My (Personal) Top 5 Financial Mistakes
Today I'm sharing with you my top five financial mistakes so that you can avoid making or repeating them again in your future financial life.
As a financial counselor, a big part of my job is to educate my clients on topics like debt budgeting and savings so that they can make the most of their money and avoid making financial mistakes. And I personally believe that it’s important for me to be transparent with my clients and community about my own journey and financial mistakes so that I can hopefully help others avoid making them as well.
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While you’re reading today’s post, one thing that I want you to notice about the mistakes I’m sharing with you is how they related to and magnified each other in the negative impact that they were having on my financial life.
It was like this little mixing pot of financial mistakes—the more mistakes I made, the pot continued to gett fuller and fuller until it got to a point where it was about to overflow.
I'm also sharing some of the strategies that I used to get out of these negative situations and start taking back control over my money. And again, my hope is that you can learn from my experiences and avoid making these same mistakes in your financial life.
Mistake #1: Buying a car I could “pay for” but could not “afford”
At the time of purchasing this vehicle, I thought that being able to “pay” for something and being able to “afford” something was the same thing.
But that is not the case at all.
Being able to pay for something means that no matter what the impact is, you're able to come up with the money to make that payment. Whereas being able to afford something means that you can pay for it comfortably with little guilt, stress or resentment.
After I bought my car and calculated the car payment, insurance, maintenance, and gas, I was spending about $550 to $600 a month on that vehicle alone.
When I was sitting down and taking out the loan, I was thinking “oh yeah, I have more than $600 available during the month.” And I assumed that just because I could make that payment meant that I could afford it, which that was not the case at all. I was in college at the time. And that $550-$600 became a huge cost burden that ultimately prevented me from laying the financial the foundation that I needed for my money because so much of those funds, were going towards that auto loan.
What I would do differently:
If I could go back in time to the point when I was financing that vehicle, some there are three things that I would do instead:
Keep the loan payment under 10% of my take home pay maximum.
If I had kept the monthly payment lower when compared to my take home pay, it would have significantly alleviated the cost burden of that monthly payment
Save for a down payment of at least 20% when buying the car
Again, I had little-to-no financial education when I was financing this car, and I didn't make a down payment at the time (in other words, I put $0 down)
If I could go back, I would save up for at least a 20% down payment if I had to finance the vehicle. The reason why saving up for a down payment is so important is because there are additional taxes and fees added onto the sticker price of the car at the time of purchase.
Because I didn’t have any down payment saved, that immediately left me with an upside-down auto loan, which meant that I owed more on the vehicle than it was worth. This is a really stressful situation to be in!
But honestly, my goal for the next car I buy is to buy it outright. I'll probably buy a used car again, and after the trauma of this auto loan, I don't want to have another auto loan for a significant amount of time.
I'm not saying that I'll never finance a vehicle again, but I want to really avoid repeating a situation like this again.
Keep the loan length shorter than four years.
There are three primary reasons for this:
Number one: according to a study by R.L. Polk, people keep new vehicles for an average of six years. When the length of auto loan is 5, 6, or 7 years, the auto loan is ending right around the same time that an individual is feeling ready for a new car.
Number two: the longer the length of a loan, the more money you're paying an interest over time. So when a monthly loan payment is smaller, but the term of the loan is longer, that likely means more money is being paid in interest.
Number three: a longer loan term extends the amount of time that that the cost burden of loan impacts your monthly spending.
My first auto loan had a term of six years. Because of my lack of financial understanding, I was not thinking about the impact that this loan would have on my future. I told myself that six years isn’t a long time, but it’s actually a pretty significant amount of time—especially when the monthly loan payment isn’t something you can afford in the first place.
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Mistake #2: Renting an apartment that was too expensive for my budget
This financial mistake was happening at the same time as I was taking out my auto loan, and my apartment was ultimately just more expensive than I needed. After paying my rent and auto loan bills, I had very little money leftover at the end of the month.
What I would do differently:
I would keep my rent below 30% of my monthly income.
But honestly, the lower your monthly housing payment is, the more freedom you’re going to have with your money because you will have more disposable income to work with.
Obviously, this 30% is a general rule of thumb that can look very different depending on the area that you live in (especially if you’re living in a big city). But it's important to keep in mind that rent or a mortgage can really quickly become a significant cost burden on a budget.
