My Financial Mistakes

My Financial Mistakes

Kris from Chronicles of a Father with Cents recently posted a very insightful article about his financial mistakes. When I finished reading it, I had no choice but to reach out to him to share an idea that came to mind. The pitch was the following: “Kris, wouldn’t it be great if we started a chain where bloggers share their own financial mishaps?  This would not only be valuable to our readers but it would also be a great opportunity for bloggers to learn from each other in an effort to maximize the value of lessons learned”. He was on board so here I am writing about my financial mistakes following his initiative and hopefully encouraging others to do the same.

My perspective about making mistakes

First off, I’m of the belief that If you are making mistakes it probably means you are making new things, trying new things, learning, living, pushing yourself, changing yourself and changing your world. You’re doing things you’ve never done before, and more importantly, you’re doing something. While all this may sound great the reality is further from the truth. Society and we, as individuals, tend to celebrate perfection and penalize results that deviate from the expected and even more so when they produce negative outcomes. 

When we talk about personal finance, there’s simply no room for the word perfection. We as investors need to understand and internalize the fact that mistakes are inevitable. The only thing we can do is be humble and prepare ourselves to do some serious damage control in the form of recognizing our mistakes, learning from them, taking responsibility and fixing them to the best of our ability.

I’ve made a ton of mistakes and very easily have managed to find my own way of screwing things up and that’s really okay. The important thing is to be open to figuring out how you messed up, learning and moving forward.

Coming up with a list of my financial mistakes was super easy; however, I narrowed it down to big-ticket items that most folks could relate to and potentially benefit from avoiding today and in the future.

1. Not trusting automation

For a long time, I would log in to my bank accounts to check charges before making payments. This gave me both the confidence and assurance that I was not overpaying for stuff that was incorrectly charged to any of my accounts. As time went on, a few things happened. I would miss payments to service providers and, in most cases, credit card companies which led to unnecessary fees I was not able to recover.

The biggest hit came in the form of financing of my engagement ring (0% APR for 12 months). I religiously make all payments without using automation but for some reason, I lost track of time and thought I had finished making all payments. One day I logged in to my account to check my balance and realized I had been charged interest for the entire 12 months. It turns out I forgot to make the final payment and as a result, I lost the 0% APR benefit. In case you’re wondering, the ladder is true for all 0% APR offers. Life is good if you make the minimum payment but if you miss one or happen to be late you’re doomed. I called the bank and they were able to lower the amount but It was still painful.

This lesson was not enough to eliminate my skepticism. Bank fees and time management eventually got to me and around 2015 I decided to give automation a shot. Since then I haven’t had any issues and life is much simpler knowing that all my buckets are taking care of. Feel free to take a look at my financial map to see how I’ve improved efficiencies via automation.

Lesson Learned: Don’t be a fool like I was. Pay attention to your expenses but leverage automation in as many aspects of life as humanly possible.

2. Not tracking my expenses

My very first attempt at tracking expenses happened to be a simple spreadsheet in Excel. The process consisted in downloading statements from my checking and credit card accounts and manually categorizing all expenses. This required a lot of discipline but in reality, it was not sustainable. In 2011, I was introduced to mint and I immediately fell in love with it. The platform gave users the ability to connect accounts, categorize expenses and set up a budget. The ladder was a very neat feature but unfortunately was the one that annoyed me the most and eventually made me give up on using it. Life went on and even though I was saving, I refused to have an in-depth look at my spending habits. Don’t ask me what my biggest expenses were because I did not have a clue. I simply saved but did not make any adjustments in our lifestyle to maximize our savings rate.

We moved to Colorado in 2015 and while listening to listenmoneymatters, I discovered personal capital. PC did an outstanding job developing an interface focused on the user experience in terms of its elegance and easiness to use. Their platform allowed users connecting all their assets and liabilities in order to facilitate tracking of net worth. In addition, they had features such as investment checkup and monitoring of cash flow based on everyday transactions. It didn’t take me too long to identify my top 10 expenses. Aside from fixed costs, I was shocked by how much I was spending eating out. I can still remember showing the numbers to my wife and having this feeling of shame and embarrassment that started to creep up. Today, things have changed dramatically. Every dollar we spend has a name and personal capital has helped us understand our behaviors and areas for improvement in order to squeeze additional $$ to help increase our savings rate.

Lesson Learned: Please get to know yourself and understand your spending habits. I recommend using tools like Personal Capital or mint.

3. Carrying debt on credit cards

Lack of automation caused not only carrying debt on credit cards but also carrying debt on dumb credit cards (high-interest rate) I signed up for. The story gets even worst with what I’m about to tell you. I actually had money sitting in a savings account making 0.01% on an annual basis. I forbid myself to “touch” this bucket at all cause, so instead of paying my credit cards in full at the end of the month I consciously decided to throw away money in the form of paying banks interest on the debt.

