We’ve all made mistakes in our life. You could probably see my biggest financial mistake coming a mile away if you were paying attention.
My biggest financial mistake is a common story – lots of credit card debt early in my career – mixed up with some tax debts and a new-to-me car.
It’s 2007 and I have just finished two degrees the year before. I’ve started working in my chosen field, making a decent living but not rocking out just yet.
I’ve been living in a nice apartment for the past few years, by myself and no roommate. Before that, it was a series of apartments with roommates and college dorm rooms. Pretty typical for college and grad school life, I think.
I’ve got about $30,000 in student loans. No credit card debt, but really high limits. Like crazy high. Awesome credit score.
I’m tired of living the broke college life.
My lease was coming up for renewal in the Fall of 2007. The apartment people let me know what the new rates would be, and it was pretty shocking. I thought to myself: I could be paying a mortgage for that kind of rent! So the search was on.
Oops… Shouldn’t Have Done That
I found a nice townhouse to buy in a good part of town. But that wasn’t the biggest financial mistake. In fact, the townhouse turned out pretty good. After I decided I didn’t want to live in the townhouse anymore, it became a nice rental property (current maintenance issues aside. It proves that you need a home maintenance budget.)
No, the biggest financial mistake was in the “stuff” to furnish the new townhouse.
My apartment had been filled with a lot of hand-me-down and cheap Walmart/Target furnishings. I decided that my new townhouse was the adult version and it needed to reflect the new adult me. All the old and cheap furniture had to go!
So, I ran up credit card debt getting:
- New Dining Room Table from Crate and Barrel
- New Dining Room Chairs from somewhere online
- New Home Office Table/Desk from Crate and Barrel
- New Big Screen TV and surround sound
- New Bedroom Furniture
Fortunately, I knew that I would have a temporary roommate (family member) for a little while so I didn’t need to furnish the second bedroom. And it took me forever to find a sofa that I wanted, so I lived with the old one.
But all that other stuff, it was a big bill already. Thousands of dollars worth of stuff all at one time. All told, it was probably in the $20,000 range. Not exactly sure anymore though. And eventually, I furnished that bedroom and got a new sofa, adding to the debt before it was all paid off.
It was 2007 and the credit life was good. Until it wasn’t anymore.
The Recession Hits
Late 2007, the economy started it’s descent into recession. I wasn’t paying attention to what was going on in the global economy and was still buying stuff.
The recession was someone else’s problem. It hadn’t affected or touched me yet. I had my townhouse with long-term plans to live there. I was making money and paying my bills, even if I was carrying a balance on my cards.
In the spring of 2008, I took a trip to New York. I had gotten a good cash inflow and was feeling like the money was burning a hole in my pocket. We wanted to go shopping! And what better place than New York City?
Credit Went Poof
The week after getting back, the credit card companies were trying to limit their exposure. They were cutting credit limits left and right. My oldest credit card had a $25,000 limit cut to $500 (the current balance on that card). When I called to ask why, they decided to just close it completely.
All my other cards cut the limit to whatever the current balance was. I suddenly had no available credit on any card! And I’ve always lived off my credit cards for everything (still do in fact. I just pay off the balances in full each month now).
I remember being out to lunch with a friend and my credit card getting declined. Fortunately, I had enough cash to cover it or a different card. But that was embarrassing. I never wanted that to happen ever again.
In September 2008, I had a credit card balance in excess of $26,000 with interest rates from 8.99 to 23.99%. In one year since buying my townhouse, I had racked up $26,000 in credit card debt all because I was tired of living like a poor college student.
Credit Score Also Went Poof
When the credit card companies cut the limits, I was using close to 100% of my available credit. The scoring companies hate this and dinged me as such. Also, when they closed my oldest card, my length of credit and average age of account went down. All big hits on my credit score. Fortunately, I wasn’t looking to buy anything on credit right then and it wasn’t until 2010 that I needed to use it. By then, my credit had improved remarkably but the score was still lagging quite a bit. I was able to finance the new car (ugh!) but I know it could have been an easier process and a better rate if I had a better score at that point in time.
2008 was my wake-up call. I had been reckless with my spending, on stuff that didn’t really matter. It was time to get things under control.
I used the debt ladder payment method to payoff my cards – starting with the highest interest rate and working my way down. The first half – about $13,000 took until October 2010 to payoff. It took 25 months to payoff the first $13,000.
I didn’t payoff the second half until just recently, in December 2015, when I got a nice bonus.
Those don’t seem to be impressive pay down rates until you realize that life got in the way.
Not a Straight Line
There were some blips in there when the balance went up. It definitely was not a continuous declining line. My big hurdles to paying off my credit cards became taxes and cars.
