The benefits of compounding earnings on investments are common talking points when it comes to encouraging people to save for retirement through employer plans or individual retirement accounts (IRA). However, a lack of financial knowledge can also have a snowball effect that causes money to deteriorate rather than accumulate.
According to the latest study by the National Financial Educators Council (NFEC), 28.8% of Americans at least 65 years old reported that lacking knowledge about personal finances caused them to lose $30,000 or more in their lifetime. While this is typically considered retirement age today, the detrimental effects can become much worse as studies show that Americans are concerned about funding living longer and many are choosing to retire later, often to negative results.
The firm asked people of all generations, “Across your entire lifetime, about how much money do you think you have lost because you lacked knowledge about personal finances?” Regardless of age group, respondents estimated that their lack of financial knowledge cost them an average of $9,724.83. This figure was calculated by averaging the total number of respondents choosing each category or money range, using the lowest number in each spread.
The categories broke down as follows: $0-999 (36.28%), $1,000-$4,999 (15.32%), $5,000-$14,999 (13.68%), $15,000-$29,000(10.22%), and $30,000+ (24.52%).
That leaves almost a quarter of Americans seeing at least $30,000 disappear simply because they lacked a firm grip on personal finance. The firm concluded that given 240 million adults live in the country, this would spell out to Americans collectively losing about $2.3 trillion in their lifetime, because of their poor financial wellness.
NFEC notes, “Lack of personal finance knowledge costs people money: bank fees, interest on credit card debt, higher interest rates on loans, and investment losses are just a few examples.”
According to the survey, estimated lifetime losses of more than $15,000 were reported by one out of three respondents, and nearly one in four people reported losses of more $30,000. NFEC notes that respondents in the 55-to-64-year-old category estimated experiencing the highest losses, with 41.5% believing they had lost $15,000 or more. When breaking down who projected losing $30,000 or more based on age group, those between the ages of 55 and 64 accounted for the biggest chunk (32.7%)
Those with time on their side reported the smallest losses, with 42.5% of 18-to-24-year-olds estimating losing between $0 and $999. But, time could be a curse for Millennials not improving their financial knowledge. And those who have lost the most and are closest to retirement may have a difficult time catching up.
These figures highlight a need to boost financial wellness across all generations as soon as possible. Advisers can benefit from better communicating their practice and reaching out to generations of vulnerable individuals. The results could be staggering. According to a recent study by the Million Dollar Round Table, Americans without advisers are far less prepared for retirement than those who work with financial professionals. However, the same study showed most Americans have never hired a financial adviser with the most common reason being they don’t believe they have enough money to warrant working with one.
“People understand that financial illiteracy costs them money; yet judging from test results and research over the last few decades, there has been no significant improvement in people’s financial capabilities,” explains NFEC’s CEO Vince Shorb. “Due to the increased complexity of the economic and financial landscape, possessing the ability to make informed financial decisions becomes increasingly important.”
This recent survey by NFEC and its collaborators represents the first part of a larger research effort aimed at defining risks and costs associated with financial mismanagement, as well as the financial attitudes, behaviors and outcomes concerning people’s personal finances.
The National Financial Educators Council is a financial education resource provider, and industry advocate conducting research and hosting think tanks around topics related to financial education. Its objective is to gather empirical data to uncover best practices to share with colleagues in the financial education industry.