Financial Literacy (or Lack Thereof) Can Make the Difference of $10,000 or More a Year on Your Wallet in 2023
Indeed, a new National Financial Educators Council (NFEC) survey found that lacking financial literacy — and not knowing how to manage personal finances — carried a high cost in 2022. The NFEC survey showed that 38% of Americans said their lack of financial literacy cost them $500 or more, and a whopping 23% said it cost them more than $10,000 — a steep increase from the 10.7% who said the same in 2021.
As a result, the estimated average amount of money that financial illiteracy cost Americans was $1,819 in 2022 — the highest average since the first annual survey took place six years ago. This figure correlates with record-high inflation rates and other economic challenges, the NFEC noted.
“You have to learn about money from somewhere. For a lot of people, they learn from mistakes. That can put them in survival mode versus really being able to thrive and win with money,” said Kristina Ellis, college finance expert at Ramsey Solutions. “Early financial literacy equips people with the tools they need to not only meet their basic financial needs, but it encourages them to save and invest, ultimately allowing them to reach financial freedom.”
In terms of common costly mistakes, overdraft fees were prominent: the median overdraft fee on a debit card is $34, according to the Consumer Financial Protection Bureau (CFPB).
According to the survey, which cites CFPB data, most debit card overdraft fees happen on transactions of $24 or less — and American consumers end up spending $17 billion a year on overdraft and non-sufficient funds fees.
Not paying attention to credit card interest rate fees is another common mistake. In the week ending Jan. 18, the average credit card interest rate was at a record 20.16%, according to Creditcards.com — so paying only the minimum balance monthly will quickly add up.
Additional common mistakes include needless luxury spending, buying overpriced new vehicles and succumbing to identity theft, scams and frauds, the survey found.
Madison Sharick, CFA, CFP and writer at Madi Manages Money, noted that while these are “explicit costs,” there’s a whole set of other costs that aren’t as commonly considered — and they’re the bigger-ticket items.
“For instance, taking an early cash withdrawal from a retirement account can cost thousands of dollars in penalties. Or, holding all of your money in cash instead of investing it leads to erosion to inflation over time,” she said.
What can Americans Do To Lower Costs in 2023?
“What percentage of us need to understand geometry in our day to day lives? But all of us need to understand how to make a budget, how to invest for retirement, and how to use credit responsibly,” said Todd Stearn, founder and CEO of The Money Manual. “The U.S. can be a very difficult place to live comfortably when you’ve never been taught at least the basics of personal finance. I highly recommend prioritizing gaining this knowledge in 2023.
For example, Stearn recommended learning how compound interest can “literally save your life in retirement.” In addition, learning how to build your credit score can help one qualify for the best mortgage or auto loan rates, and learning about inflation can help you manage your savings better.
“You don’t need to be perfect. Gaining financial literacy is the start to greater peace of mind,” he added.
Other experts also stressed the importance of better understanding the cost of higher education.
“More attention needs to be paid to educating families about 529 college savings plans and other ways to prepare for higher education expenses,” said Patricia Roberts, COO of Gift of College and author of “Route 529: A Parent’s Guide to Saving for College and Career Training with 529 Plans.”
“Families need to realize that borrowing excessive amounts to attend an unaffordable dream school can lead to financial nightmares,” said Roberts.
Roberts added that in addition to unmanageable amounts of student loan debt potentially causing significant stress for years to come, it can stymie borrowers’ ability to save for retirement, qualify for a mortgage, or save for their own children’s education when they start a family.
This sentiment is echoed by several experts, including Will Sealy, CEO of Summer. Sealy said the top advice for student loan borrowers is to start your homework early and lean on trusted sources like Federal Student Aid.
“When in doubt, ask your HR or benefits team for help. Employers may offer student loan assistance as a free employee benefit, along with other financial literacy tools. Student loan contribution programs are only becoming more popular and can make a big impact on your financial situation,” said Sealy.
More From GOBankingRates