6 Financial Decisions – Don't Learn The Hard Way

By glblguy

Learning the Hard Way
Photograph: Learning The Hard Way by Alex @ Faraway

This article is part of an M-Network group writing project. We are all writing articles revealing our best and worst financial decisions. See the end of this article for links to other M-Network member articles!

I’ve made a number of good and bad financial decisions in my life. Unfortunately until about a year ago, the majority of them where bad. I could list far more than 6 decisions and frankly could probably write a whole book on the them. To keep from completely boring you though, I’ll only share 3 of each. My sincere hope is that you can learn a little something from my decisions and maybe avoid learning things the hard way like I did.

Our 3 Worst Financial Decisions

#1 – Purchasing an RV

About 6 years ago, we decided to buy an RV. We purchased a new 26′ travel trailer. It was incredibly nice and we enjoyed many wonderful times camping at the South Carolina beaches and the North Carolina mountains. Here’s where we went wrong though:

  • We paid too much for it when we bought it. We should have done more research on dealer price as we ended up paying about 10% too much.
  • We purchased new. RVs depreciate in value at an incredibly fast rate, purchasing a new one isn’t a smart decision and you will really take a beating. A much better option is to purchase a 1-2 years old used model, and let someone else take the hit. Many people purchase RVs only to find fairly quickly they don’t enjoy it. Finding opportunities like this will provide you with the best deal.
  • We folded our negative equity into a new trailer. Not only did we make the mistake of buying new once, we did it again not 2 years later. We upgraded to a larger RV and folded the negative equity from our first camper into the new one making a bad financial decision even worse.

We ended up selling our trailer for $9,000. The balance still owed was around $12,000. We paid about $19,000 for it new. Add to this the cost of insurance, storage, the camping supplies and the monthly payments for a vehicle to pull and you have the biggest money pit we’ve ever owned. Sure, the adventure was fun and we loved camping, but it just wasn’t worth it. We’ll wait until we’re retired and hit the road then.

#2 – Paying Too Much For Our Home

When we moved back to North Carolina, we had picked out two neighborhoods where we would consider living before we came down. We additionally picked out the specific model and floor plan we wanted. My wife and I both feel in love with a 2-story with a front porch.

The house we wanted was a high demand one. One of the neighborhoods wasn’t building anymore nor where there any for sale. The second neighborhood had one left, the model, which had just gone on sale. The model was about $20,000 higher than the standard home, but the sales person told us that was due to the all of the options: extra trim, higher quality carpet, larger A/C units, curtains, etc, etc.

Our real-estate agent (who was under a buyers broker agreement) agreed, and that based on her fair market analysis the house was a good buy. Given we were renting a one bed-room apartment on a short term lease at about $1500/month (with 2 kids I might add) we decided to buy it.

We later found out that being a model ads nothing to the value and when you go to sell, it makes no difference to the home value at all. Our real-estate agent lied about the fair market analysis. We should have paid $20,000-$30,000 less than we did, especially since the house was already 5-years old.

Only in the past year or two now that housing values in our area have started to increase significantly have we gone positive. We finally owe less than the home is worth. Hard lesson learned, but a valuable one for us in the future. In hindsight, we should have sued out buyer broker agent for misrepresentation and we should have done our own homework.

#3 – Doing an early withdrawal of our 401k to pay-off our debt

Some years back, we were deep in debt. We didn’t know about debt snowballs, didn’t know about living on less than you earn, or even how to live on a budget. We just knew we were in more debt than we could pay and had money in our 401k we could use to pay it off.

We decided to take an early withdrawal from our 401k to payoff all of our credit card debt. I paid the taxes and the the 10% penalty, and in hindsight ended up paying what equated to 40% interest for that money. We did pay-off the credit card debt, but failed to get rid of our credit cards. Not 5 years later, were right back in the same deep in debt situation.

Don’t withdrawal money from your 401k under any circumstance. It’s like taking out a loan at 40% interest to pay off your debt. Additionally, you basically kill any progress you’ve made on your 401k accounts compound interest, making it grow that much slower when and if you restart.

Our 3 Best Financial Decisions

#1 – Cutting Up Our Credit Cards

8 months ago we stood around the shredder and each of us, including our children put a credit card in the shredder. It was a life changing moment for all of us. A moment where we removed the temptation of having cards from our wallets, a moment we declared war on debt, and a valuable lesson for our children.

We had cut up our cards in the past, but always kept one “just in case”. The temptation to use that one card was just too strong, and we always did. Not this time, all of our cards are gone. The only credit card I carry in my wallet is my corporate card for work. We have been credit card free for 8 months, and haven’t even come close to needing one. We have a $1,500 emergency fund and use it to cover any unplanned expenses. We don’t miss those cards one bit and most likely will never have one again.

Do you struggle with using credit cards? Do you find yourself always coming up with a reason to use them? Get your cards out, call the family down (if you have one) and shred them, blend them, scissor them, burn them, whatever but remove them from your life, you won’t regret it.

#2 – Getting Control of Our Finances

At the same time we removed credit cards from our life, we also decided to get control of our finances. This involved establishing an emergency fund, creating a budget, living on less than we earned, and aggressively paying off our debt using a debt snowball.