I know what you’re thinking and you’re right … what a dumbass!. Since then not only have I optimized credit card utilization by using them for fixed expenses but have also maximized rewards while making sure they’re all fully paid by end of month via automation.

Lesson Learned: Understand all your credit card debt and get rid of it as quick as humanly possible. Believe or not, I love math so start with the credit card that has the highest interest rate and walk your way down from there. Furthermore, I highly encourage using automation and paying your balance at end of month!  

4. Buying a brand new car

Automobile depreciation is the single most expensive cost of owning a new car. Even cars that are well maintained and kept in pristine condition decrease in value over time. According to Trusted Choice, a brand new car drops, on average, 11% in value as soon as you drive it out of the lot, 25% after a year of ownership, 46% at 3 years and 63% at year 5. Assume a brand new car at $30,000 dropping in value to $11,100 in year 5 … ouch!

new car depreciation

Back in 2010, I decided that it would be a great idea to get a brand new Toyota Rav4. The total acquisition cost was ~$33K with a downpayment of $5K and financing at ~3.25% for 60 months. Fast forward to 2015 and our car was paid off meaning no more car payments which felt great. Believe or not, that same year we discussed whether or not we should upgrade to a bigger SUV because we had a baby and were also considering having baby #2. Unfortunately, the wife got into an accident (thankfully nothing happened to her) and our Rav4 got totaled. I received a paycheck for $19K from our insurance which basically translated to 42% loss on an initial $33K asset.

Lesson Learned: Stay away from putting a lot of money on depreciating assets. Minimize your losses by considering certified pre-owned vehicles which have already suffered early to mid time depreciation.

5. Not starting to invest earlier

Knowing that your money is working for you has to be the best feeling in the world. For this to happen three things must take place: money to invest or a present value, an investment vehicle that’s expected to provide a particular rate of return and time to take advantage of the miracle of compounding.

In 2007, I moved to the US to attend grad school at Texas A&M. Upon my arrival, I was given the opportunity to become a research assistant which automatically made me eligible for applying for an SSN. Once I received that little card my world pretty much opened up. Looking back, I remember being excited about getting a credit card(s) and starting to build my credit history but I don’t understand why I never thought about starting to invest. If you’re thinking that I saved myself from losing a lot of money in 2008 then I’d say your wrong. It didn’t have anything to do with luck but more so with lack of interest around money at that point in my life.

I graduated in December of 2008 and started working in 2009. I immediately got enrolled in my company’s sponsored 401(k) but my asset allocation was not the best in the world. It wasn’t until 2015 that I discovered the personal finance community and my life pretty much turned 180 degrees. That same year, I opened two IRA accounts and a taxable investing account. Today, I’m happy to say we’re in a far better spot but I can’t hate to think about missing out on all those years where I could have taken advantage of compounding.

Lesson Learned: Start Investing now and let your money work for you by taking advantage of the miracle of compounding

6. Buying too big of a house

We love our home but in my opinion, it’s too big for a family of 4. I know the wife won’t be super happy when she reads this post but babe you know it’s true. Just to give you an idea, our total square footage is 3300 sqft not including the unfinished basement. We have a guest room, full bath and office downstairs and a 3 beds/2 baths upstairs including a game room.

Since we were moved by my employer from Texas to Colorado we actually got some incentives such as $0 closing costs and a couple of points to lower the interest rate which currently sits at 3.125% for 30Y. This is all good news; however, I think we could have gone for something smaller. My mortgage payment currently represents 28% of our take-home pay and I honestly believe that’s limiting our ability to save more for the future.

Don’t get me wrong we love our home and we are happy (especially the wife!); however, I still believe we could have done better by not letting our emotions and employer incentives get the best of us.

Lesson Learned: Consider your needs and do not let your affordability dictate how big of a house you should get. Just because you can afford it doesn’t mean you should buy it.

7. Not opening an online savings account sooner

According to Wikipedia Online Savings Accounts (OSAs) have been available to customers since 2005. OSAs are often characterized by a higher interest rate or lower fees, compared with traditional savings accounts. It wasn’t until 2015 when I became aware of OSAs and immediately transfer our nest egg to Ally bank. The question you should have by now is … how much money did we leave on the table by not switching earlier … say in 2007? Well, let’s assume two scenarios, one where I leave the hypothetical amount of  $100,0000 in 2007 sitting at a brick and mortar bank and the other where the money is at an OSA.

Online Savings Account

As you can see if we do a simple future value calculation assuming an annual interest of 0.01.% APY vs 1.2% APY compounded monthly for a total of 10 years the difference is huge at $12,642. If you’re thinking why in the hell would you leave $100K sitting in an account making 1.2% instead of investing in the stock market via low-cost index funds, all I can say is that you’re correct but you’re missing the point.

