Investing

Are You Making a $23,000 Mistake?

OOPS road sign against  blue sky

Have you ever made a financial mistake that cost $23,000? If so, you have company. Two thirds of middle class Americans admit to major financial mistakes, with the average loss pegged at $23,000.

That’s according to a recent study by the Consumer Federation of America, which also found that financial professionals, rather than online or print publications, were the main sources of information for making financial decisions, cited at 45 percent.

The survey quizzed more than 2,000 people with incomes from $30,000 to $100,000 last summer.

When it came financial mistakes, middle class Americans were worse decision-makers than that $23,000 price tag suggests. That’s because while 67 percent said they had made at least one “really bad financial decision,” nearly half (47%) acknowledged more than one financial foul-up.

With an average cost of $23,000, the price tag for two financial slip-ups could come to $46,000 or more.

Playing It Too Safe

The source of their errors does not appear to be a raging appetite for risk. Middle class Americans are actually very conservative when it comes to personal finance.

For example, when they were asked what they would do with a $1 million windfall to invest for retirement, just 21 percent would invest in stocks and bonds, which are riskier than, say, certificates of deposit at Federally insured banks.

An almost equally large group, 19 percent, would put the windfall into a savings account. That is very safe, as savings accounts are typically Federally insured. But savings accounts also typically pay very low interest rates, which the Mint.com Savings page pegs at below 1 percent.

That’s lower than the rate of inflation, so a $1 million savings account would actually lose purchasing power for its owner over time.

Wealthier Americans seem less risk-averse. Forty-eight percent of high-income Americans surveyed would invest the $1 million in the stock and bond markets.

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Finding a Solution

If being aware of a problem is essential to finding a solution, then middle class Americans aren’t likely to remedy their financial failings any time soon. That’s because, according to the survey, they are confident that they know what they’re doing.

For example, 81 percent said they were “good” or “excellent” at budgeting income and 80 percent said the same for managing credit card debt. Still, nearly half carried credit card debt from one month to the next.

Despite their failings, only a small number of survey respondents appeared to be in serious financial difficulty, as measured by being seriously behind on loan payments. Only 9 percent, or 1 out of 11, said they were 60 days or more late on any debt payments.

Luck Vs. Skill

In addition to results from its new survey, the Consumer Federation released an analysis of the Federal Reserve Board’s 2010 Survey of Consumer Finances, which came out earlier this year.

The news was sobering: the typical middle class family’s financial assets including stocks, bonds and bank deposits, came to $27,300, down about 28 percent from $37,800 in 2007.

The main culprit for that fall is not making poor financial decisions, but the general state of the economy. Similarly, the broad decline in home values was said to be the primary reason the typical middle income family’s net assets, including real estate and financial assets, shriveled 35 percent, from $145,600 to $94,700.

That $50,900 loss is due to a widespread decline in the value of an investment class most experts consider both sensible and safe, which suggests it might be better to be lucky than smart.

“Are You Making a $23,000 Mistake?” was written by Mark Henricks.