No one is perfect, and that includes me. Everyone makes mistakes and there is no reason to feel ashamed about the past decisions we have made in life.
My past few articles have all been focused on why a high savings rate is so important for early retirement, savings strategies (fixed and discretionary), and extreme lifestyle changes that can save big. My hopes are that I can share what I have learned through my research and personal experiences, while providing helpful/valuable content to my readers. There is plenty to be learned when it comes to saving money and personal finance.
However, the best way for people (and myself) to learn about savings is not through my successes, but through my mistakes in life. Specifically, mistakes in regards to saving money.
1- Going Into Debt
The first mistake I made in regards to saving money was spending FAR more than I could afford. Whether the debt is a student loan debt, a mortgage loan, a car loan, or consumer debt (credit card debt), it is important to fully understanding how crippling debt is when trying to save money.
I would argue that if you are in debt, you should save a minimal amount for the short term (3-6 months) and spend the rest of your money paying off the debt. Any interest rate debt carries will always be more than saving a dollar in the bank. So, if you are in debt and have minimal savings, then you should focus on paying off the debt as soon as possible before saving any more money.
The debate between paying off debt as compared to saving has paying off debt as the winner since the interest rate on a savings account is far lower than the interest rate on any loan.
The debate between paying off debt as compared to invest is less clear. The rate of return on the investment as compared to the interest rate of the loan will determine whether you invest or pay off the debt. This topic can have an entire blog post written about it, but let’s just focus on saving for now and leave investing for another blog post.
My problem was that I actually went into debt by buying a co-op apartment and was paying as much in interest payments as the principal cost of the house. In other words, I bought an apartment for $150,000 (30k down payment, and 120k mortgaged), but would end up paying more than $120,000 in interest payments over 30 years. The total amount I would pay at the end of the 30 years would be roughly $280,000… far more than the $150,000 market price of the apartment.
It is important to understand the opportunity cost of money. If you go into debt, not only do you commit to paying interest on your debt, but you will have less disposable income to save and invest over the lifetime of that loan.
2- I Spent My Savings
Savings are just that, money that is intended to be kept for long periods of time. Too often are savings used to fund a vacation, a marriage/honeymoon, or a down payment for a house. Personally, I was guilty of spending my savings on parking tickets, expensive toys, and to replace things that I NEEDED after they broke (like my cellphone).
With interest rates on savings accounts at an all time low of %0.09 (almost %1 with online savings accounts) there is little incentive to keep money in a traditional savings account. Considering inflation averages between %2-%3, you are actually losing money every second your money is in a savings account. With barely any incentive to ‘save’, it makes a lot of sense that people spend their savings like their checking account.
Online banking has also made all of our personal finances available at the touch of a finger. Within seconds we can move money from our savings account to our checking account, and subsequently spend that money. Before the era of online banking, you would have to go to the bank in person (what a nightmare!) and request the bank to make the transfer, then the actual money transfer would take a couple of days to complete.
This delay, in combination with the effort involved, would allow consumers enough time to think over their decisions or even completely deter them from taking money out of their savings account all together.
As banks have become more technical, consumers are able to access their savings accounts more recklessly.
I urge all readers to commit to NEVER using their savings. Savings should only be used for (1) emergency situations (like job loss or health issues) or (2) investment opportunities.
3- Never Setup Automatic Transfers into Savings
Not setting up an automatic transfer from my checking account to my savings account was one of my biggest mistakes. I was always influenced by the idea that I would save money once I saw there was ‘extra’ money in my checking account. The problem was that there was never any ‘extra’ money in my checking account at the end of every month. As the great Warren Buffett once said:
“Do not save what is left after spending, but spend what is left after saving” – Warren Buffett
I am not referring to saving money in a retirement account (IRA, 401k) that receives funds automatically from your paycheck. I am referring to the actual act of setting up a recurring transfer from your main checking account into a savings account.
The exact amount or percentage that is directly transferred into a savings account should be as much as possible (%10-%20 of your paycheck is a good start). Personally, I transfer $500 every two weeks (on the day I receive my paycheck) from my checking account to my savings.
Once this automatic transfer is setup, there must be a commitment to never spend that money unless for an emergency or an investment opportunity (as mentioned in #2, above).
This automatic transfer will force people to reduce their consumption and also build good money habits. Once enough time has passed, this automatic deduction in your discretionary spending will not even be noticed. The reduction in disposable income will teach you how to live a more modest life and even force you to change your lifestyle choices.
After all, you can’t miss money you never had. 🙂
4) I Paid For Other People’s Skills
This is a very general topic that can be interpreted in many ways. In general, I am referring to the most basic tasks in life that we outsource simply because we are too lazy or too busy to take on ourselves. To be clear, I am not saying that we should all Google our own ailments instead of going to a doctor. Some skills are worth paying for.
When we begin ‘adulting’ in our journey of life, we begin to think that we deserve things. We believe that we cannot be bothered to do menial tasks if we can simply pay someone else for it.
The main task we outsource is the actual cooking of our meals! Stop ordering delivery! Learn to cook at home. You will save a ton of money and live a healthier lifestyle. Cooking at home has a high upfront cost of buying all the kitchenware, cutlery, herbs, and spices. However, once all of the upfront costs are paid for, cooking costs a fraction of what eating out costs.
Cooking is not the only task I outsourced. I have paid plumbers to fix leaky pipes for hundreds of dollars, even though it seemed like all the plumber did was put a large amount of glue where the pipes screwed into each other so the water would stop leaking. So instead of buying the glue for just a few dollars, I spent several hundreds of dollars for a ‘professional’ to come fix it properly.
There are many skills we can learn that will save a significant amount of money. These skills can be easy or incredibly difficult to learn. The more difficult the skill, the more value you save. For example, we could mow our own lawn, cut our own hair, clean our own house, cook our own food, build our own furniture, fix our own pipes, and/or manage our own finances.
These tasks do require effort, and putting effort into something is deathly frightening itself.
“Why is effort so terrifying?
There are two reasons. One is that in the fixed mindset, great geniuses are not supposed to need it. So just needing it casts a shadow on your ability. The second is that it robs you of all your excuses. Without effort, you can always say, ‘I could have been [fill in the blank]. But once you try, you can’t say that anymore.
You have to work hardest for the things you love most.”
-Mindset – Carol S. Dweck
5- I Was Too Scared To Invest
Investing is an obvious requirement if we are to become rich. It is unclear to me why so few people actually take the time to invest in something. It is easy to use the limiting belief that ‘I don’t understand the stock market’ or ‘Investing is too complicated’, but the hard thing is to actually take the proper steps to begin investing wisely.
I tried to invest once with just $1,000 in a company called ETSY when they IPO’d. Needless to say, I was a novice investor and did not know IPO stood for ‘Idiots Purchasing Overpriced Stocks’. I ended up losing $600 when I sold it, and felt terribly embarrassed about the whole ordeal.
I was like the vast majority of people and did not know how to invest. Once I received my first loss in the market, I was turned off of stocks completely for a couple of years (until I saw one of my stocks I invested $250 in increase by %300 in 2016).
The fear I felt that drove me to stop investing was by far the biggest money mistake on this list. Not only because I didn’t invest due to irrational fear, but I missed out on 2 years of amazing growth in the stock market.
Out of all my money mistakes in this article, I bet the majority of readers are guilty of #5, not investing.
P.S. As always, if you find this content helpful, insightful or just entertaining, please share, like, comment, and follow.