When it comes to managing your money, nobody is perfect. Everyone makes mistakes occasionally, and it’s nearly impossible to live a life free of financial missteps.
And there’s one mistake in particular that’s costing Americans billions of dollars per year.
The hefty cost of financial illiteracy
The average American estimates they waste around $1,279 per year as a result of their lack of financial knowledge, according to a survey from the National Financial Educators Council.
That comes out to around $307 billion in total costs when you consider the nation’s population.
A couple of thousand dollars per year may not sound like much at first glance, but if you’re consistently making financial mistakes without realizing it, that number could skyrocket.
Over a lifetime, you could end up wasting tens of thousands of dollars simply due to a lack of understanding. And the most dangerous part is that if you don’t realize you’re making potentially harmful mistakes, it’s difficult to correct that behavior and get your finances back on track.
Financial illiteracy can take many different forms, too. Perhaps you’re not saving for retirement because you’re not sure how to get started. Or maybe you are saving, but you’re stashing your cash in a savings account instead of your retirement fund because you (mistakenly) believe it’s safer. Even if you are investing in your 401(k) or IRA, you may not be saving enough because you’re not sure how much you should be socking away for your senior years.
It’s not just retirement planning that can be confusing, either. There’s also a lack of understanding surrounding topics like budgeting, establishing an emergency fund, and paying off debt.
You don’t know what you don’t know, so it’s possible you could be making costly mistakes and won’t experience the consequences until years down the road. Fortunately, the more you learn about basic financial concepts, the better you can protect yourself against these potentially harmful blunders.
Knowledge is power when it comes to finance
Finance may not be the most exciting topic to think about (in fact, 26% of Americans say they’d rather get a cavity filled than prepare a yearly budget, according to a survey from Capital One), but if you want to ensure you’re not unknowingly putting your money in jeopardy, it’s important to at least understand the basics.
Keep in mind that you don’t need to know everything (after all, even the experts don’t know everything there is to know about the finance industry), but the more you know, the better off you’ll be.
If you’re not sure where to start, begin with your basic budget. Start tracking your spending, if you don’t already, to see exactly where all of your money is going. Categorize all of those expenses, then see if you’re overspending in any area. Having a solid grasp on what you’re spending each month can ensure you’re not wasting any money, and it also makes it easier to cut back in certain areas and reallocate that cash to your savings.
Retirement planning is another area where it’s important to do your homework. Use a retirement calculator to estimate how much you should aim to save by retirement age, then create a savings plan to come up with enough cash each month to reach that goal. Also, if you have access to a 401(k) and your employer offers matching contributions, take full advantage of them. Those matching contributions are essentially free money, so make sure you’re saving enough in your 401(k) to earn the full match.
Finance can be a tricky topic, so it’s understandable if you’d rather bury your head in the sand and avoid thinking about money. However, doing so could come at a major cost. The good news is that there’s a wealth of information available online about any topic you can think of, so it’s easier than ever to educate yourself about any financial concepts you don’t understand. It may not be the most enjoyable task on your to-do list, but when you do your research, you’ll make better financial decisions and avoid letting any of your hard-earned cash go to waste.
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Source: The Motley Fool