Prior to doing this, it was a like a dark financial cloud followed us everyday. We worried about our finances all the time. We lived paycheck to paycheck, paid bills late, and overdrafted our accounts far too frequently. It was a constant strain that caused money fights and frequent lack of sleep.

Since we gotten control of our finances, the dark cloud is gone. We don’t worry about money, we know where our money goes and how it is being spent. We feel more in control and see significant progress being made on paying off our debt. We aren’t out of debt, but because we have a plan and see our debt slowly going away we feel so much better. Controlling your finances doesn’t take much time, it’s easy to do, and will dramatically change your life.

Unfortunately it took something pretty major happening in our lives to make us realize our finances where out of control, but I’m glad it happened. Don’t learn this the hard way, get control of your finances and see what a difference it makes.

#3 – Buying Used Cars

Not long ago we had two new cars. I had a new Dodge diesel pickup (to pull the camper) and my wife a new full size Dodge conversion van. The van was sold and a 2-year old Dodge Durango purchased. When we sold our RV, I sold my truck and used the positive equity to purchase a $4,000 2001 Nissan Sentra.

This wasn’t too difficult for us as we had put a significant amount of money down on both of the new vehicles so we weren’t upside down. The equity in the van was used as a down payment on the Durango, and the equity in my truck used to pay cash for the Sentra and the remainder to pay for the negative equity on our camper.

Cars depreciate almost as fast as RVs. The average new car loses $2,000 – $3,000 dollars as soon as you drive it off the lot. To make matters worse, most people finance them for 5-7 years. Financing and paying on a vehicle that is constantly losing value is probably one of the worst financial decisions you can make.

Instead, find a well kept car that is 2 or more years old and pay cash for it. Let someone else take the initial large depreciation hit. Cars 2 years old are almost always still under warrenty and very reliable. If you can’t afford a car that new, do some research and find out what cars are the most reliable that meet your needs to buy an older one like I did. Mine has 120,000 miles on it and runs great. It’s amazing how nice a car drives and runs when it’s paid for!

oo00OO00oo

Sadly, when I wrote this article I really had to think hard to come up with the best financial decisions I’ve made. The worst came to mind far too quickly. 3 is only a very small portion of the mistakes I’ve made. You can see a few more by reading another article I wrote.

Make sure you read about the other M-Network bloggers best and worst:


35 Responses (including trackbacks) to “6 Financial Decisions – Don't Learn The Hard Way”

  1. Erin Says:

    Wow-the thing with the realtors lying to you is huge and so scary. It’s not like you are talking about $1000 or so, a house is a HUGE purchase, and the biggest purchase that most people will make.
    I’m super glad that the market has gone up since you bought it and you are now positive :)

  2. Justin Says:

    I can’t say I agree about the credit card issue. We never got into credit card debt, so take that as you will, however I wouldn’t spend money any other way. The protections just can’t be equalled with a debit card. Checks are even less secure than a credit or debit card. Cash even less so.

  3. Lynnae @ Being Frugal Says:

    Nooooo! Don’t say home prices are going up in North Carolina! My husband and I always figured if there came a time we couldn’t afford Oregon anymore, we’d want to go to NC!

    Great post! And I totally agree with you on the used cars. My husband and I have never bought new, and we never plan to.

  4. glblguy Says:

    @Erin – I agree, big hit to us and they took advantage of us. I’m glad our property values are up too!

    @Justin – Have we talked about this before?? ;-)

    @Lynnae – Not sure if they are in NC overall, but they are in the area I live in as it is a growing area. Seem to recall reading though that houses in NC are going up, but still far lower than the national average. Give us about a year or 2 and we’ll sell you ours ;-)

  5. Justin Says:

    Yep, this is old ground by now! :)

    I think as I mentioned in a previous post how we have only bought one new car, ever. I bought it this year because used were about the same price, with 10-20000 miles on them. I put a lot of miles on my cars, and I am fairly certain with the proper care we can get 10 years out of it. A lot of hemming and hawing went into that 15,000 dollar car, let me tell you.

  6. SingleGuyMoney Says:

    Thanks for the heads up on the model home. I would have thought all the extras would have added value too.

  7. ChristianPF Says:

    Used cars – I think cars have the most impact on a persons financial well being – for most people – I think I am going to write about that sometime – I have learned that one the hard way too :)

  8. glblguy Says:

    @Justin – We were looking at used minivans earlier this year and came across a similar situation. 2 year old Sienna minivans were only a little less than new. We decided to hold off as we just didn’t want to spend that much money. I like to find cars that lose their value quickly, make the best second hand purchase deals price wise.

    @SingleGuyMoney – They do make the house nicer, but make little to no difference what so ever on resale. I wish they did!

    @ChristianPF – I would agree, wish I would have learned the hard way a little earlier…took me about 4-5 new car purchases to get it through my thick head :-)

  9. justin Says:

    Yep, fortunately, or unfortunately, right now Toyotas and Hondas are holding their value for extended periods of time. Yes, I will say unfortunately, because I like to drive a car until the wheels are falling off, and us used car buyers get screwed in that situation when resale is 95+% of new.

