Part of changing your financial course is taking a good hard look at yourself and accepting the consequences of your mistakes. I thought it might be helpful to highlight some of my biggest financial mistakes. If you’re reading this site wondering if overcoming your setbacks is even possible, I hope you’ll use me as an example of just how badly you can sabotage your finances and still recover.
So, without further ado, a (far from complete) list of my financial missteps.
Cashing Out a Pension
I worked for a few years in a government job with an extremely generous pension (90% of final pay for the rest of your life after 30 years). When I left that job, I took my contributions and the vested employer matching, and cashed them out. I then went on a spending spree because I had “lots of money.”
The worst part about this screwup is that I didn’t consider the taxes, either. I owed the government a stiff penalty at tax time.
What I did to get out of it: Nothing. I paid the government and moved on. It was years before I began to save for retirement again.
What I’d do if I had it to do again: Again, I’d do nothing. I’d roll the pension into an IRA and leave it alone. I spent it on complete nonsense, and I would be so much further on the road to financial independence if I hadn’t spent it all in an emotional fit.
Maxing Out Credit Cards
When money was tight, I put everything on credit cards, maxed them out, and then moved on to the next one. I would make a few hundred dollars progress towards paying down the balance, and then use what little was available next time I “needed” (wanted) to buy something.
At my worst, I was over $15,000 in credit card debt. All of my cards had usurious interest rates of 29.99%, which meant I was paying $4,500 to the credit card companies every year just for the privilege of owing them money, making no progress whatsoever towards the principal.
What I did to get out of it: I cut my spending to the bone. I canceled trips, got rid of every luxury, and treated my credit card debt as a major emergency. It took me a couple of years, but as I picked up steam, my credit card debt disappeared faster and faster. I haven’t carried a balance on a credit card for many years.
What I’d do if I had it to do again: I’d reduce my spending before it all got so out of control. I would never, ever carry a credit card balance. I would not apply for new credit every time I ran out of the credit I had.
Lots of Collections
Before I started to turn myself around, I had a number of credit cards and phone bills go to collections. I knew they were out there– it was impossible not to! Every day was an unending string of collections calls to my cell phone! I just couldn’t pay it off!
What I did to get out of it: I negotiated settlements, but whenever possible, only after receiving a letter stating that the collections would be removed and the negative marks removed from my credit. Some companies were more flexible about this than others, so I just had to wait out some of the negative remarks on my credit.
What I’d do if I had it to do again: Same answer as above. Reduce spending, don’t carry high-interest consumer credit balances. Ever!
Buying a New Car
While only employed part-time (in retail), I purchased a brand-new $30,000 automobile. With extended warranty. And 72 month financing. And a 5% interest rate. I was definitely a paragon of wasteful, stupid spending. My payments were $479 a month.
What I did to get out of it: By the time I started to get my financial act together, only a couple thousand dollars remained on the loan. Once that was paid off, I had the whole car payment available to put towards the credit cards, which sped things up a lot. I still drive the (now eleven year old) car, and have no plans to get rid of it. It was a mistake to purchase it in the first place, but now the best thing I can do is drive it into the ground.
What I’d do if I had it to do again: I would have purchased a 3-5 year old, fuel-efficient vehicle from Craigslist. This car would have experienced most of its depreciation already, but would still be in reasonably new shape. I would be getting a near-new car for a very used price.
Buying Property for $0 Down, with Two Mortgages
It was 2007, the heyday of the zero-down mortgage. I knew nothing about Real Estate, and everything I heard from my realtor was some variation of “Real Estate always goes up! You need to get in now before you’re priced out!” Nobody ever cautioned me that putting nothing down, taking out two mortgages (one of which had an interest rate of 11.5%), and paying asking price could cause me problems. Within two months of me buying the property, values were crashing, and within a year, it was worth 35% of the price I paid for it.
What I did to get out of it: Only time has remedied this problem. I still have very little equity, but I am at least above water. Refinancing when it became possible helped a lot. We’re biding our time now to get out of the property with a tiny bit of cash, but it’s a source of some anxiety for me to know that another crash could strand us in this property for many more years.
What I’d do if I had it to do again: If I knew everything I know now, I would have bought the same property, with a down payment, a year later! However, since nobody can know what to expect from the market, I would have insisted that I put 20% down. This would have had the same effect, since I would have still been saving when the market crashed.
Annual Electronics Buying
I was completely broke, but that didn’t stop me from standing in line for new smartphones, getting a new computer every year, and spreading it all out across multiple credit cards. I remember with a large amount of shame having tens of dollars put on one card or another to purchase some incremental upgrade to a device I already owned.
What I did to get out of it: I stopped buying stuff! I couldn’t afford it!
What I’d do if I had it to do again: I’d stop buying stuff much, much sooner! I kept my last phone for five years, until I literally couldn’t install any more applications on it, and my work application needs required me to have access to a moderately recent phone. I bought an unlocked phone, which I plan to keep another five years!
Deferring Student Loans Over and Over
Whenever I would be short on cash, I would call up my student loan company and request a deferral for a few months. You may know this, but you only have a limited number of months to defer your loans across their entire lifetime. I’ve used up almost every deferral month for all my loans. I’ve taken what is meant to be a safety net and squandered it to buy more useless stuff. Meanwhile, all of the loans continue to accrue interest in deferral. I was literally getting further behind every month.
What I did to get out of it: As previously mentioned, I cut my spending back and started paying off my debt. As soon as there was just a little daylight visible between all of my expenses, things began to improve very quickly.
What I’d do if I had it to do again: I’d stop spending before requesting deferrals!
Using Cash Advances
This is one of the things I did that brings me the most shame and frustration. Of my biggest financial mistakes, this is probably the worst! My bank offers cash advance of up to $500 per pay period, and deducts any amount advanced from your next direct deposit, plus a 10% fee. In practice, this means that if you advance $500, you owe $550 within two weeks. I was using the max cash advance every single pay period. Consider for a moment what this means. I was paying $1300 in interest every year to carry a constant balance of around $500, or basically 260% interest annually. Insane!
What I did to get out of it: I paid off one thing, then I paid off the next, and the next. It all started with cutting my expenses and making my debt my first priority.
What I’d do if I had it to do again: I’m a broken record here– stop spending on nonsense, don’t carry high-interest debt, don’t buy useless garbage!
Biggest Financial Mistakes Are the Best Lessons
Writing these stories out brings back a lot of memories of desperation, frustration, and shame. I remember how I felt and if you’re anything like the way I was, I get it. Given that we’re coming from the same place, let me tell you: it is absolutely possible to escape. All you need is a little breathing room, and reducing your spending is the best way to get started.
I know that you feel like because you work hard, you deserve some nice things. Maybe you do. But first, you’ve got to solve your emergency. Get just one thing paid off, then the second, then the third, and before you know it your finances will be completely changed. You just have to start somewhere by making reducing your expenses your first priority. My recommendation is that you start by closely tracking your spending. You may be shocked by just how much goes to the tiny, everyday stuff.
How about you? Do you have any anecdotes or lessons you’ve learned after making some huge financial mistakes? Let me know in the comments!