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Part of being human is making and learning from mistakes. Today I’m sharing a more personal post, looking at my 5 worst money mistakes. I’ve touched on how little I learned about money from my parents and I’m going to share the hard truths I’ve had to learn for myself.
Money Mistake 1: I maxed out my student loans.
Despite qualifying for scholarships, I still needed to take out student loans to cover my tuition. When I was presented with the loan agreement, I read that I didn’t have to take the full amount of what was offered if I didn’t need it. Even though I didn’t really need it, I took the full amount out each semester throughout my undergraduate education.
This amount ranged from an extra $200 to an extra $600 per semester, which quickly adds up (especially when you take interest into account). After my 3 years in undergrad, I owed approximately $11,000 (and I didn’t even pay for my last year at school).
Throughout undergrad, I repeatedly told myself that I would just hang on to it I case of an emergency and then I’d pay it back at the end of the semester. Guess what? I never did pay it back at the end of the semester. An “emergency” always came up, preventing me from paying it back at the end of the semester. Then I’d start the process over again, telling myself the same thing.
How To Avoid
There are several ways to avoid this particular mistake. First, I would highly recommend attending a local community college before attending a four-year college/university. Here’s a comparison for 2016-2017 for the two schools I could have attended:
These are the annual totals of tuition and books while living with your parents.
The local community college is HALF the cost per year.
Another way to avoid this mistake is to only take the cost of tuition and books out of my offered loans. Remember, it is not free money.
Money Mistake 2: I got a private student loan because I didn’t understand financial aid.
I am incredibly embarrassed about this mistake. I was anxious about not being able to afford school. I had turned in all my FAFSA information and necessary documentation. I was so anxious that I applied for a private loan because I was afraid I’d get denied financial aid. My first year of undergrad, I had taken out TWICE the cost of attendance. I was thankful at the time to be able to afford a laptop and other supplies for school. Unfortunately, those purchases came with a hefty interest payment later.
How To Avoid
Unless absolutely necessary, do not take a private student loan. The interest rates can vary drastically, often around 8-12%. My Federal loan had an interest rate of 5% while my private loan had an interest rate of 10.81%.
If you don’t qualify for financial aid, research all possible lenders. Don’t forget to check with local banks and credit unions, as they usually offer scholarships and student loans at a lower interest rate.
Money Mistake 3: I didn’t commit to my financial goals or hold myself accountable.
As I mentioned in my first mistake, I originally planned to keep the excess of my student loans as an emergency fund. Unfortunately, I didn’t hold myself accountable to this goal and ended up spending that money. I honestly cannot remember what I spent that money on and I likely don’t have whatever I bought anymore, either.
What’s worse is realizing that I’ve probably paid for whatever I bought at least twice in the interest that I pay on my loans now. All of this because I wasn’t able to hold myself accountable.
How To Avoid
Create SMART financial goals. Reward yourself for both small and large successes. If necessary, implement a “punishment” system (such as writing a check to a despised organization if you fail).
If you struggle with holding yourself accountable, you can get an accountability partner. Be sure you select a person you can be open and honest with (spouses and partners are great for this).
Money Mistake 4: I frequently borrowed from myself because I didn’t have an emergency fund.
Full disclosure: I didn’t officially create an emergency fund until this year. Originally I set up an automated savings account that I could use in the event of an emergency but I always funneled it into my student loans at the end of the year.
During my early adulthood (and I use that term loosely), I frequently put things on my credit card that I would pay off with my next paycheck. Thankfully I never carried a balance, but I was stuck in a vicious cycle: every time I got paid, I had to use about half of my check to pay off some emergency I’d put on my credit card.
Many of my emergencies were car-based: new tires, repairs, parking tickets, a speeding ticket, Driver-Improvement Class (required for people 18-20 for speeding violations in Virginia), and more.
How To Avoid
First, if you don’t have an emergency fund, you should create one immediately. Even if you can only contribute a small amount to it regularly, it’s better than not having one. Trust me on that.
I keep my emergency fund with Capital One 360 because I do better with an “out of sight, out of mind” approach to my savings. I prefer Capital One 360 because of the high-ish interest rate, free transfers between my local credit union and Capital One 360, and their great customer service! Not to mention I can set up automatic transfers and I don’t have to think about it.
Second, do whatever you can to break your cycle of borrowing from yourself. For me, I went on a spending freeze for about a month. This included a smaller grocery budget, not eating out, and no unnecessary shopping.
Third, don’t be a dumb driver like I was. Always mind traffic laws, including speed limits and parking restrictions. If you have any doubts about an action, just don’t do it.
Money Mistake 5: It took me years to grasp the real concepts of budgeting and bills.
In my early adulthood, I thought I was great at budgeting. And I was, in theory.
At 20, I thought I knew way more than other people my age did about money because I’d had to learn it for myself (yes, I was kind of a self-righteous poor kid). I worked two jobs, went to school full-time, and bought a car with cash just a year after breaking my cycle. I’d read The Complete Idiot’s Guide to Personal Finance in Your 20’s and 30’s at least 5 times in the 3 years since I’d bought it. I even thought I was doing great because I prepaid my rent and utilities for the entire year (this sounds great but I had 4 roommates in a 4 bedroom apartment so it was pretty cheap).
That’s where that fantastical thinking ends.
I was never able to actually estimate my income, often overestimate my paychecks. I was terrible at tracking my bills. I got surprised by my insurance bill almost every single month. I was a master of $0 budgeting, in that I was able to spend my money down slowly to $0 right before payday. When my insurance bill came, I’d be lucky to have $100 in my account to cover the $78 bill. This was terrifying and even though I knew it was coming, I was always surprised.
I was lucky to avoid doing anything bad enough to damage or ruin my credit.
How To Avoid
First, you should be tracking your bills. If you’re not actively tracking them, you should be able to name off your due dates for all bills.
Second, you need to learn how to create a budget that works for you. Research different budget strategies, such as 50-30-20 budgeting or look at example budgets. Set guidelines for your spending and saving. Be prepared to make changes to your habits.
Continue to learn about personal finance and modify your budget as needed. I review and update my budget almost every month.
Other Tips to Avoid Money Mistakes
- Tell yourself “no” sometimes.
- Save something every paycheck (1%, $5, whatever).
- Learn what works best for you.
- Having a weekly amount works best for me, both for spending and for savings goals.
- If necessary, open a separate account for your emergency fund to prevent borrowing from yourself.
- If you can’t pay for it with cash, you can’t afford it (excluding buying a house, etc.).
Have you ever made any big money mistakes? How did you recover?