Are You a Money Dummy? Here’s How to Fix That

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Financial freedom is a goal many Americans spend decades working to achieve. Being liberated from debt while sustaining the lifestyle you crave can be an amazing feeling, however, getting there isn’t easy.

Finances can be confusing, and unfortunately, a majority of us weren’t properly taught about them in school. According to a recent survey from Experian, 3 in 5 adults feel their limited understanding of credit and personal finance has led them to make financial mistakes, setting them back $1,000 or more. To avoid making these costly mistakes, you must become financially educated.

We all know we need money to live, but being financially intelligent goes deeper than that. Financial literacy is the ability to understand how to manage your finances. Learning how to budget, build savings, manage debt and invest are important skills that can aid you in becoming financially independent through your working years and into retirement. These skills can also help you avoid creating poor spending habits or making foolish financial decisions.

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Start by measuring your cash flow

One of the first steps to mastering your finances is identifying your cash flow. A common misconception is that your cash flow is only the amount you're bringing home each pay period, but it’s not. To calculate your cash flow, take your total monthly income and subtract your monthly expenses.

Being knowledgeable about what you have coming in versus what is going out will help you recognize whether you’re living within your means. If you’re not, you will need to evaluate your spending habits. Once you know your cash flow, the next step is to create a budget, then stick to it.

Next, get serious about saving

Understanding how to properly save is a component of financial wisdom. Building savings comes with some obvious benefits, such as covering emergency costs or providing a financial cushion in the event of a job loss, but it also allows you to grow your wealth and prepare. The sooner you start saving, the longer that money has to grow. High-yield savings accounts are an option. These accounts typically have higher interest rates, allowing you to grow your savings at a higher rate than a traditional account.

The importance of saving should be recognized early, if not, you will find yourself unprepared for the future. It is better to start saving today than procrastinate years down the road and then try to play catch-up.

Look ahead to retirement

Another important savings strategy is building a retirement account. With the reduction of pensions and the uncertainty of Social Security, many feel we’re headed toward a crisis. The National Institute on Retirement Security found that in 2024, 79% of Americans agree there’s a retirement crisis, up from 67% in 2020.

Many companies offer an employer-sponsored 401(k) plan with matching contributions, and you should also check into opening a separate retirement account, such as a Roth IRA or brokerage account. This will help ensure you can actually afford to retire. In any of these retirement vehicles compound interest is your best friend. Think of compound interest as interest on interest. The money is earning interest on the principal sum of your deposit, and with compound interest, that interest is earning interest too.

Put a dent in your debt

Managing debt is a useful skill, especially at a time when more Americans are struggling to pay it off. According to data from the Federal Reserve Bank of New York, the rate of credit card delinquencies has climbed to 10.7%, the highest it’s been since 2012.

Accumulating debt isn’t bad so long as it can be managed. If you begin charging more than you can afford to pay off each month, you're heading down a slippery slope. To avoid this, create a payment plan for repaying that debt. Don’t use credit cards to pay bills, or to pay off other delinquent accounts. It might seem tempting in the short term, but it’s harmful in the long term. Accruing too much debt will keep you in a vicious cycle that can be extremely difficult to dig your way back out of.

Know the risks and rewards of investing

You’ve probably heard about the importance of investing, but understanding how it works is all part of becoming more financially literate. There are several different ways to invest. Some people invest in the stock market, while others purchase real estate. Regardless of how you choose to build your wealth, it’s important to know that every venture carries financial uncertainty and that each product has its own rate of return. To ensure an investment is right for you, figure out the level of financial risk you’re willing to take and compare that with the rate of return. The rate of return is the net gain or loss of an investment over a certain amount of time.

Taking care of your finances can be an overwhelming process. It can be uncomfortable and confusing, but your financial health should never be neglected. Learning how you relate to money and the true purpose of money can give you freedom and peace of mind around how you use it.

Consider talking to a professional. You don’t and shouldn’t try to do it all alone. Taking a personal finance seminar is another step to educating yourself. This will give you the knowledge and tools to make financial choices that are in your best interest.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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For over 20 years, Mindy Oglesby has been a stalwart in the realm of finance, illuminating the paths of countless individuals and families through the complexities of personal wealth management. With an unwavering dedication to excellence and a fervent commitment to client prosperity, Mindy has become a trusted beacon in the financial planning landscape. Mindy specializes in retirement planning, investment management, tax optimization and estate planning. With a keen interest in sustainable investing and philanthropic strategies, she helps clients align their financial goals with their values, creating a legacy that extends beyond wealth accumulation.