My 5 Worst Financial Mistakes

A while back, I posted the 5 Best Financial Decisions I Ever Made. Today, I will look at the other side of the coin and share some of my worst financial mistakes. Nobody is perfect and we all make mistakes. The important thing is to embrace your failures and learn from them, right? That’s the best way to grow. Imagine how boring life would be if you never made any mistakes. It means you’re being too conservative and never take any chances. Never making any mistakes will limit your personal growth.

“If you’ve never failed, you’ve never tried anything new.” Albert Einstein said that.

I made my shares of financial mistakes, but I have been pretty lucky and avoided the big ones. A lot of families are in financial trouble because they make many of these fundamental mistakes.

• Spend more than you make – Obviously, this is not sustainable, but people still do it. The only scenario this would work is if you’re retired and you’re in spend-down mode.
• Build up high interest debt – The average U.S. household owes over $6,000 in credit card debt. That’s not good. Also, the average student loan debt for recent college graduates is nearly $30,000. Student loan debt is becoming a huge problem for the next generation.
• Not saving for retirement – This is why we have a retirement crisis.
• Buy too much house – Your primary residence is not an investment. Buying too much house means you will pay more for furniture, insurance, tax, maintenance, and utilities.
• Too much lifestyle inflation – Most of us make more money every year, but a lot of the raise we receive goes right into lifestyle inflation. It can be very difficult to cut back once you get used to your new lifestyle.
• Gambling – The house always win.
• Getting a divorce – This is a big one, but it is sometimes unavoidable.
• No financial goals – If you don’t have long-term goals, you won’t work hard to achieve them. I recommend setting your sights on financial independence.

All these mistakes will set you back and become bad financial habits if you’re not careful. We are naturally frugal so we avoided most of these pitfalls. It is amazing how one trait affects so many facets of personal finance. Anyway, here are my 5 worst financial mistakes in no particular order.

Taking a $10,000 interest free loan

A lot of families have credit card debt. This is one of the worst debts because the interest rate is high and missing payments can screw up your credit history. The only sensible way to use your credit card is to pay off the balance in full every month.

However, there was that one time… When I first started working, I kept hearing my coworkers talking about interest-free purchases. One guy purchased all new furniture for his apartment with store credit and bragged about the 0% interest. Another guy told me about his new car purchase with 0% introduction interest rate for 12 months. I thought – wow, that’s great! Free money, what’s not to like?

So when I got a letter from my credit card company about a $10,000 cash advance for 6 months with 0% interest, I was sold. I took the $10,000 and invested it in the stock market. Stocks were doing great in the late 90s and there was no way I could lose. Anyway, I didn’t make much money, but the $10,000 debt weighed heavily on me. I found that I hated having a big balance on my statement even with 0%. I paid it off and I could sleep a lot better. It wasn’t worth the headache.

Luckily, I did this before the dot com bubble burst. It would have been horrifying if I borrowed $10,000 and lost a big chunk of it in a stock market crash.

Lesson: Don’t borrow money to invest in the stock market. The gain is not worth the risk. It’s another story if you’re borrowing money to run a business; then you have more control.

Buying company stocks in my 401(k)

I made this mistake in the late 90s as well. When I first started investing in my 401(k), I didn’t know anything about investing. I picked the funds with the highest performance from the previous year and spread my contribution around. If a fund is good the previous year, it should be good this year, right? Who cares if they charge more fees as long the performance is better? Oh, boy! That was a rookie mistake.

It took me a couple of years, but I finally noticed that chasing performance doesn’t work. Funds that outperform the previous year couldn’t maintain the lead for long. Well, that didn’t work, so let’s put it all in the company stock instead. This is called doubling down on dumb ideas.

I moved all the money in my 401(k) to the company stock and it was great at first. Everything internet-related was booming. Everybody and their grandmother were making a ton of money on the stock market. I bet you all know how this story ends. The dot com bubble popped and I found out you should not put all your eggs in one basket.

It is an extremely bad idea to hold any employer stock in your 401(k). I was already depending on the employer for my paycheck, health insurance, life insurance, and other benefits. I also had employee stock options, stock grants, and stocks from the employee stock purchase plan. It was a terrible idea to invest any more money in the company. Luckily, I was young and didn’t have a lot of money in my 401(k). Nevertheless, it was very painful. I learned that lesson early so I’m happy about that. It would have been devastating if I learned this lesson in my 40s.

Lesson: Minimize your employer’s stock because you’re already depending on them for far too much. No job is safe these days. Also, don’t chase performance because it doesn’t work. It is better to stick with low-cost index funds and rebalance every year.

