If you are reading this, congrats and thank you for continuing on this journey with me! The most important step is taking action. By reading past my introductory post, you are taking action to make your financial (and personal) future brighter! I promised in my last post that I would start off by sharing the things that I have done right and that I have done wrong financially. The list of what I have done right is short and recent. The list of what I have done wrong is loooooonnnnnngggg. Honestly, there are probably not many people out there who have made more wrong financial moves than me. So take this whole list as encouragement even if you relate to some, many, or all of the mistakes that I’ve made. If I can begin to emerge out of the financial pit that I have dug for myself, so can you! For this reason, I’ll start by sharing this “uh-oh” list of mine before going into the few things that I did right as well as what steps I am taking to correct my past sins in the next couple of posts.
Quick aside – I just finished reading Rich Dad Poor Dad by Robert Kiyosaki. I bought this book for about $5 and I am sure that it will make me many thousands more than that (file this in the “right” column). In his book, Robert discusses failure a great deal. On its face it may seem odd that a book on creating great wealth spends so much time on failure. He goes on to share his philosophy, which I agree with, that losing inspires winners while it defeats losers. It’s ok to hate losing, but not to be scared of losing…that leads to a fear of trying and a guarantee of not succeeding because you’re playing not to lose rather than to win. I’ve applied this concept to many areas of my life successfully without even realizing it. But when it came to finances, I was scared of losing, so I didn’t even try. And what happened…things got worse, my lack of trying was actually making me lose and guaranteeing that I didn’t win.
So now, when I go through these missteps with you, I get even more inspired and focused on my goals of personal and financial well-being…losing is now helping me to win. That has made all the difference for me and I encourage you to adopt that mindset with your finances as well. Get angry and get motivated by your mistakes, the best day to fix them was yesterday, but the second best day is today!
Editor’s Note: I initially planned this as a single post, but my mistakes are many and I really want you all to learn as much as you can from them. So, for the sake of not giving you too much all at once, I’ve separated them into 2 posts, Part I (Mistakes 1-5) and Part II (Mistakes 6-10). Enjoy!
Mistake #1: Spending up to my paycheck
Unfortunately, I think this mistake is all too universally common. I must admit that before I started my journey to financial well-being, I just sort of assumed that spending what you make is just what you did. It’s a testament to the advertising and marketing machinery that I was conditioned to respond to each pay increase (yearly raise, tax refund, etc) by buying something. I did not save wisely, or pretty much at all, throughout my 11 years of post-undergraduate training.
I always told myself that I would worry about saving when I started making more money, but as I came closer to this increase in pay, the price tag for an increase in lifestyle struck me – a house, cars, daycare, furniture, new toys, you name it. I’ve had so many attendings or other high income professionals groan as they told me “the pay gets high as an attending physician/lawyer/etc. but the costs get even higher.” As physicians, we abide by the “suffer now, it will pay off later” philosophy for all of our training as our friends get paying jobs and we sink further into debt in medical school. By the time training is over, we are ready for it to pay off! My advice – pump the brakes BIG TIME.
No matter what your salary is, do not spend it all. Someone who makes a million dollars a year and spends a million dollars is not a millionaire. They are as wealthy as me (a zero-aire?). Someone who makes $75,000 and spends $50,000, they are richer than us both. As Paula Pant describes so well in her blog, you want to “mind the gap.” The gap is the room between what you earn and what you spend. You can grow this gap by increasing what you earn or decreasing what you spend. But the major point is to mind the gap and invest it.
Mistake #2: Paying myself last
This one dove-tails off of my #1 mistake. I paid myself last and as a result, I didn’t pay myself. Each month I made $X and each month I spent $X – that’s a sure-fire way to have a savings rate of 0.00000%. It seems like a no-brainer to say, “well just don’t do that, save money.” But if you are always paying the rent/mortgage, car payment, daycare, groceries, dinners, movies, concerts, etc. first, before you know it there is nothing left. This is what I always had done. I rationalized by saying that I was just spending what I needed to, but I knew deep down I was just equilibrating with what I was brining in every 2 weeks.
