A recent survey by the National Financial Educators Council found that in 2022 financial illiteracy cost Americans an average of $1,819 per person. It’s the largest number in the six-year history of the survey.
The survey is based on the average losses reported by 83,000 survey respondents in 50 states. Individuals were asked how much money they thought they lost due to a lack of knowledge about personal finances.
The increase in losses for 2022 could be attributed to record-high inflation and other recent economic challenges, but there are several common mistakes individuals make every year that can cost people thousands. Here’s a look at four.
1. Credit card interest and fees
According to the Consumer Financial Protection Bureau (CFPB), the most common and costly financial illiteracy mistake made annually is due to credit card interest and fees, which costs Americans nearly $120 billion each year.
To avoid fees and accruing interest, the National Financial Educators Council recommends doing a simple credit card interest calculation to assess how much you should be paying monthly. For example, let’s say you owe $3,000 on a credit card with an ARP of 25%:
Source: National Financial Educators Council
2. Luxury spending
Luxury spending is the second biggest cost to Americans, resulting in about $64.8 billion in spending in 2020, the report noted, per SaveMyCent.
From 2020 to 2022, the purchase of luxury goods increased in the U.S. by over 10 billion, according to Statista, and the category is expected to experience continued growth until 2028.
If you’re looking to save or avoid overspending, the report suggests being conscious of marketing terms and images promoting “exclusivity.” It’s okay to want a new watch or handbag, but is it really in your budget to buy a Rolex or Chanel?
3. Overdraft fees
Overdraft fees are the third biggest financial illiteracy cost at an average of $17 billion annually, according to the CFPB. Although banks offer overdraft protection that allows purchases to go through even if the entire amount is not present in one’s account, the results are damaging because the bank charges for the overdraft transaction.
While most overdraft transactions are incurred on purchases of $24 or less, the median overdraft fee is $34 according to the CFPB. It may not seem like a lot, but make it a habit, and those fees stack up quickly.
4. Identity theft and fraud
Other common (and costly) errors include identity theft and fraud, which cost Americans an annual average of $6.9 billion and $5.8 billion respectively, per data from the FBI and Statista.
While being a victim of identity theft and fraud can be out of our control, there are measures you can take to ensure your accounts and personal information is secure such as creating strong passwords, setting up alerts on accounts, and checking your credit reports regularly.