Thursday, February 4, 2010

Mistakes I Have Made Over the Years

 Buying brand new cars was one mistake I made.
Fortunately, I did it far less often than some folks do.

In reading this blog, I hope you don't come away with the idea that I know everything about finances.  Nothing could be further from the truth.  Almost every entry in this blog is based on horrible financial mistakes I have made over the years.

How have I been successful in spite of all that? Well, for starters, I have a decent income. And I got lucky in the Real Estate business - and got out before it crashed.

But others are not so lucky. They squander as much (or more) as I did on junk and don't have the income to bail themselves out of it. And a lot of unlucky folks bought investment Real Estate, paid too much for it, and didn't cash out when they could.

Such folks are facing serious hardship today. And that could have been me, if I had made a few decisions differently.

But seriously, I could easily be a million dollars richer today if I had made different lifestyle choices earlier in life. And by that, I don't mean living like a monk and eating bread and water. But there were a lot of things I spent money on that turned out to be bad bargains, or worse, worthless. And there were times I could have saved a few dollars when instead I chose to spend.

What mistakes did I make? The catalog is huge. Where do I begin? Well, let me list a few real boners that come to mind readily.

1. Drugs: My later older Sister thought it would be a good idea to turn me on to Pot when I was 13 years old. The next decade of my life was affected by this. I could have chose to say "No" but did not. And I knew, deep down, at the time, that the drugs were affecting my life negatively, but of course, being stoned all the time prevented me from changing my behavior. In addition to the thousands of dollars in money spend on drugs, being stoned all the time meant I made a lot of bad financial decisions, often to have consumer goods now, instead of saving for later. I was fortunate in that eventually, I figured out that the drug thing was a dead-end trap, and the key to real happiness was to be independent. People on drugs may be "functional" at best, but that's not really a life. It is hard to put a cost on the effects of drug use. But assuming I spend $100 a month on pot, over a decade that comes to $12000. At 5% compounded interest, that comes to $84,000 at retirement.

But the real cost of drug use is far more, as it lead to many of the other bad financial decisions I made at the time - and later on. I was fortunate enough to quit, finish college and go to law school. If I had stayed with the drugs, I would have ended up as some underemployed impoverished "stoner" like my old drug friends.

2. New Cars: In my lifetime, I have purchased five new cars, mostly when I was younger. I could have purchased a similar used car for 20-30% less than the new cars I bought and saved a bundle. And in every case I bought a new car, I did so for reasons unrelated to actual need for a car - I already had a working car in my driveway that could have been driven reliably for a few years more. But ego (the desire to have something "nice") made me trade-in or sell perfectly serviceable, "paid for" vehicles in exchange for monthly car payments, high insurance rates, and rapid depreciation. I estimate that I wasted at least $50,000 this way. Compounded over time at 5% interest, this would amount to $169,000 at retirement (!!).

I could have done a lot worse. Many middle-class people buy or lease brand-new cars every 2-3 years and claim "we can afford it". Well, they can pay for it, only because they are not fully funding their retirement plan. So no, they really can't afford it.

3. Cashing in a Retirement Plan: When I left GM, I was paid out a modest sum ($2500) as part of my retirement plan. I could have rolled this over into a IRA, which at retirement, would be worth $18,00o (invested with a modest 5% rate of return). What did I do with the money? Bought a cheap Japanese motorcycle. Duh. I needed that like a hole in my head! I sold the motorcycle and probably bought pot with the money. Double duh!

4. Mortgage Refinancing to Pay off Debt: Like everyone else in the go-go 1990's, the temptation to refinance a high interest rate mortgage to pay off debt was too strong. Yes, it can be a good idea to refinance a mortgage if your interest rate is too high. And yes, a refinance can be a good way to get a fresh start on your finances - provided you stop spending like a drunken sailor. But like everyone else, we went out and ran up debts again and repeated the process. We were just lucky enough to "cash out" before it all went horribly wrong. I estimate we easily overspent $50,000 this way. Again, this comes out to $169,000 at retirement.

Others were not so lucky. The refinanced again and again until they used up all the equity in their homes. Now they owe more on their houses than they are worth! At least I avoided that trap.

5. A Boat Too Far: We wanted a boat for Florida, but wanted something "reliable" and newer. So we spent $65,000 on a newer boat. We could have had the same boat, as 5-year-older model for $35,000. Five years later, it is worth half what we paid for it (typical of any depreciating motorized asset). We could have saved nearly $15,000 by buying an older, cared for, boat instead. Cost at retirement: $25,000.

Again, I count myself lucky. A friend of mine went out and paid $300,000 for a boat. When I asked him if he could afford it, he replied "Well, the bank says I can!" Ouch. At least we paid cash for our boat, so when it came time to sell it, we had no liens to pay off. Many folks who bought boats in the go-go 2000's ended up "upside down" and had to walk away from them.

