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April is financial literacy month. Financial literacy is a measure of how well the public understands financial processes and concepts such as budgeting and how interest works. 

Your individual level of financial literacy often correlates with your ability to make smart financial decisions and confidently navigate financial accounts and services.

Start by reviewing these 8 common financial mistakes and make some changes to improve your financial literacy this month. 

Mistake #1: Creating Credit Card Debt  

Credit card debt is arguably the easiest thing to create and the hardest to get rid of. Unlike cash or a debit card, paying with a credit card allows you to spend more than you have in your bank accounts. Suddenly, the balance you owe is more than you can pay off and you start accruing interest on your debt. Credit card interest rates are often the highest you will pay on any loan. The average annual percentage rate (APR) on credit cards was 22.8 percent last year. According to the Consumer Financial Protection Bureau, major credit card companies charged over $105 billion in interest in 2022.

If you currently have credit card debt weighing you down, focus on taking these 4 steps to improve your finances this year.

• Pay more than the minimum balance each month.
• Transfer your balance to a card offering zero percent APR.
• Prioritize paying off your card above other spending.
• Limit additional credit card use.

Mistake #2: Neglecting Your Emergency Fund 

Even the most financially secure households can quickly fall into debt if they fail to create and maintain an emergency savings account. A car accident or unexpected home repair can create bills totaling thousands of dollars. An unexpected health crisis can put you out of work for months leaving you with no income to support your basic monthly expenses. Without a well-funded emergency account, you could quickly go from financially secure to drowning in debt.

Experts suggest keeping an emergency fund that provides 3 to 6 months of coverage for your lifestyle. Open a savings account dedicated to emergencies and treat it separately from your other savings. Look at what you spend each month in housing, food, and lifestyle then multiply it by 6. This amount would allow you to have six financially stress-free months should something unexpected happen.

Mistake #3: Slacking on Retirement Savings 

CNBC suggests that you need $64,003 each year to retire comfortably in Pennsylvania. If that number seems daunting, you are not alone. According to CBS News, thirty seven percent of Americans feel like they are “significantly behind” when it comes to saving for retirement. For most retirees, social security isn’t enough to live on. You need to start putting money aside today in order to live comfortably in retirement.

Does your company match employee 401k contributions? If so, your pre-tax dollars could be earning extra money for your golden years. If you already have a 401k, consider adding an additional retirement savings account. Opening a Roth IRA diversifies your retirement funds and helps build the nest egg you need for future retirement. Unlike a traditional IRA or 401k, a Roth account allows you to withdraw funds tax free when you’re ready to retire.

Mistake #4: Living Paycheck to Paycheck 

Setting money aside for retirement or an emergency fund may seem impossible if your income barely covers your basic living expenses. Living paycheck to paycheck leaves you one unexpected expense away from falling into debt. The best thing you can do in this situation is examine your monthly income and expenses and create a tight budget for yourself.

Creating a budget can help spotlight areas where you can cut back on spending. A general recommendation for people new to budgeting is to create a 50/30/20 budget. Under this budgeting model 50 percent of your income goes to needs, 30 percent goes to wants, and 20 percent goes to savings. If parts of your lifestyle are consuming a larger portion of your income than recommended, a shift in priorities can help you refocus on your financial goals.

Mistake #5: Overspending on a House 

If 50 percent of your monthly budget is dedicated to your needs, only 30 percent of that should be taken up by your housing expenses. Typical housing expenses include mortgage payments, utility costs, taxes, HOA fees, and any monthly maintenance costs. Many first-time homebuyers in Northeast Pennsylvania get swept up in the excitement of picking out their first house and end up spending more than they should.

Before you buy your next house, be sure to break down all the expenses and factor them into your budget. Restrict your house hunting to homes that fit your budget and avoid the temptation to rationalize spending more than you should. Overspending on a house will weaken your ability to save for the future and put you farther away from achieving your financial goals.

Mistake #6: Draining Your Savings to Pay Off Debt 

Many PA residents have multiple savings accounts dedicated to short term goals like a vacation, long term goals such as buying a house, emergencies, and the ultimate goal of retirement. All of these accounts play a crucial role in creating financial health. If you are carrying debt, you may start to consider using your savings to pay off your credit cards. While this may help your financial situation in the short term, it can jeopardize your financial future and retirement.

Rather than emptying your savings or borrowing against your 401k, consider a home equity loan or personal loan. Debt consolidation can simplify your finances and lead to a lower interest payment. By taking out a new loan to pay off multiple high-interest debts, you save time and money each month. Continue eliminating the debt by portioning off a piece of your monthly budget for debt repayment. Cutting back on extra spending can make a big difference in your level of debt over time.

Mistake #7: Misusing a Home Equity Line of Credit 

If you decide to access your home equity to help consolidate debt or pay for an ongoing project, a home equity line of credit (HELOC) may be the tool you choose. Instead of providing a lump sum loan like a home equity loan, a HELOC operates more like a credit card. A HELOC allows you to withdraw funds over time as costs for a project arise. You only accrue interest when you use the funds, so you don’t have to worry about paying interest on parts of the loan that you haven’t accessed yet.

Financial mistakes occur when borrowers treat their home equity like a piggy bank. If approved for a HELOC, you may suddenly feel like you have money burning a hole in your pocket. Remember that a HELOC is a type of loan and must be repaid. If you fail to adhere to the repayment schedule you could risk losing your home. Only open a HELOC if you have a specific need for the money and a plan to handle repayments.

Mistake #8: Ignoring Your Credit Score 

A big part of financial literacy is knowing and understanding your credit score. Checking your credit report should be part of your yearly financial checkup. You should know what a good credit score is and how to improve yours this year.

Credit scores range from 300 to 850 and a higher number indicates a history of financial responsibility. Consumers with higher credit scores pay less in loan interest and are more likely to be approved for the loans and accounts they want.

Five factors that determine your credit score are your:

• payment history
• credit mix
• length of credit history
• credit utilization/amount owed
• number of new accounts

If your credit score is on the lower side, work to improve it this year by making on-time payments, avoiding new accounts, and paying down debt.  

Improve Financial Literacy with Citizens Savings Bank 

Citizens Savings Bank is here to help you learn more about financial literacy and build a strong understanding of your finances. Whether you have questions about paying off a loan, finding the right loan, or saving money, we can help. Our Customer Support Team is ready to answer any questions you may have.

When your financial goals include saving for retirement, Citizens Savings Bank offers the best retirement accounts for your needs. If you are looking for financial tips to help build your wealth in Lackawanna, Wayne, and Monroe Counties, our knowledgeable associates are right down the street. Stop by one of our branches in Scranton, Mount Pocono, Taylor, Clarks Summit, or Honesdale today. For branch locations and hours, visit our website. We also have a Customer Support Team ready to answer any questions you may have. Call us today at 1.800.692.6279 or email [email protected]. Member FDIC. Equal Housing Lender.