How Financial Literacy Can Help You Avoid Mistakes and Build Wealth
Written by
Nicole Spector
Edited by
Kristen Mae
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Financial literacy isn’t widely taught in schools, and many people carry this crucial knowledge gap with them throughout their lives. In the U.S., financial literacy has been stuck for years at around 50%, according to research by the World Economic Forum.
Without strong financial literacy, we simply can’t make informed decisions about money. But how exactly does financial literacy benefit us? Here are 5 ways it can help you avoid costly mistakes and build wealth.
You’ll Avoid the Trap of Low-Interest Returns
If you’re unfamiliar with high-yield savings accounts, bonds or other interest-bearing vehicles, you might assume your best bet is a traditional savings account. But stashing cash in a low-interest savings account is a surefire way to lose money over time, as these accounts typically don’t keep up with inflation.
“While keeping money in a savings account feels ‘safe,’ it’s actually losing value over time if the interest rate is lower than inflation,” said Andrew Latham, CFP, content director at SuperMoney.com. “Financial literacy helps you understand the risk of playing it too safe. By learning about investments like index funds, high-yield savings accounts, and bonds, you can grow your money instead of watching it slowly erode.”
You Won’t Miss Out on Tax-Advantaged Accounts (Roth IRAs, HSAs and 401(k) Plans)
If you’re not taking full advantage of tax-advantaged accounts, you’re leaving money on the table — money that could be a lifesaver in your retirement. Many people don’t realize the impact of these accounts until it’s too late.
“A 401(k) match from your employer is literally free cash, yet many people contribute less than the match or nothing at all,” Latham said. “Roth IRAs and HSAs also offer huge tax benefits that can help build long-term wealth. Financial literacy teaches you how these accounts work, how to reduce your taxable income, and why compounding interest makes early investing a game-changer.”
You’ll Learn Budgeting Skills To Live Below Your Means
Many of us don’t grasp the importance of budgeting until we’re adults managing expenses on our own. Unfortunately, failing to budget properly can lead to debt and financial stress, even for those earning higher incomes.
“In addition to helping you realize the dangers of indulging in a lifestyle you can’t sustain, another way financial literacy can help you avoid mistakes and build wealth is that it teaches you how to avoid the mistake of living beyond your means,” said Aaron Razon, a personal finance expert at Couponsnake. “Financial literacy doesn’t only help you realize that you need to budget your expenses — it also shows you that your budget shouldn’t prioritize your wants but should instead cater to your needs and financial goals.”
You’ll Be Able To Spot High-Interest Debt Traps
Credit card debt is particularly nefarious because of the astronomical interest packed into it, which can quickly spiral out of control. If you lack financial literacy, you may fall for this trap without realizing the long-term consequences.
“Credit card companies love financially uninformed consumers because they make billions off high-interest debt,” Latham said. “Financial literacy helps you understand the real cost of carrying a balance — a $2,000 credit card charge can take years to pay off if you only make minimum payments. Learning how to manage debt, negotiate lower interest rates, and prioritize payoff strategies like the avalanche or snowball method can save thousands of dollars in unnecessary interest payments, freeing up more money to invest and grow wealth.”
You’ll Navigate Major Financial Events With Confidence
So many of life’s biggest milestones — marriage, buying your first home, having kids, retirement — come with major financial implications. Without proper knowledge, it’s easy to make expensive mistakes that can harm your long-term financial security.
“Financial literacy provides the tools to understand these impacts, plan accordingly and avoid costly mistakes,” said Melissa Murphy Pavone, CFP, CDFA, founder of Mindful Divorce Partners. “I often see how a lack of financial knowledge can lead to inequitable divorce settlements or long-term financial insecurity — mistakes that could be avoided with better education.”
Looking to build a legacy? Check out our Life to Legacy guide for expert advice and smart moves you can make today.
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