FoolProof believes our half-million dollar claim is conservative. We cannot know for sure, of course, how much individuals would waste in their lifetime by making bad financial decisions. But we make a very good estimate based on existing data.
To determine our half-million dollar figure (which totals about 25% of our average consumer's lifetime income) we analyzed nine core categories of spending and the percentages the average consumer spends in each category, based on the U.S. Bureau of Labor Statistics' Consumer Spending Survey.
In determining the total amount of money wisely or poorly spent in each category, we normally assumed an average remaining economic life of 30 years. For items like food, coffee and personal care products, we used the Bureau of Labor Statistics average working lifetime figure of 44 years. We also assumed that most consumers make wiser decisions in some areas as they get older.
The percentage of expenditures assigned to each category listed here are based on the average lifetime income of a typical consumer, as reported by the U.S. Census Bureau.
- At home expenditures: 7.7%
- Away from home: 5.4%
- Alcohol: 1.0%
- Including mortgage or rent; utilities; insurances and upkeep/maintenance.
- Vehicles purchased: 9.1%. We did not include vehicles rented.
- Gasoline: 3.3%
- Insurance: 6.7%
Apparel and Services: 4.0%
- The cost of new clothes, dry cleaning expenses, etc.
- Doctors, dentists, eyewear expenses; over-the-counter-medications, medical co-pays and deductibles.
Movies, outings, vacations.
- Personal Care products and Services: 1.3%
- Haircuts, salon fees, etc.
Personal Insurances and Pensions: 9.9%
- Health insurance premiums, 401K contributions, life insurance, disability insurance, etc.
We assigned our "average" consumer a bachelor's degree. That degree determined projected lifetime income of $2.1 million, using the synthetic estimate used by the U.S. Census Bureau in their report on the impact of education on lifetime income.1
For consumers with an advanced degree, their potential "wasted money" total would be much higher than $500,000, if our spending assumptions are correct. Oddly enough, the wasted expenditure percentage of total income for consumers who don't have a college degree, and whose incomes are less, are at times higher than for consumers with higher incomes.2
We then tried to put some numbers to the amount of opportunities we have to spend without thinking. We used the Census Bureau's shopping statistics here, plus data from several studies.3
We then looked at our expenditure categories and weighed categories according to their frequency and the average gross expenditure in those categories. We did not include the cumulative cost of a one-time mistake, which automatically makes many of our projections very conservative.
For instance, the average consumer that buys a dwelling will buy at least two dwellings in their economic lifetime.4 A single $10,000 purchasing or financing mistake on one of those purchases over the course of a 30 year-fixed mortgage actually costs the consumer $17,000 rather than the $10,000 figure we use. Most consumers have financed their mortgage mistakes. If a $10,000 mistake is financed at 4% interest for 30 years, the cost of that mistake is $17,000.
We also tried to use real-world scenarios. Take our coffee example. A coffee lover isn't going to give up coffee and drink water or give up a regular visit to a gourmet coffee shop. But that coffee lover might switch from the most expensive designer concoction to a lesser expensive cup. We therefore used Starbucks (not the most expensive coffee chain) as our coffee standard, and compared their designer coffee prices to their most popular standard coffee.
FoolProof then used generally accepted studies or article sources to determine "wasted" sums of money. Determining how much a person has wasted isn't a science. But dozens of articles and studies give us a good idea about the potential waste inherent in most transactions.
For instance, our waste figures in the carbuying transaction are based on five purchases (even though most data shows consumers buy 6-7 vehicles). We've combined the waste from several parts of the car transaction to come up with a reasonable total: the purchase price of the vehicle; the value of a trade-in, the cost of add-ons such as extended warranties, the cost of financing, the cost of unnecessary repairs. We've used discovery data from class action lawsuits to determine total waste amounts in these various areas.5
We had fun developing figures for expenses like "movie night." Here's how we determined the movie figures. We used movie websites to determine the average in-theatre costs. The average cost for two tickets, two drinks, and large buttered popcorn is $38.55. Based on 8.5 movies a year, the average person in their economic lifetime (44 years) would spend $14.417 for 374 nights out. Cutting your theatre visits to 4.5 would lower your expenditure to $7,632.90.
The cost of renting a movie and making your own popcorn and providing your own drinks for four movie nights a year at home would be (believe it or not) $461.12.
We're assuming you paid $1.30 for the movie. You paid 50 cents per bag for popcorn (you can get a ten-pack for about $5.00) you paid 25 cents per drink (you can generally get a 12-pack of pop for $5.00.) Total savings? About $6300. Priceless.
In determining our half-million dollar figure, we reviewed over a hundred studies and articles on the costs related to bad money decisions. Here are a portion of those sources. The complete list will be posted on the site shortly.
The Store Brand Taste Test Challenge: They're as Good as Big-Name Brands
What Are Pros and Cons of Buying Generic
Brand Name vs. Store Brands: How to Get the Best Bargain
Effects of Brand Name on Quality Perception and Preference
Gallup (relates back to Bureau of Labor Statistics)
Economic Research Service - United States Department of Agriculture
Consumers and food price inflation
Including mortgage or rent; utilities; insurances and upkeep/maintenance.
Don't forget about these 20 costs of home ownership
PERSON (relates back to Bureau of labor Stats)
Bank Car Financing vs. Car Dealership
Should I borrow from a car dealer or a bank to buy a car?
What that car really costs to own
The Advantages of Buying a New or Used Vehicle
Used car savings for savvy shoppers
Advantages of New and Used Cars
Journal of public transportation
The cost of new clothes, dry cleaning expenses, etc.
Consumers Back to Feeling Flush
Movies, outings, vacations.
How Much Should I Spend on a Family Vacation?
Tips for Finding the Best Vacation Deals
Adjusting For Ticket Price Inflation
Haircuts, salon fees, etc.
Teenage Consumer Spending Statistics
Always Leave Home without It: A further investigation of the Credit-Card Effect on Willingness to Pay
Credit Cards: Do You Spend More With Them?
Study: Credit Cards Cause More Spending
Study: Paying Cash, Not Credit, Leads to Healthier Food Choices
1 The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings
2 Dozens of studies and articles show this, but here's a quick summary in the Los Angeles Times .
3 Relative and Interaction Effects of Situational and Personal Factors on Impulse Buying.
4 Read The Evolution of Home Ownership. Also, articles such as "Don't Buy That" proved helpful.
5 We used cases whose discovery materials are available to the Consumer Task Force for Automotive Issues.