In the U.S, personal finance generally isn’t taught in schools, and a new survey by GOBankingRates shows that this is to the detriment of many. The survey, which garnered over 1,050 responses, found that Americans are losing money due to lack of financial literacy. Not just pocket change, either — nearly 11% of those polled said that financial illiteracy had cost them more than $10,000 in the past year alone.
How does financial illiteracy present itself and how can it cause damage to one’s monetary life? Let’s explore eight ways a lack of financial literacy can cost people a fortune.
Ignoring Budgeting Basics
We all need to make and stick to a budget regardless of income, but one may not realize this if they’re financially illiterate.
“Without basic financial literacy skills, it can be challenging to create and stick to a budget,” said Baruch Silvermann, CEO of The Smart Investor. “This can result in overspending, unnecessary debt and missed opportunities to save and invest money.”
Not Understanding Your Credit Score
Understanding the importance and the nature of credit scores is integral to financial health, and sadly, too few know this. Alas, many people don’t even know their credit score.
“If you don’t know how your credit score works and work on it by paying bills on time, monitoring your credit report for errors or fraudulent activities, managing your debts wisely, diversifying your credit, and avoiding opening too many new accounts in a short period, your score may be too low, and low scores lead to higher interest rates,” Silvermann said.
“If you have a poor credit score, lenders may see you as a high-risk borrower and charge you a higher interest rate to compensate for the perceived risk. By improving your financial literacy and credit score as a result of it, you can save yourself money in the long run.”
Accumulating High-Interest Debt
Not understanding high-interest debt (and how it accumulates) can cost you tons of money. Mind you, credit card debt is currently at a record high, meaning too many folks are buried in high interest payments.
“If you don’t pay off your credit card balance quickly, you could end up paying thousands of dollars in interest charges alone,” said April Eick, a financial coach of Freebird Financial Coaching. “For example, if you have a $10,000 credit card balance with an 18% interest rate and only make minimum payments, you would take over 14 years to pay off the debt, and you would pay over $13,000 in interest charges.”
Attacks of high interest rates can also happen when you buy a car.
“If you don’t shop around for the best rates on a car loan, you could end up paying thousands of dollars more in interest charges over the life of the loan,” Eick said. “For instance, someone with a $30,000 car loan at a 6% interest rate who agrees to a loan with a dealership that offers a 10% interest rate instead would pay over $6,000 more in interest charges over the course of a 5-year loan term.”
Poor Investment Choices
Investing money is crucial for every financial plan, but how we invest is perhaps even more crucial. Poor decision making on this front due to financial illiteracy can cause one to hemorrhage money.
“If you invest all of your money in a single stock that performs poorly, you could lose a significant portion of your investment,” Eick said. “For instance, if that stock loses 50% of its value, you would lose half of your investment. Similarly, if you invest in a mutual fund that charges high fees and has a high turnover rate, you could end up with lower returns than if you had invested in a lower-cost and lower-turnover fund. Over time, these differences in returns can add up to thousands of dollars in lost investment gains.”
Lack of Emergency Funds
Let’s cut to the chase: You need 3 to 6 months of accessible cash savings on hand in the event of an emergency. This is Finance 101 but a lot of people don’t know it — and they suffer as a result.
“Not having a sufficient emergency fund and missing out on tax-advantaged savings accounts are other ways that financial illiteracy can cost you real money,” Eick said. “If you don’t have an emergency fund and have to rely on credit card debt to pay for unexpected expenses, such as a car repair or medical bill, you could end up paying significant interest charges and accumulating long-term financial debt.”
Cushy Tax Refunds
Getting a tax refund may feel like a blessing, but it’s actually the result of poor financial planning and the symptom of missed interest-gaining opportunities.
“A big tax refund is giving you the cash on one day instead of giving you some of that cash each week in your paycheck,” said Holly Wolf, advisor at Berkshire Advisors. “You’re deliberately overpaying the government to keep your interest-free money to return it to you a year later. Would you do the same thing for a bank?”
Missing Out on Tax Breaks
Lack of financial literacy can cost you money when you file your taxes.
“If you don’t understand the basics of taxes, you might not be able to take advantage of all the tax breaks that are available to you, and you might end up paying more taxes than you need to,” said Brian Wilcox, CFO at Debt Bombshell.
Becoming a Victim of Financial Scams
It may seem like a stretch, but you’re actually an easier target for financial scams if you don’t know how finances work.
“You could incur significant losses as a result of scams and frauds if you lack financial knowledge,” said Carl Jensen, founder of Compare Banks. “Those who don’t comprehend investment instruments or investing techniques are a common target for scams.”