During part of the time between 2006 and 2012, I was self-employed or working as a contractor. In other words, no W-2 income. While I didn’t have withholding on each paycheck, I was also responsible for the employer portion of the taxes (self-employment tax). I had researched what the interest rate and penalties were for not paying through withholding or estimates and using the extension. I figured out that at that point in time, the interest rate was lower on income taxes than some of my credit cards. So I did minimal withholding throughout the year and paid it all on October 15 when the extension was due. But for September and October, the credit card balances would climb while I was paying the taxes. Then they would start declining again when I focused back on the credit cards and not paying taxes.
I know I could have paid the cards off faster, but at the same time, I ran into an issue where my car was no longer reliable. Without public transport options where I live and work, I had to purchase a new vehicle. By this point, in 2010, I was better equipped to handle it. I knew I didn’t need to buy the fanciest car. Instead, I bought a two year old used car with low mileage. For whatever weird reason in my brain, car debt is worse to me than credit card debt (even at a lower rate). My main focus became paying off the car instead of the credit cards.
The Master Spreadsheet
In 2008, when I got my wake-up call, that’s when I started getting my financial house in order. It was time to get over my biggest financial mistake. The “Master Spreadsheet” was born.
Tab 1: Cash flow. I forecasted out my income and my expenses for the entire year. As time went by, I changed forecasted to actual so I could make necessary adjustments.
Tab 2: Liabilities. I listed out all my credit cards and loans, added columns for balances, due dates, and interest rates. This I updated as the balances changed.
Tab 3: Net Worth. I listed out every asset (minus consumables, so all that furniture and stuff wasn’t included) and every liability. I updated this tab monthly as I progressed. Eventually, I started forecasting on this tab as well, seeing when things would be paid off and what the differences would be if I added a little extra here or there.
Over time, the Master Spreadsheet has grown. It currently has 29 tabs, although most are dormant. Each loan has an amoritization schedule broken out to the monthly payments. As my financial house has gotten more complicated, the Master Spreadsheet now has tabs for investment accounts so I can track the purchase price, the growth, etc. Special savings accounts have tabs. I even have a goal that is just for listing and tracking specific goals (pay off credit cards, pay off house, special purpose saving, emergency fund growth, etc).
Why The Master Spreadsheet Worked For Me
I didn’t want to stop living life while I paid down my debt. No drastic measures here because I knew that I wouldn’t be happy and wouldn’t do well in that environment. I still got my nails done and my hair “did.” I went on some vacations, although I did pick more reasonable ones than around-the-world trips like some other people were doing. I still partook in some expensive entertainment options (still do today) with concerts and sporting events.
But the Master Spreadsheet let me know when I could and when I needed to forego one of those things. I had goals on how much I wanted to be paying down each month. It was in that Tab 1 Cash Flow Forecast. I really hated when I had to adjust that and pay less than the forecast.
The Master Spreadsheet became a game. What could I do to make the cash flow increase, the liabilities go down, and the net worth go up. Was I doing better than last year? What about two years ago? As long as the numbers were going in the right direction, I was ok letting myself live a little. But when things were going the other way, even temporarily, then it was time to reign in some more spending.
Or see where I could make the biggest changes for the biggest impact. Does putting the money into savings or investing work best? What about paying down the mortgage early? It let me know exactly when I could request the PMI be cancelled on the mortgages. It became my tracking document to keep everything in order and help make decisions.
The Debt Payoff
All told, I’ve paid off over $85,000 in debt since Fall 2008 (not including mortgage or student loans). Today, I have only three debts: mortgage on my primary residence, mortgage on that townhouse turned rental property, and my student loans (see why I am not paying my student loans off early). My credit lines have improved, although not to the pre-recession limits. And my credit score has bounced back and is even higher than it was pre-townhouse purchase.
I’ve also managed to build up retirement accounts and cash savings. I’ve gone from a negative net worth to a net worth on track for early retirement (not a crazy early retirement but I also won’t be working at my desk until the day I die).
I don’t blame the recession or the credit card companies. I spent way too much money leading up to that point. The recession was just the wake-up call that I needed. I still use the Master Spreadsheet today to drive decision making and track my progress.
What Was Your Biggest Financial Mistake?
Americans currently owe over $1 trillion in credit card debt with average monthly balance of $9,600 for borrowers who don’t pay their cards in full each month. I definitely was not the only one a decade ago with a bunch of credit card debt. Fortunately, I was able to overcome the biggest financial mistake I’ve made, pay off the debt and keep going.
How about you? Comment below to share what your biggest financial mistake was. And how you overcame it. Don’t be shy and feel free to use a pseudo-name if you don’t want to tell us who you are. It’s best to learn from others’ mistakes and to know that if we are not alone in the mistakes that we make.