7 Stupid Financial Mistakes I've Made
Romans 8:28 – “…And we know that all things work together for good to those who love God”.
No, I didn’t make the mistake of buying a BMW M3. Some day maybe, but when I do it won’t be a mistake. Here’s 7 financial mistakes that I’ve made that hopefully others will benefit from and not make the same mistakes. Read on and you’ll see how the BMW plays in, but nothing like a shiny red car to get your attention huh?
1. Living On More Than I Made
I’ve read numerous times that personal finance is about common sense. If that is true, I must not have any (no comments dear). We lived on more than we made for so long we thought it was normal. We constantly overspent and bought things when we wanted them rather than waiting. We used our credit cards far too frequently and for things like buying groceries and gas. Not a good sign.
If I could give just piece of advice to people looking for the one thing they could do to improve their finances, it would be live on less than you make. After our life crisis late last year, we completely did a 360 on our finances. Since then, we have been living on about 80% of income, we have a $1500 emergency fund and are putting 20-25% towards debt.
So if you find yourself struggling to make ends meet, take a hard look at your budget and begin living on less than you make today.
2. Purchasing new vehicles
Until recently, we always had new vehicles, knowing that it wasn’t a good financial decision. New vehicles lose a large portion of their value as soon as you drive them off the lot. We currently both drive used vehicles, my wife a 2004 Dodge Durango and myself a 2001 Nissan Sentra.
I highly advise that you let someone else take the initial hit on a new vehicle, it can save you a tremendous amount of money. I recommend buying something 2-3 years old. Generally they are still under warranty, in very good condition and just as reliable as a new car.
Don’t get me wrong, I love cars, especially brand new latest model cars. I have an incredible weakness for them and trust me driving around in a 2001 Nissan Sentra isn’t my idea of a great ride. It is however reliable, good on gas, has plenty of room for my needs, and best of all, it’s mine. It is 100% paid for. I plan on keeping it for a while. It currently has 115k miles on it and I am a bit curious to see how long it will go. Any predictions? So for now, that BMW M3 I have craved and drooled over for years will just have to wait.
3. Not doing my homework when we purchased our house
We really took a beating when we bought our current house. We thought we were in desperate need of a home and fell into the trap of trusting our real estate agent and not doing research on our own. Turns out we ended up paying about $20,000 more for the house than we should have. It has been a painful lesson, but one we won’t forget.
Now, with that being said, we love the house, just wish it had more land. We’re going to fix that problem as soon as we get out of debt.
When buying a home, make sure you do your own research. Many states and counties have GIS databases where you can see what your prospective neighbors payed for their homes. Find houses similar to yours in the neighborhood or area, and look them up. Make sure those values line up with the market analysis your real estate agent is showing you. Also, make sure your agent has signed a buyer’s broker agreement. This will legally keep them working in your best interest. In hindsight, even though our agent signed a buyers broker agreement, she mislead us. If I knew then what I know now I would have sued for he difference, but just another example of “stupid tax”. Nobody to blame but myself.
4. Borrowing off of my 401k
I always thought that borrowing from your 401k was a great idea. I mean, you borrow from yourself and you pay yourself interest right? Great deal right? Wrong. Borrowing from your 401k is bad. Just a few quick things to remember about borrowing from your 401k:
- You are pulling money out that should be making on average about 10-12% return only to pay yourself 6%. You cut your investment by 50%.
- With today’s job market, who knows if you will have a job tomorrow or not. If you suddenly don’t you owe the company the full amount of the loan within 30-60 days. If you don’t pay, it is treated as a withdrawal and there are heavy tax and penalties associated with withdrawals
- You may have to stop contributing to your 401k while the loan is outstanding
I have a loan outstanding now, and once it’s paid off, I won’t borrow from it again.
5. Missing payments on Credit Cards
In the past I’ve been late on credit card payments. In today’s world of online banking, scheduled payments and online calendars, there is no excuse for this. Missing a payment and/or being late can really cost you. Many cards are now charging $30+ dollar late fees, and if you have a low interest rate and miss just one payment, your rate can increase significantly.
This happened to me on a card a few years back. It was a 0% interest deal on balance transfers, which I took advantage of. In the fine print, which of course I didn’t read, it stated that if you were late on any payment your rate would go up. I was a few days late on a payment, was charged a $30 late fee, and my rate went up to over 20%!
Don’t make this mistake. Use online banking and schedule your payments monthly. For credit cards, I would suggest scheduling the minimum payment at the beginning of the month to insure it gets paid. If you can pay more on it later in the month, than either bump up the minimum or just schedule another payment. Many online banking sites now have payment reminders as well that will send you an email x number of days before the bill is due.
6. Not Having an Emergency Fund
An emergency fund, next to spending less than you make, is probably one of the most significant things you can do to change your financial life. It allows you to stay on budget, avoid using credit cards, and reduces your stress level when it comes to money. Just knowing that if something goes wrong or that something unexpected comes up and you can financially cover it gives you a tremendous peace of mind.
If you don’t have an emergency fund, start one today.
7. Not Saving for known upcoming expenses
Upcoming expenses are expenses you know you will have to pay. For me, these are things like: property tax, Christmas, home owners insurance, and yearly home owners association dues. You may have others. These are expenses for which you know the amount and you know when you will need to pay them.
In the past, we always intended to set money aside and just never did, thinking we would have the money when we needed it. We seldom did, so we ended up using a credit card to pay for it. Dumb, dumb, dumb.
The concept is simple, take the expected payment, divide by the number of months between now and when it’s due, and begin setting this money aside. I set-up an automatic transfer from our checking account to our CapitalOne High Yield Money Market emergency fund. I don’t even think about, and it’s a fixed line item in our budget.
It’s incredibly simple to plan for these expenses, so don’t make the mistake of putting this off. A benefit of doing this is accruing interest while the money is waiting to be paid out too.
The good of mistakes
I believe Paul’s words in Romans 8:28 and believe that even though I’ve made financial mistakes that good comes from them. My hope is that the good is you reading these and learning from the mistakes I’ve made
I have many others, but these are the top one’s. What mistakes have you made? What things do you wish you could go back and change? Share your mistakes below so that others can learn from them.