Lesson Learned: Do not have money sitting in an account where it’s losing value to inflation. I encourage you to leverage OSAs and think about parking your emergency fund in this type of account. I personally use ally bank which currently pays 1.20% APY with no minimums and no BS fees. If you have additional money … think about investing in low-cost index funds.

Final Thoughts

  • When trying something new try testing on a small scale. Think of it as a pilot program.
  • It’s OK to try the same thing again with small adjustments, but don’t keep making the same mistake over and over.
  • Own your mistakes, learn from them, and share your story with others so they can benefit from your experiences.
  • Reflect on what probably caused something to go wrong, and work smarter next time.
  • Mistakes are inevitable but don’t give up.

Join the chain gang

I need to thank Kris from Chronicles of a Father with Cents because his original post was inspirational for the writing of this post. Other bloggers may have already shared their financial mistakes but I find that bringing them all together in the form of a chain will create a list of lessons learned that will be valuable to us as bloggers and our readers. I hope you join this initiative and share your own Financial Mistakes.

  1. Write a post about your financial mistakes and lessons learned.
  2. At the bottom of your post link back to other bloggers before you in The Chain.
  3. When you tweet out your post tag the other bloggers.
  4. Try to keep your list of chain members up to date. This helps encourage others to keep their back-links up to date and in turn, helps you

Financial Mistakes – The official chain gang

Anchors: Chronicles of a Father with Cents, A Journey to FI

  1. ThinkSaveRetire
  2. OthalaFehu
  3. Turning Point Money
  4. Femme Cents
  5. Jumpstart From Scratch
  6. The Frugal Gene
  7. Gen Y Money
  8. 99to1percent
  9. Atypical Life
  10. Winning Personal Finance
  11. Chief Mom Officer
  12. Foreign Born MD

10 comments

  1. Hey thanks again for starting this chain JJ, owning up to our mistakes especially our financial ones will makes us better decision makers when it comes to dealing with your finances.
    The one account I’m missing is an online savings account. I know the rates are really good but haven’t gone around to opening one yet. Any suggestions on which online bank I should open one?

      1. Hey OthalaFehu, thanks for stopping by. I will say there are options out there that would easily beat 0.5% APY. At one point I had MySavingsDirect but their rate which was one of the highest at one point at 1.1% dropped to 0.75%. Ally has been great but feel to check these ones as well [http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001/]

    1. Hey Kris, thanks for stopping and you bet. Give yourself a lot of credit as you were the one who actually broke the ice and started things going!. Anyways going back to your question I’ve been happy with Ally bank [www.ally.com]. Their rate is currently sitting at 1.2% APY and this has been raised on an on-going basis. There are other banks [http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001/] out there that pay up to 1.3% APY but Ally’s customer service has been so good that I’m hesitant to move my money for 0.1% … maybe I should but we will see. I would hate to move the money and then see that Ally suddenly raises their IR which they have done twice at end of Q1 and middle of Q2.

  2. Great lessons learned, thanks for sharing your experiences. 28% of your pay isn’t too bad, I think the recommended is under 32%, but I agree, when you have higher fixed costs it’s hard to have disposable income to put towards savings.

    1. I didn’t even know there was a rule of thumb about the % … good to know; however, like you said it comes down to matching your needs with your long terms goals. Just because your affordability is X doesn’t mean you should get Y. You and are I on the same page … the more you can control your fixed (and wants) expenses the more you’ll be able to save for the future.

  3. Financial mistakes seem to be a serious right of passage. I feel so many of them you really need to experience the consequences of first hand to realize you’ve been operating suboptimally. I’m glad I learned most of my bad lessons early on. I didn’t post an article about my financial mistakes, but I did write about moving to NYC with less than $1000. There were plenty of financial mistakes abound with just that one life decision.

    I also just wrote about how credit card interest works, and a friend read it and asked “do you really get charged interest if you just pay the minimum payment?” She pays her main card in full, but still wasn’t aware of this at all. Turns out she had let a store card accrue interest because she felt paying the minimum was what you were supposed to do. It’s completely not obvious! I’ve actually heard of multiple people doing this. It just makes me think we all probably make these mistakes because NO ONE teaches you why you shouldn’t be doing it!

    1. Yeah, making credit card payment minimums thinking life is good seems to be a common theme. All CC companies give their disclosures but honestly who reads all the tiny letters at the bottom of their offers? I agree with you, no one will teach you something just because. I think the answer comes down to 1) first admitting we are making the wrong moves, 2) coming up with a plan and 3) executing that plan.

    1. I hope to lead by example and perhaps be in a position of influence; however, it certainly doesn’t hurt to go back and share the list of things we screwed up with our kids. I strongly believe in exploring new/different ways of improving our financial situation so the challenge will be making sure we keep the list of our mistakes evergreen. If we are not making mistakes we are not trying hard right?

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