I’ll repeat what I said above – do not spend everything that you make. Save! Mind that gap. The easiest way to do this is to pay yourself first. Choose a percentage of your earnings and take that amount out of your slush fund AKA checking account when each pay check hits. Put it in a savings account or investment account and then spend the rest of your earnings guilt free.
What percentages should you save? Some people advocate for a huge savings rate on the order of >50% of your yearly income with a goal of retiring very early. This can be done, very successfully, but requires a great deal of sacrifice and discipline. I recommend at least trying to save about 20% of your yearly earnings, investing it in low-cost broadly diversified index funds. My wife and I had a 0% savings rate last year. Our savings rate is now 31% (including paying off commercial and student debt which I believe counts towards the savings rate).
Mistake #3: Not paying off any debt
Since I mentioned debt, let’s hit that topic. I have a lot, like A LOT, of debt. I went to a private undergraduate and medical school. I paid for every cent of it in loans in my name. Private loans, federal loans, subsidized, unsubsidized, you name it, I have them all. They stressed me out terribly. But I knew nothing about finance and was intimidated to learn anything, so I ignored them. I deferred them through medical school and all the way through my training in plastic surgery which was another 7 years.
Each year, I would have to fill out more paperwork to defer my loans and cringe at the huge numbers I saw. How in the world could I pay off the huge number I saw. I was making little money, paying New York City rent, with two kids? I’ll tell you how I could have started doing it, by paying myself first – which includes the loans! My interest on the loans went way up, because most of the private loans were variable interest rates – not that I even knew what that really meant until I picked up a book. As of this writing, I owe close to $500,000 in student loans. Yikes. Wish I had started chipping away at that sooner.
The lesson to learn from my ignorance is to attack debt aggressively, especially consumer and high interest (>8%) debt. This is a guaranteed 8% return on investment, and there are few better guarantees in finance. This is a form of paying yourself first and should count towards your savings rate. Celebrate each milestone and before you know it, you will be debt free. We now have a plan in place to pay off all of our commercial and student debt in 5-7 years without sacrificing our retirement savings plan.
Mistake #4: Dipping into savings
Ok, to recap…I was spending all the money I was making, I was not paying myself first or saving, and I was not paying off my debt. I did have a savings account, so not all is lost. This was basically an account of all the checks that family had given me for my kindergarten graduation and things like that. It was about $30,000, not too bad, right? What is the worst thing that I could do with this, other than invest it poorly (more on that later)? Yup, you got it – spend that money.
To my credit, I didn’t spend all of it. But, when I would come across a big expense that I felt I needed, this was the fund that I would dip into. Looking back, could I have found an alternative way to deal with these expenses? I’m sure that I could have but this was the path of least resistance. As has been said before, the easy road often gets hard and the hard road gets easy.
Mistake #5: Buying on credit
I know, I know. At this point you’re screaming at the screen trying to stop my former self from doing anymore damage. Too late.
On top of dipping into my savings, I used our credit cards way too liberally. We had one bank card with a decent cash back bonus and no yearly fee. We also had another card that I had used to pay for my travels interviewing for residency as a medical student. We used this card to cover bigger expenses like the fees for my plastic surgery written board exam. The other card we at first used reasonably, paying for large purchases that we had cash for and then immediately paying off the card to get the points. But then we got loose and started using it for things we didn’t have cash on hand for. We didn’t get out of control but we stopped paying it off in full each month. I learned the hard way that the bonus cash back pales in comparison to the interest rates charged by the credit company. Any cash back is totally negated if you aren’t paying the card off in full each month and are accruing interest.
Don’t use your credit card for large purchases until you have the cash to pay it off in the same month. Follow that simple rule and you will not accrue credit card debt.
Ok, we covered a lot of ground. Let’s take a breather and I’ll be back tomorrow with Part II, covering Mistakes 6-10. Remember, I’m sharing this as an exercise to demonstrate the importance of acknowledging your mistakes and lack of knowledge in order to take back control of your financial well-being and eliminate the financial waste in your life. I hope that I’m also demonstrating that if I can start on the right path from such a bad place, so can you! Mistakes will happen. It’s what we do with them that matters. Let’s turn them into lessons leading to our success!
What do you think? Can you relate to any of these mistakes? How did you handle them? Do you think acknowledging our mistakes can lead to our success? Comment below!