When the lease ended on my this particular apartment, I made a commitment to do much more research on the next place I would live in. This extra time and research allowed me to find a place that I still enjoyed living in (working appliances, layout, amenities, etc) while staying in a more reasonable price range.
By spending time on a little bit of extra research and apartment hunting, I was able to save 45% on my next apartment. I had to drive a little bit farther to work (like we're talking 10 minutes), but the savings was ultimately so worth it.
Mistake #3: Living Paycheck to Paycheck
With the car payment and the expensive apartment in mind, both of these decisions created a significant cost burden on my finances. As I was entering the working force, I was in a very negative mindset when it came to managing my money in general and quickly found that I was living paycheck to paycheck.
Because of my student loans, credit card debt, auto loan, and rent payment, I hardly had any money left over at the end of the month.
Coupled with my negative money mindset, I would tell myself that "since I don't have a lot of money, it doesn't really matter what I'm spending my money on, because I'm not able to save anyways.”
So, what did I do? I started spending frivolously because I didn't believe that being able to save was possible for me.
Steps I took to stop living paycheck to paycheck:
I talk more on spending frivolously in mistake #4, but the first steps I took towards breaking out of the paycheck to paycheck cycle are:
Taking full stock of my financial situation
Building an emergency fund
Spending intentionally (more on this below)
Selling items that weren’t bringing value to my life and putting the money towards my emergency fund
For example, a dresser that I never used, clothes I wasn’t wearing, etc.
Finding ways to boost my income.
By starting different side hustles, working part time jobs, and negotiating a higher wage, I had more funds to work with each month, which was huge to help me stop living paycheck to paycheck.
Mistake #4: Spending frivolously
Like I mentioned above, spending frivolously was a huge driver in my living paycheck to paycheck.
To combat impulsive spending, I started focusing on spending more intentionally by tuning in with my needs, what types of purchases aligned with my values, and the things I truly cared about in life.
I eventually found that a lot of my frivolous spending did not align with the things that were genuinely important to me. By spending more intentionally and mindfully, I was able to save more and pay down some debt to alleviate the pressure bills were putting on my budget.
Mistake #5: Waiting to start investing
I can remember when I was around 21 and started to hear people talk about investing and the money that they were saving for retirement. But because I was in the paycheck to paycheck cycle and a negative money mindset space, I convinced myself that there was no way that I could make investing a priority.
In hindsight, I really could have started saving and investing much sooner, even if it was only $15 or $25 a month. Today, I realize that the ability to save was much more in my control than I thought it was at the time.
But because I thought that it was impossible for me to save, I put off investing longer than I wish I had. Now that I fully understand, how powerful compound interest is, and how much farther my finances could have been if I had prioritized setting aside even a small amount money each month.
And one thing that I just want to share with you now is that it is absolutely possible to get started with investing with as little as $10 a month, for example. Some popular online brokers are Fidelity, Charles Schwab, M1 Finance, Betterment, etc.
A supper common misconception people have about investing is that you need to have thousands of dollars to get started. But that is absolutely not the case in 2021! There are tons of online brokers that allow people to get started with as little as $10, which is so awesome and exciting that people can start taking those steps towards growing their money.
By investing with just a little bit each month, you’re still able to take advantage of compound interest.
One thing that really helped me finally start investing was creating a budget. Budgeting allowed me to fully see where my money was going, what areas of spending were out of alignment with what was truly important to me and, like I mentioned earlier, spending more intentionally so that I was able to send funds towards my different financial goals.
Final Thoughts
So to summarize everything that we've talked about today, my top five biggest financial mistakes:
buying a car couldn't afford
renting an apartment that was too expensive.
Living paycheck to paycheck which caused me to get in a negative money mindset that caused frivolous spending
Spending frivolously I didn't mention this but there was also some credit card debt that was on there as well. was leading and lending itself to that paycheck to paycheck cycle.
Waiting to invest. And all of those things essentially prevented me from starting investing sooner at a time when I really could have started. But because I was in that negative money mindset space, I did not think that it was possible for me.
So those are my top five biggest financial mistakes. I hope that by me sharing the experiences that I've gone through that you're able to learn from them and hopefully avoid them in your own life or if you're going through these experiences right now that you learned a little bit of the processes that I took to get out of those situations and ultimately take back control of where I'm where my money was going and break out of that paycheck to paycheck cycle. This should be some type of promotion, about leaving a review
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