6. Home Improvements: Home improvement shows tout the idea that you can increase the value of your home by remodeling a kitchen or bath. What they don't say, and what every Realtor knows, is that the increase in value is usually LESS than the amount spent on remodeling. So while a kitchen and bath add the most value, it is still 90 cents on the dollar. I can only say I am glad we did not opt for a $150,000 home overhaul, which would have put a new house on top of a shoddy foundation ("Dressing the Pig" they call it). We easily overspent $100,000 in room additions, remodeling efforts, a swimming pool, gardens, etc. We could have had these things, or some of these things, scaled back, for far less. Money lost at retirement: $340,000.

Again, we count ourselves lucky in that a developer offered us far over market value just for the land. Other neighbors, who had poured hundreds of thousands of dollars into remodeling their homes couldn't sell, even at the inflated "buy-out" prices. If not for that developer's offer, we'd be stuck in that house, perhaps upside down (or darn close to it).

7. Car Mods: I like to tinker with cars. But over the years, I realize that this can be a money-saving hobby, if you can do necessary car repairs yourself. It can also be a money-squandering hobby if you do unnecessary modifications touted by the car magazines as "upgrades". I've easily spend $10,000 trying to "upgrade" pedestrian cars which were perfectly serviceable with their stock parts. Total cost at retirement: $26,000.

I learned from this experience and decided that the catalog companies and car magazines were not my friends. If you like to tinker with cars, you can SAVE money by doing your own repairs. "Mods" just squander money.

8. Being Careless With Money: When I was a "working stiff" at the factory, I had all the bad habits of a factory worker. I would cash my paycheck at the bar, or cash checks at the corner grocery to buy beer and junk food. I wouldn't keep track of my money and bounced checks with regularity (causing more charges to my account). I tried to play "big shot" by buying drinks for friends. They never returned the favor. Hard to figure out an exact cost here, but with bounced check fees and the like, plus excess spending, I'll peg it at $10,000 at age 23, which is like $70,000 at retirement.

Since then, I have been getting progressively more aggressive about tracking money, to the point today where almost every purchase, even small cash purchases, are logged in Quickbooks. I can now tell you, to the penny, what I spend on different things. And I now know how much I'll really need for retirement.

9. Speeding/Insurance: The subject of a future article. When I was young, I was impatient and drove fast and tailgated. Stupid. I got tickets and my insurance went through the roof - over $3500 a year! And since I had a car loan, I had to buy collision insurance. Double-stupid. The cost over my first decade of driving, was easily an excess $10,000 in insurance and speeding fines, as well as lawyers fees. Again, another $70,000 at retirement.

I drive the speed limit, or at most 5 mph over. It is far more relaxing and I get there just as quickly. Speeding really doesn't save time. And tailgating really wrecks the paint on your car.

10. Borrowing money unnecessarily: As a young person, I wanted to have "things" - cars, motorcycles, a water bed, a stereo, etc. I thought that having things was a sign of wealth, because my friends had these things and we were all envious of them. I realize now, that my friends were in hock up to their eyeballs to have these things, often paying high interest rates for cheap consumer goods. I borrowed less than they did, but still, I ran up interest charges in the thousands of dollars for no reason at all, other than to stroke my own ego. Another $10,000. Another $70,000 lost at retirement.

I have not had a car loan in nearly a decade. We pay cash for all our purchases, or do without. If you can't save up the money for something, don't get it, period.

11. Cable TV: When I was young and poor, for some reason I felt I had to have cable TV, even though it cost the staggering sum of $35 a month. Later in life, I signed up for a deluxe plan that cost nearly $75. What the frick was I thinking? Cable makes you fat and slovenly and promotes sloppy, stupid thinking. Watch Cable TV and you WILL end up a blithering idiot, babbling on about "America's Idol" and the new season of "Lost". Speaking of "Lost" - that is what happens to your life in the process. I figure at least $3000 in cable fees, but that does not begin to address the damage done! Still, that's $13,000 at retirement.

We have been cable-TV free for over 5 years now. And we don't miss it a bit!

* * *

These are just some of the "boners" I have made with regard to finances. And we continue to make them on a daily basis. You can't beat yourself up too much over things like this, as we are all prone to weakness on occasion. And when we are young, let's face it, we haven't a freaking clue whatsoever.

As a young adult, I got all my normative cues from television and what my friends were doing. So I thought a hopped-up Camaro was the "ultimate" cool thing to have and that getting stoned and drunk beyond all recognition was a worthy pastime. Saving money so that I could be financially independent just wasn't in the picture, as I felt that being financially independent was not in the cards for me, or that I could do that later in life "when I was making more money".

In reality, if you put aside money when very young, it compounds over time to quite a staggering sum by retirement. And although I did squander a staggering amount of money, I also did manage to put SOME aside, which has now blossomed into a comfortable nest egg. Not as much as some, but more than most.

According to one source, the average pre-retirement household in America has retirement savings of only $60,000. This is a scary small amount of money to have for the rest of your life. And yet, as the examples above illustrate, many middle-class Americans can have (our could have had) literally hundreds of thousands more in their retirement plans, simply by not making boner mistakes over their working careers.

You can live richly while spending less. It can be done.

And its never too late to change!