15 Financial Mistakes Beginners Should Avoid With Money

Here’s a three-question money quiz. Take a guess before you read on.

Question 1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After 5 years, how much would you have if you left the money to grow? More than $102, exactly $102, or less than $102?

Question 2. Suppose the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, would you be able to buy more than today, exactly the same as today, or less than today with the money in the account?

Question 3. True or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

The answers are more than $102, less than today, and false. These are known as the “Big Three” questions, written by economists Annamaria Lusardi and Olivia Mitchell to test three basics: compound interest, inflation, and risk diversification. When they first asked them of Americans over 50 in 2004, only about a third got all three right. In the 2021 National Financial Capability Study, fewer than 30 percent of Americans did, and among adults under 35 just 14 percent did.

If you missed one, you’re in very large company, and it says nothing about how smart you are. The researchers also noted that people who get any of the three wrong are unlikely to master trickier money decisions, which is why these basics matter so much.

The 15 mistakes below start with those three ideas. Mistakes 1 through 5 are tied to them. The rest are common beginner mistakes from my own experience, and I’ll mark where the research stops. The quiz shows what people know, and it doesn’t prove that knowing the answers fixes every money problem.

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1. Not knowing that savings earn interest on their own interest

This is the first quiz question. When you leave money to grow, the interest you earn starts earning interest too. That’s compound interest, and over many years it makes a bigger difference than most people expect.

The mistake is thinking that saving a little early doesn’t matter. Time does a lot of the work. Even small amounts started now have more time to grow than bigger amounts started later.

Try this: Open a savings account and set up a small automatic transfer, even $10 a payday.

2. Forgetting that compound interest works against you on debt

The same idea runs in reverse when you borrow. Interest on a balance can pile up on top of earlier interest. That’s why credit card debt can grow faster than people expect.

Know the interest rate on every debt you have. Write the numbers down. It’s hard to decide what to pay off first when you don’t know what each one costs.

Try this: List every debt you have with its interest rate, and circle the highest.

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3. Paying only the minimum on a credit card for months

Early on, I paid only the minimum on a card for about half a year. I felt responsible because I never missed a payment. Then I looked at the statement and saw how little had gone toward the balance.

A lot of a minimum payment can go to interest. Paying more than the minimum, when you can, shrinks the balance faster. This is my own experience and a common pattern, and it’s worth checking on your own statement.

Try this: Find the minimum payment and the interest charged on your latest statement, and compare them.

Nobody is born knowing how interest works. It’s something you learn.

4. Ignoring inflation when you save for the long term

The second quiz question is about inflation. If your savings earn less than prices are rising, the money buys a little less each year, even though the balance goes up.

Cash in an account is great for emergencies and near-term goals. For money you won’t need for many years, an account that earns less than inflation slowly loses buying power. If you’re unsure where to put long-term money, talk with a qualified professional.

Try this: Look up the interest rate on your savings account and compare it to recent inflation.

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5. Putting all your money into one company’s stock

The third quiz question is about diversification. A single stock can fall a lot if that one company has trouble. A mutual fund spreads your money across many companies, so one bad result hurts less.

That doesn’t make funds risk-free, and I’m not giving investment advice. The mistake is not knowing the difference. Learn the basics first, and ask a professional if you’re unsure.

Try this: If you own a single stock, write down what share of your investments it makes up.

6. Buying an investment you can’t explain

If you can’t describe in a sentence or two how something makes money and what could go wrong, wait. This one is my own rule of thumb, not a finding from the research.

A friend’s tip or an exciting ad isn’t an explanation. Take your time, and ask questions until it makes sense.

Try this: Before buying anything, write two sentences explaining how it works and what the risks are.

7. Having no cushion for emergencies

A car repair, a medical bill, or a missed paycheck can turn into debt if you have nothing saved. A small cushion gives you options.

Start small. A week of expenses is a fine first goal. It’s my own advice, and it’s the one I wish I’d followed sooner.

Try this: Set a first cushion goal of one week of basic expenses.

8. Having no budget or plan at all

When I first started earning, I didn’t have a plan, and my money just disappeared. A simple plan lists what comes in, what goes out, and what’s left. It doesn’t have to be fancy.

Planning doesn’t restrict you. It tells your money where to go. You can change it any time.

Try this: Write down your monthly income, your fixed bills, and what’s left.

9. Ignoring fees

Bank fees, card fees, late fees, and fund fees can quietly drain your money. Small amounts repeat every month or year.

Read the fine print on your accounts and ask about fees you don’t understand. Some can be avoided with a small change. That advice is my own.

Try this: Scan your last statement for any fee and find out how to avoid it.

10. Never reading your statements

Statements show what’s really happening, including mistakes, duplicate charges, and subscriptions you forgot. Skipping them means missing all of that.

Set aside ten minutes a month to go through them. It’s one of the simplest money habits, and it’s saved me from paying for things I’d forgotten about.

Try this: Put a ten-minute statement review on your calendar each month.

11. Borrowing for wants without a plan to repay

Borrowing isn’t always a mistake. The problem comes when you borrow for something you want and have no clear plan for paying it back. The interest becomes the price of the delay.

Before you borrow, figure out the monthly payment and where it will come from. If you can’t answer that, wait.

Try this: Next time you consider borrowing, write down the payment, the interest rate, and the date it will be paid off.

12. Lending or co-signing without thinking it through

When you co-sign a loan or lend money, you can end up responsible for the payments. Many people say yes because they care about the person. That’s kind, and it’s worth thinking carefully first.

Ask yourself whether you could afford to pay it all if the other person couldn’t. If not, consider other ways to help. This is general advice, and a professional can explain your exact risks.

Try this: Before you say yes to a loan request, decide what you could afford to lose.

13. Waiting to save until you earn more

It’s tempting to think you’ll start saving when you make more. But the habit is worth building now, and early saving has more time to grow.

Start with whatever you can. The amount matters less than the routine. Raise it when your income rises. That advice is mine, and it connects back to the first quiz question.

Try this: Start a small automatic savings transfer this week, however small.

14. Comparing your money to other people’s

What you see of other people’s finances is rarely the whole story. You don’t see their debts, their help from family, or their stress. Comparing can push you to spend in ways that don’t fit your life.

Focus on your own goals and your own numbers. Your plan only needs to work for you. That’s my view, not a study result.

Try this: Write down one money goal that’s completely your own.

15. Being too embarrassed to ask for help

Many people don’t learn about money until they’re adults, and nobody has it all figured out. Asking a question is a sign of wanting to learn.

Talk to a trusted friend, a nonprofit credit counselor, or a qualified professional. There’s no shame in it. Most of us wish we’d asked sooner.

Try this: Write down one money question you’ve been afraid to ask, and find one person who might help.

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