My Three Biggest Financial Mistakes
Have you ever done something really stupid with money? Chances are if you’re breathing and old enough to be able to read this, the answer is yes. Guess what? Me too! I haven’t always made good decisions with money, and in fact, I’ve done some pretty stupid things when it comes to my finances. Lest you think I’ve been a super frugal financial genius my whole life, today I’m spilling it on my three biggest financial mistakes and the lessons I’ve learned along the way.
I’ve always loved learning from someone else’s mistakes, rather than making my own. So, I’m sharing these big time mess-ups so you hopefully can avoid the same blunders.
Here we go!
Mistake #1 - Getting Student Loans
I grew up poor, with my mom earning barely enough money to cover rent, and my dad not working at all due to repeated heart attacks. When it was time to go to college, I knew my family would be able to contribute exactly $0 to fund my education, but that didn’t stop me from going.
I went to undergrad on almost exclusively student loans. I borrowed extra so I could have money to live on, and used that money to go shopping and out to eat with my friends. I worked my final year in college as a waitress—a night shift on Friday night, a double on Saturday, and a morning shift on Sundays. But, did I use any of that money as a mechanism to borrow less or pay the massive accumulating interest on my loans? Of course not!
Not only did I get undergrad loans, but I deferred them all for YEARS while I went to law school on—you guessed it—MORE student loans!
After it was all said and done, I had amassed $105K in student loan debt. $105K, y’all. Imagine what I could have done with that money. Wouldn’t it have been a great down payment on a house?
It is by far the biggest financial regret of my life.
If I had it to do all over again, I would have gone to community college for the first two years and then transferred, to reduce the overall cost of college. I would have worked more and used the money to pay off accumulating interest or to keep from having to borrow so much in the first place. I would have saved up and paid cash for law school. Or gone to law school at home, where I could have lived with my parents, and kept my living costs down.
I don’t have to tell you what a drain student loans are on today’s graduates. So many graduates cannot afford to live with massive student loan repayments. They can’t save up for a down payment for a home, and many are locked into jobs they hate, just to be able to earn enough to dig themselves out of debt.
Debt does one thing consistently and expertly: it robs you of your options. You can’t decide what to do with your own money when you have debt. You have to send your money to creditors, instead of doing whatever you want to do with it—whether that be saving, investing, shopping, or giving.
Don’t do this to yourselves! This is a horrible way to start off your life as an adult. Trust me, there are plenty of ways to go to school debt free, and I highly encourage you to investigate them if you are college-bound. Check out this article on how to pay for college without loans, for starters.
Mistake # 2 - Purchasing a Stupid Brand New Car
After graduating with my undergraduate degree, I had my first big-girl job as a corporate paralegal, and I thought I was pretty damn cool. I was in my early 20s earning a whopping $22,800 per year. At the time, I was burdened with student loans from undergrad (see mistake # 1) and still living at home with my parents. I had no car to speak of, and my parents couldn’t afford to buy me one either. So, every day, I took a city bus to work, got off at the closest stop, and walked several blocks to my office.
If I lived in, say, NYC, this would be commonplace and no big deal. But, I lived in Houston, where (unless you worked downtown, which I didn’t), only “poor” people took the bus. I hated it. I’d been poor all my life, and I hated the stigma attached to it. I cared desperately what people thought of me, and I didn’t want them to think I was poor.
So, I started saving up for a car.
After I saved up $2,000, my mom and I headed to the dealership, where I was intending only to look at reliable used cars. It didn’t take long for the salesman to lead us away from the used models, over to the shiny brand new cars on the adjacent lot—where I was quickly convinced that somehow, only a brand new 2002 Chevrolet Cavalier would be able to meet my needs.
The first (and last) brand new car I ever bought.
Fast forward to the financing office, where some calculations were run. With my $2,000 down, I could finance the car for $320/month (I don’t even remember for how many years—we’ll get to that part in a second). Living at home with no other bills, I could definitely afford that! Where do I sign?!
I couldn’t wait to drive that car to work the following Monday. Never had it felt so good to drive past that old bus stop, filled with “poor” people milling about, and straight in to the parking garage at work into my very own parking space! I had made it! I had finally arrived financially, or so I thought.
When I got into the office, I couldn’t wait to tell everyone about my new purchase. “Guess what I bought this weekend?” I beamed. “A Chevrolet!”
When I was talking to one of the attorneys in my office, he asked “How much is your interest rate?” Interest rate? What’s that? I don’t know! It’s $320/month! That’s all I needed to know.
