• Sun. May 26th, 2024

I’m a Financial Planner: 5 Ways a Lack of Financial Literacy Is Costing You Every Month

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Not investing the time and effort into becoming financially literate can propel you into a lifetime of financial struggles. 

“Lack of financial literacy significantly affects individuals each month and over the long term, influencing immediate budget management and future financial prosperity and security,” said Michael Hills III, certified funds specialist with Apex Wealth

Here’s how your lack of financial knowledge might be hurting you — not only today but for the rest of your life. 

Poor Budgeting Skills

At the very least, you should be able to successfully plan and manage a budget. 

“Without a basic understanding of budgeting, people may struggle to manage their income and expenses effectively,” said Michael Collins, CFA and founder and CEO of WinCap Financial.

“This can lead to overspending, not having enough money for essential expenses or falling into debt.”

So many options are available to help you budget, including free templates and spreadsheets, YouTube videos, blogs, books and budgeting apps. All you have to do is pick one of these resources and start learning. 

Inadequate Retirement Planning

Collins said that many people don’t understand the importance of saving for retirement — or how to do so effectively.

“This can result in not having enough money to sustain oneself after retirement,” he added. 

Unfortunately, Social Security benefits for retirees are modest and won’t likely be enough to cover your expenses in retirement. In March 2024, the average retirement benefit check was $1,864.52, according to the Social Security Administration. The sooner you start saving and investing for retirement, the longer you’ll have for compound interest to take effect, which essentially multiplies your money. 

High-Interest Debt

“A lack of understanding about interest rates and credit card repayments can lead to high-interest debt that can be difficult to escape from,” Collins said. “This can cause financial stress and limit one’s ability to save and invest for the future.”

One way to understand how long it takes to pay off credit card debt that’s accruing interest is to look at your credit card statement. Credit card issuers are required by law to disclose on each credit card statement how long it will take you to pay off your current balance if you only pay only the minimum amount due each month and make no additional charges. They also must disclose how much you’ll need to pay each month to pay off your current balance in 36 months. However, if you continue to make charges as you pay your balance down, you’ll keep yourself in a never-ending cycle of debt and interest.

Limited Investment Knowledge

“Without knowledge of investing, people may miss out on opportunities to grow their wealth and achieve their financial goals,” Collins said. “They may also fall victim to investment scams or make poor investment decisions.”

If your employer offers investment options, such as a 401(k) plan, it’s wise to start investing and take advantage of compound interest. Additionally, if your employer offers matching contributions, which means it will contribute a certain amount toward your plan based on your contribution, make sure you contribute enough to receive the full match. Otherwise, you’re leaving money on the table. 

Lack of Emergency Savings

A car that needs major mechanical repairs, a dental emergency that’s not covered or an unexpected tax bill are all costly expenses that many people don’t have immediate funds to cover. 

According to Collins, financial literacy also includes understanding the importance of having an emergency fund.

“Without this knowledge, people may not prioritize saving for unexpected expenses, leaving them vulnerable in times of financial crisis,” he said. 

Ideally, three to six months’ worth of expenses makes for a good emergency fund, but even one month is a good start. Open a high-yield savings account and start saving whatever you can each month to start building the fund. 

Financial Literacy Is a Valuable Investment

“Just as mastering a language can open doors to new cultures and opportunities, understanding the language of money enables individuals to navigate financial landscapes effectively, make informed decisions and ultimately achieve financial freedom,” Hills said. “The financially literate understand not only the basics of budgeting and saving but also how to make their assets work for them — leveraging investments, real estate and other vehicles to grow their wealth. This ability to ‘speak’ the language of money fluently is a common trait among the wealthy, who often excel in maximizing the efficiency of their assets and ensuring that every dollar is strategically aligned with their financial goals.”

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