basic arithmetic to figure out the priority payments. Discover the methods that will give you a quicker escape from that debt pit.
Make a list of your debts and rank them accordingly. Find extra cash to settle those debts by focusing on one debt at a time. Remember to continue saving money. This is so that you don’t return to the liability abyss any more.
Money Mistakes #11: Not Financially Educating Yourself
If you’re falling behind in your financial literacy, you’re making a big financial mistake. Mistakes and failures are normal occurrences of life. But money setbacks could have dreadful consequences. Financial education could be in the form of reading of books related to personal finance.
This also includes money management, budgeting, and investing. These eventually open doors of opportunities, while at the same time shutting the gates of money problems in the near future.
Money Mistakes #12: Making Costly Investment Mistakes
Costly investments are among the common money mistakes to avoid when investing. These could range between mild, and serious. The former may entail choosing the wrong investment vehicles for accumulating money. You will end up with higher fees that erode a chuck of your principal. The latter, more serious consequences could be jumping into the wrong investment trend. There could be a total wipeout of your investment dollars if you experiment with high risk speculation.
Money Mistakes #13: Not Planning to Own a Home
Owing a home is the best thing that could happen to your money. You’re making a mistake if you think renting is the cheaper option. In the long-run, the monthly amounts add up when you could have engineered a comfortable mortgage. While this is not the end game, seek to pay off your mortgage as fast as you can and see the equity in your own personal habitation grow. Yet another common money mistakes to avoid if you’re starting a family.
Money Mistakes #14: Living Paycheck to Paycheck
Financial literacy, when well pursued will slowly wean you off of the rat race gracefully. The idea of living paycheck to paycheck appears to be a global standard. At least you have a job – they say. But what if something happens to that income? How would you then be able to cover your super tight daily, weekly, and monthly expenses?
Secondly, an unforeseen emergency could wipe you out flat and leave you vulnerable. A very common money mistakes to avoid but disregarded by many people. Become adequately financially literate, and develop a passive income stream. Direct that stream to fuel a fully funded emergency fund.
Money Mistakes #15: Changing your Lifestyle after an Income Increase
Don’t upgrade your wardrobe, and all the other things in your life in lockstep with income increase. A common case of lifestyle creep. But everyone does it because it comes so naturally. This is either because we seek a psychological reward for working in jobs we don’t like; or simply trying to keep up with the Joneses. Either way, educating yourself financially will enlighten you with ideas for better money management.
Money Mistakes #16: Not Diversifying Your Investment Portfolio
Another notable common money mistakes to avoid is investing without proper diversification. You cannot have just one stock, or one ETF, or even one money market instrument in your portfolio. You could be heading for trouble.
Investing requires the spreading of risk among several investments you understand. There is also the need for adequate due diligence. This is true both in the research and purchase processes. Better still, invest in multiple asset classes that make sense in your investment plan.
Sage Tip:
Money Mistakes #17: Not having an Insurance Cover
Insurance is the key to sleeping well at night. Not having an insurance policy as safety is one of those common money mistakes to avoid. This can take a toll in an event of financial emergency when least expected. Life insurance and health insurance are key to your financial survival.
Let the insurance company pay for some of life’s unexpected problems. You only part with a small periodic premium in exchange for that all important cover listed in the insurance policy. Shopping around for the best deal is a mark of due diligence. Discover the options available and sign up.
Money Mistakes #18: Not Creating a Budget Plan
The final common money mistakes to avoid is, ‘Not Creating a Budget or Financial Plan. Budgets are so easy to setup nowadays that the absence of it cannot be justified. One of the easiest budgeting ideas I would recommend is the 50-30-20 budget rule. This helps you allocate 50% of after-tax income to your NEEDS, 30% to WANTS, and then finally a 20% allocation to SAVINGS.
As basic as this looks, it works to align you properly in managing your money. It brings order to the financial noise. All your expenses can be tracked and categorized over time. You can use the savings component to pay off debts, then build an emergency fund.
A Few Parting Words
In summing everything up, financial literacy should be the backbone of your financial independence aspirations. Your ability to retire early will be based on surmounting the obstacles in your path. If you don’t deal with the 18 common money mistakes to avoid discussed above, you will have steep resistance. Your money goals may probably end up in non achievement.
Have you experienced a financial setback recently or in the past that you could link to lack of financial literacy? Do share these in the comments below.
Most Popular Posts:
- 12 Giant Steps Financial Freedom Seekers Take To Retire Early (Epic List !!!)
- Learn to Trade Stocks Step by Step for Beginners (A Comprehensive Guide)
- Top 10 Financial Freedom Courses (Mostly FREE)