Our beloved BMW Z3

In 2001, I purchased a used BMW Z3 when Mrs. RB40 went to visit her family in California. We had a hand-me-down van and I wanted to surprise her with a nicer car. Imagine the look on her face when I drove up to the airport with the top down in the winter. She was speechless and was quite mad at me for making this decision without her. It took a while for her, but we came to love our BMW Z3 eventually.

We drove the car for almost 10 years and it was awesome to put the top down when the weather was nice. There are two kinds of people in this world — convertible people and non-convertible people. Hahaha. It feels great to drive around in a convertible, no matter what the inconveniences. Ahhh, got my shades on with the wind in my hair. What could be better?

The problem with the BMW was the expensive maintenance and repair cost. As the car got older, we had to fix various things and every visit to the mechanic was over $500. Eventually, it overheated and the engine header cracked. I sold it off for cheap because we needed a bigger vehicle with a baby on the way. We loved the Z3, but I will stick with a regular vehicle in the future. I will get a Mazda Miata someday, though.

Lesson: Consider maintenance costs as well as the upfront cost when you purchase high ticket items like a car, a boat, or a house. Luxury vehicles cost more to maintain than regular cars.

Also, I learn that Mrs. RB40 hates surprises. This was a very good lesson to learn early in our marriage. 🙂

Sold our 4-plex

Newer readers probably aren’t familiar with our 4-plex adventure. We purchased a 4-plex in 2011 and sold it in 2014. We purchased it for $300,000 and sold it for $376,000. That’s not bad for 3 years. The profit was around $50,000 because we had to pay commission, repair, depreciation recapture, various fees, and taxes.

I think we did pretty well, but we could have done much better if we held on to the rental property. The real estate market was doing well in 2014, but the value of the multi-family properties was lagging behind the single-family homes. If we held on for 2 more years and sold in 2016, the sale price would be closer to $500,000!

We didn’t maximize our profit, but that’s okay. That 4-plex was causing a lot of headaches for us. It was in a cheap area and the tenants weren’t financially secure. The property backed up to a creek and we had major drainage issues every winter. One tenant built a treehouse without telling anyone. It was one thing after another at this 4-plex. We had a property manager, but I still had to drive out there more often than I’d like. We were happy to get out with some profit and hand off the headache to the next owner. Hopefully, they knew how to deal with the tenants better.

Lesson: Avoid rental properties in sketchy areas. The tenants have more issues and there will be more problems.

Retired Early

Retiring early is definitely my worst financial decision. I was making a good income and I could have earned a lot more if I continue to work. There is no question we would have been better off financially. We could have saved and invested all of my income and given a big boost to our net worth. However, money isn’t the only consideration here.

Retiring early wasn’t a good financial decision, but it was the right decision for our family. My old job was taking a big toll on my physical and mental health. Who knows what would happen if I continued working and became more miserable? Life is much better now for our family after 9 years of early retirement. I’m making much less income as a SAHD/blogger, but we are much happier.

Lesson: Money isn’t everything. Money will help you achieve your goals, but money itself won’t make you happier. Sometimes, a financial mistake can mean a happier family life so don’t always prioritize money over everything else.

Also, I probably should have tried harder to negotiate for a severance instead of just quitting. My former employer started handing out voluntary separation packages soon after I left and they haven’t stopped since. Check out Financial Samurai’s book if need help with your severance – How to Engineer Your Layoff.

Make your financial mistakes when you’re young

Okay, this is running long so I’d better wrap it up. I have made a lot more financial mistakes, but I think these five were the worst. It’s good to get financial mistakes out of the way when you’re young. You don’t have a lot to lose, you can afford to learn from big mistakes, and you have time to get back on track. When you’re older, it’s much more difficult to recover from a big financial misstep. That’s why I’m glad I learn most of these lessons early.

What are some of your worst financial mistakes and what did you learn from them?

Looking for an easier way to manage all your investment accounts? Try using Personal Capital for free to keep track of your finances. Personal will aggregate all your accounts and give you a great overview of your savings and investments.

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Joe started Retire by 40 in 2010 to figure out how to retire early. After 16 years of investing and saving, he achieved financial independence and retired at 38.

Passive income is the key to early retirement. This year, Joe is investing in commercial real estate with CrowdStreet. They have many projects across the USA so check them out!

Joe also highly recommends Personal Capital for DIY investors. They have many useful tools that will help you reach financial independence.

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