After some research, I found the interest rate was 22%. That’s not a typo—TWENTY TWO PERCENT interest. On a car!!!! Not only that, on a brand new car that had already lost tons of value, as soon as I drove it off the lot.
Later I refinanced that car to a lower, more normal interest rate with my credit union, thanks to the advice from a wise attorney I worked with. But, this car continued to haunt me, encouraging me to make even dumber financial mistakes in the years to come. See Mistake #3, below.
But here’s what we can learn from my disastrous car story:
Buying a new car is stupid. Don’t do it. Three reasons: (1) New cars depreciate at astronomical rates, (2) Car payments steal your wealth, and (3) Used cars are just as reliable as new ones. A used car can do everything a new car can, holds its value for so much longer, and will cost you thousands less. Plus, used vehicles are just as reliable as new ones, and someone else has already taken the hit on the depreciation when you buy used.
Thinking about purchases in terms of how much per month versus how much overall is stupid. Don’t do it. I thought I absolutely could afford that car. After all, it was only $320/month. What I didn’t think about was the outrageous interest rate, and the term of the loan, which was probably something like 72 months. Which means I probably ended up paying something like $10K in interest over the span of the loan. For a $14,000 car. Ouch. That hurts. With interest, that $14K car probably cost me $24K. Not to mention all the lost earnings I could have gained, had I paid cash for the car and invested my car payment.
Financing a car at all (new or used) is stupid. Avoid it whenever possible. I should have taken that $2,000 and paid cash for a car. I would have saved tens of thousands over the term of the loan, and freed up $320/month to pay off debt or invest. Had I invested $320/month instead of sending it to a bank in the form of a car payment, after 25 years, earning an 8% annual return, that monthly car payment turns into $303K. At a 12% annual return, it turns into $572K. What would you rather have? Hundreds of thousands of dollars or a “nice” financed car that doesn’t make you look “poor”? When I say car payments steal your wealth, I’m not kidding.
Caring about what other people think of you and your financial status causes you to spend unnecessarily. I didn’t want a “crappy” $2,000 car. I wanted a car that looked good. I’d spent my entire childhood being poor, and I didn’t want to continue to be poor (or look poor) as an adult. What I didn’t realize is that financing a car is a decision that would keep me down financially as long as I had car payments. What I didn’t realize is that wealthy people don’t finance cars. They pay cash for them.
[Note: We’ve paid cash for the last two cars we’ve purchased, and I will never go back! There is nothing like owning your car outright, free from worry].
If I didn’t care about what others thought, I could have easily purchased a beater car, and it would have been a MUCH better financial decision to have done so. This not-caring-what-others-think-of-you was a tough lesson to learn, one that was years in the making, and one that I still struggle with occasionally. But, master this one, and you’ll be well on your way to financial success.
Mistake # 3 - Cashing out my 401(k) to Pay off Above-Mentioned Stupid New Car
After I worked as a paralegal for some years, I decided to go to law school. I applied, was accepted, and was so excited to be getting an advanced degree. The only problem was, I wasn’t going to be working while in law school full time (there were rules against it so I couldn’t have done it even if I wanted to—which I didn’t, because apparently I was still young and dumb and just wanted to have fun).
So, how was I going to go to school full time and still be able to pay that $320/month car payment?
Enter my 401(k).
At least I had been smart enough to have one in the first place. I brilliantly thought I would simply cash the 401(k) out and pay off the car. Problem solved. I actually thought this was a super smart plan, and I was so proud of myself for paying my car off early.
A stock photo showing the growth line of my 401K had I left it alone and not fooled with it.
Y’all, I told you I made some really dumb mistakes with money, ok?
I don’t remember how much money was in that 401(k) when I cashed it out (and paid taxes and penalties on the withdrawals), but let’s assume it was around $8,000 or so. I was 26 years old at the time. If I had left that 401(k) alone, by the time I reached 65, it would have grown to $160,922, with an 8% annual return. With a 12% return, it would have grown to $664,649. Did you catch that?! Over half a million dollars!!!
I basically threw away hundreds of thousands of dollars by closing out that 401(k). Dumb. Dumb. Dumb.
Say it with me, now, y’all: Retirement savings are for retirement.
I beg of you, don’t use your retirement savings for anything else: like paying off a car (or any other debts), or putting a down payment on a home, or going on a vacation, or any other number of things that are not retirement. Do so, and you’ll have to pay penalties and taxes, and rob yourself of the growth of your investments over time. Don’t do that to yourself! Don’t steal from future you.
And there you have it, friends—some pretty dumb mistakes I’ve made with money.
I know I’m not the only one. Tell me what mistakes you’ve made with money and what you’ve learned from it in the comments below!
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