  10. glblguy Says:

    @justin – Exactly. Didn’t get screwed though, just keep on driving what we have :-)

  11. Sean Says:

    Going somewhere in an RV is not the same thing as camping. Camping is a great hobby that can be incredibly cheap, since all you need is know how and food. Of course, you can always spend more on fancy gear, but you don’t have to.

  12. glblguy Says:

    @Sean – Sean excellent point. We actually have gone tent camping since, and while not as comfortable as the RV, it was a great deal of fun. Thanks for pointing this out.

  13. Justin Says:

    @Sean: Yep. There’s camping, and then there’s parking.
    ;)

  14. Danny Says:

    Good post.

    One thing though, I am 23 and just got my first credit card a few months ago, and I wish I would have done it sooner! Credit cards are not evil at all. I still don’t have a credit score because I haven’t had it long enough. By using it as if it was a debit card and paying it off every month, it is a free way to gain a credit score and make it grow. Also, I save 1-3% on every thing I buy. Can’t beat that!

  15. glblguy Says:

    Danny – I personally am not a fan of credit cards. There are way to many people in this world living in significant credit card debt, and struggling to make payments as a result. Card cards themselves aren’t the problem, but when combined with an “I want it now” society they are huge problem.

    I am not going to rip you for having a credit card, as long as you are meticulous about making payments early and always paying off the balance in full.

    I also side on not having them at all, as it eliminates any risk, but they are a personal choice.

    Thanks for commenting!

  16. Steve "The Debt Reduction Man" B Says:

    The best thing you did by far was cut up those cards and congrats on coming to that decision. Credit cards bleed the money right out of your bank, they make you spend more than you should and in return will charge you very high interest. Not having credit card debt frees up a lot of money for better things, such as actively investing or saving.

  17. Danny Says:

    I understand the negative connotations about credit cards, however, just with anything in life we must change our will power and use the tools we have correctly.

    I really do have sympathy for everyone with credit card debt. My dad ran up many credit cards and ruined my mom’s credit before they got divorced, which affected my life quite a bit in a negative way. I told myself that I would not be like my dad, and used it as an example of what not to do.

    Anyone know of another way (other than the visa I just got) that I can build my credit score? I currently do not have enough accounts for a long enough period of time to even have a credit score…. I know that it is important for when I will be buying a house, etc. I would greatly appreciate it, as I have been married for just over a year and my wife and I are trying to start out the best we can.

  18. Justin Says:

    @Steve: That’s interesting, how do credit cards force you to spend more money? I know they don’t charge you interest at all if you pay it off every month.

    A hammer drill can be used to kill people, but works wonderfully at making holes in wood and concrete, too.

  19. Steve "The Debt Reduction Man" B Says:

    Justin what I mean is it is very easy for people to use them if they have them. If it is in your wallet you will use it almost guarenteed, many people do not use credit the way it should be used. Therefore they buy things on credit when they really do not have the money for that item, and then end up running a balance. That is when you lose a lot of money from interest.

    Most people are not like you and do not pay off the full balance every month.

  20. Danny Says:

    @Justin:
    I like your thinking. Credit cards are one of the greatest things ever invented– when used properly. You just need to not misuse them. It is an interest free loan for about a month, plus you should definitely get a rewards card, and everything is cheaper. Free money!

  21. Debbie M Says:

    For those going on and on about how credit cards are a tool, did you miss the point where the author explained learning the hard way that they cannot be trusted with that tool? If you own a gun and keep shooting yourself in the foot, getting rid of that gun is a wise move, especially in the face of opposition. Once you’ve learned (even though you’ve tried not to) that you lose more with credit cards than you gain, you shouldn’t ignore that knowledge about yourself.

    Many decisions that are good for some people would be bad for other people and vice versa. I love these stories, though, because they show us, the easy way, some of the possiblities.

    @Danny, my advice is to save 20% for a down payment for your next house. By that time, either a lot of time will have passed, in which case you will have a credit history, or if you have a high income and were able to save quickly, that makes you look good, too. Plus, when you have a down payment of 20%, people don’t care so much about your credit score because if they have to repossess your house, they only have to be able to sell it for 80% of what you bought it for.

    Keeping the same job (or increasing your income when you change) is also good for your credit.

  22. justin Says:

    @Debbie M: High income alone doesn’t help your credit. Banks are even baulking at nodoc loans with 20% down these days.

  23. Ben Austin Says:

    Good article, I must agree with you wholehartedley with regards to the credit cards, as I am a Mortgage Broker, and I speak to people daily who are in financial trouble, mainly because of credit cards. I believe credit is too easy to get these days. The industry is going to have problems in the near future.

  24. Make Friends, Earn Money Says:

    Cutting up your credit card is always a winner in my book. Credit Card companies play on the concept that you should have a credit card for an emergency purchase. But really I ask how many emergency financial situations actually arise that can’t be negotiated. The reality is that credit card companies know that as human beings many of us (and i include myself) are weak when it comes to money and are likely to spend what we don’t have.

  25. Wendy Marino Says:

    From my point of view, it does not matter at all.

Leave a Reply

css.php