5 Things 'Financially Literate' People Always Avoid

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Financial success isn't just about knowing which stocks to buy or how much to put in your IRA; it's also about understanding what traps to avoid. Financially savvy folks tend to sidestep many common pitfalls that can derail their financial goals -- and no, I'm not talking about skipping the daily latte or forgoing the avocado toast.

If you're looking for ways to improve your financial health, here are some key habits to steer clear of.

1. Carrying credit card debt

High-interest credit card debt can be an easy trap to fall into, especially if you're struggling to make ends meet. Financially literate people know how easily debt can pile up when you're paying 20% interest. That $100 purchase can turn into thousands in credit card debt over time.

Instead of carrying a balance, financially savvy people prioritize paying off their credit cards each month to avoid interest fees. Just like compound interest can snowball your savings, paying high interest can snowball your credit card debt. To stay on top of your finances, aim to only spend what you can pay off at the end of the month whenever possible.

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2. Storing savings in a traditional savings account

That checking and saving account you've had since you were a teen? It could be holding you back from reaching your financial goals. Traditional savings accounts don't offer much in terms of savings. (My traditional savings account, for example, is currently offering 0.01% interest -- which is why I don't keep much in that account!)

Financially savvy people understand that high-yield savings accounts (HYSAs) are a better option for storing their emergency funds. While rates can vary, HYSAs tend to offer APYs between 4.00% and 5.00% these days. These accounts provide higher interest rates without putting your savings at risk of market fluctuations.

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3. Pulling from retirement savings too early

Dipping into retirement savings prematurely can be a costly mistake. In addition to paying penalties, pulling out money early derails your long-term growth.

Let's assume your 401(k) earns an average annual return of 7%. If you leave that $10,000 in the account and let it grow for 20 years, it would grow to approximately $40,387.39 thanks to compound interest.

However, if you withdraw that $10,000 now, not only do you lose that potential growth, but you may also face early withdrawal penalties and taxes (which could be between 20% and 30%, depending on your tax rate), leaving you with only $7,000. So, in the long run, you could be sacrificing over $30,000 in potential retirement savings by pulling the money early.

Folks with financial know-how avoid this situation by pulling from emergency savings before considering withdrawing from their 401(k) or IRA. They know retirement savings are meant for the future, not for patching up short-term financial issues.

4. Not diversifying investments

Relying on a single source of income is risky -- and so is relying on a single type of investment. Savvy investors know the importance of spreading their money across different asset classes, such as stocks, bonds, CDs, and even alternative investments vehicles like real estate. This diversification helps minimize risk and creates more opportunities for growth over time.

To reach your financial goals, don't put all your eggs in one basket. While you should always keep your emergency fund safe and easily accessible (like in an HYSA), other investments can be in multiple types of funds. That might mean investing in stocks and mutual funds in your brokerage account or including options like CDs or bonds in your portfolio.

5. Neglecting their emergency fund

Emergencies happen, and when they do, financially literate people are ready for them. Whether it's a sudden job loss, medical emergency, or just a broken dishwasher, they avoid credit card debt or taking out payday loans by tapping their emergency fund.

To keep your finances on track, aim to have three to six months' worth of expenses set aside in a rainy day fund. It's also a good idea to create buckets for expected expenses, like repairing or replacing home appliances, buying a new laptop, or pet medical expenses. This lets you easily cover expenses without tapping retirement accounts or racking up credit card debt.

Remember, we all start somewhere. The key to financial success is to stay focused, do your best, and go at your own pace. Making small, consistent steps with your personal finances leads to big results over time.

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