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Latest posts by Kumiko Ehrmantraut (see all)
- How to Live Within Your Means Without FOMO - October 29, 2020
Have you ever made a decision, one that seemed like a good idea at the time, only to feel awful about it later? I think we all make these types of decisions in life. After all, it's these kind of decisions that we are supposed to learn from, right? They end up making us better people in the end, but they also leave us with an overwhelming feeling of regret.
When it comes to money and your finances, there are plenty of opportunities to make decisions that you'll be kicking yourself for later. Sometimes these decisions end up affecting more than just your feelings. There is a huge difference between second-guessing a purchase you made the night before and making a major decision that could follow you for the rest of your life.
Here are some of the most substantial mistakes that you can make with your money, and some solutions on how you can avoid them all together.
SPENDING MONEY YOU DON'T HAVE
Let's face it, almost everything in life costs money. You get up and get dressed in clothes that you bought at the mall. You make yourself a cup of coffee that you bought from the grocery store. You get in your car and drive to work using gas you bought at the gas station. Spending money is just part of daily living.
Even though spending money is normal, spending more money than you make is a huge problem. In fact, it's a pretty common problem that has significant consequences. Sometimes, the scope of spending more than you have doesn't show it's ugly face until it's too late. Putting a grocery trip or a few clothing purchases on your credit card may not seem like much, but if you do it enough times without paying off your credit card balance every month, things can spiral out of control pretty quickly. Add interest charges to the mix, and you have a recipe for disaster.
The simple solution – if you don't have the cash to pay for it, don't buy it. If you're already in debt, leaving your credit cards at home might help with these impulse decisions. Credit makes it easy for you to spend money you don't have. It allows you to tell yourself, “I'll just pay it off later or with my next paycheck,” but in reality, there's not enough money from your next paycheck to pay it off.
If you want to know how much money you have to spend, you need to create a budget, and you need to stick to it.
ACCEPTING MORE FINANCIAL AID THAN YOU NEED FOR SCHOOL
This was and still is one of the biggest financial decisions that I regret. Almost seven years later, I am still paying for my bad decisions.
After filing for financial aid, your school's financial aid office usually sends you an award letter. The first step is indicating which financial aid you want to accept and how much. This is where a lot of students make decisions based on the present, rather than thinking about the future. It's so easy to accept everything you were awarded, even though you only need half of it. Why? I can't speak for everyone, but I do know why I accepted way more financial aid than I needed.
I used the excuse of “cost of living.” I told myself, I would use what I needed for school, and the rest would be used for housing and food. The ugly truth, I worked full time during the day and went to school at night. I didn't need the extra money; I just wanted it.
So many students don't know what they are getting when they accept financial aid. To many, it seems like “free” money. The realization that it's a loan that needs to paid back doesn't happen until they get their first bill in the mail.
Always accept only what you need, and start by accepting financial aid funds that don't have to be paid back. Free money that can be accepted is in the form of scholarship and grants. The next financial aid to accept is earned money such as work-study. After these two forms of financial aid are exhausted, then it's time to look into borrowed money (federal loans).
When excepting financial aid, start from the top of this list first and then work your way down:
- Scholarships and Grants
- Work-Study
- Federal Student Loans
- Loans from your state government or your college
- Private Loans
Remember, it's ALWAYS okay to accept less loan money than the school offered. Only accept what you need.
BORROWING FROM YOUR 401K
If you are in a bind, with no other resources, this option might seem tempting. Believe me; I've done it. After all, you've worked hard for this money, shouldn't you be able to use it when you need it? If your plan sponsor does allow you to borrow from your 401k, then the answer is “yes.” But just because you can, doesn't mean you should.
Borrowing from your 401k is always a bad option, and here's why. Essentially, when you borrow from your 401k, you are taking a loan. Yes, that's right. You are borrowing money from yourself. Usually, you have five years to pay the money back with interest. If you end up leaving your job before the loan is paid back, you usually have to pay it back within 60 days of leaving, or it's considered a distribution and taxed as income.
Not only are you paying interest on your own money, but you're doing it with after-tax dollars. You will have to pay taxes on those same funds again when you withdrawal the money in retirement. This is known as double taxation. Who wants that?
You are also missing out on any compound growth that your investment would have earned if you didn't take the loan.
Most people stop contributing altogether or decrease their contributions for their duration of their loan, so they also miss out on any company match. To me, that's like throwing free money away.
If you are borrowing from your 401k to pay off debt, save yourself from regret, and look into every other option first. Look into getting a second job, set up a debt payment plan, work with a credit counseling agency such as the National Foundation for Credit Counseling who can help you work with your creditors to establish a repayment plan that can lower the interest rates on the debts you're trying to pay off.
ONLY MAKING THE MINIMUM PAYMENT ON YOUR CREDIT CARD
I was guilty of this for years. It's what kept me in debt for so long. Do me a favor. The next time you get your credit card bill in the mail, find the little box (usually on the right side of the statement) which tells you how many years it will take for you to pay off the balance if you only make the minimum payments. Once you see this number, it should kick you into high gear to pay it off. Who wants to make credit card payments for the next 23 years?
So what makes it take so long to pay the balance off when you only make the minimum payment? There is only one answer – interest.
For example, if you have a $5,000 balance on a credit card, and the minimum payment is 4%, or $200, it will take you over 11 years to pay off and over $3,000 in interest payments.
The best thing for you to do if you are carrying a balance on your credit cards is to stop making new charges. If that means you have to freeze your credit card in a cup of water, then do it. Stop using it. You could also look into transferring your balance to a lower-rate card to save on interest. Thus, more of your payment will go to principal. Every small increase to your monthly payment will help.
When it comes to making decisions with your money that you will regret later, the most important thing to remember is to live within your means. Create a budget that works and stick to it. That's one decision you won't regret.
Have you made a money decision you are now regretting? Let me know about it in the comments below!
Thank you Kumiko for writing about the minimum payment issue! I hate how credit card companies make it seem as though the minimum payment is the norm when paying off the balance actually is!
So true Jing! Thank you!
Ugh. One money decision I still regret to this day was in 2008 when I invested a portion of my down payment in Blackberry and quickly lost $16,000. I felt sick. Every day I wanted to vomit.
I made multiple mistakes at once. One was investing part of my down payment. Another was not diversifying. Another was investing way above my risk tolerance.
The one benefit from my terrible terrible decision was that I started to learn about investing and personal finance. I’ve probably made money from that terrible decision in the long run. It was a real kick in the @$$ and it made me save and invest more than I would have.
This is so true Owen. Investing above your risk tolerance and not diversifying properly can cause some scary problems. But it sure does make you learn quickly 🙂 Thank you!
This is really great advice! I too was guilty of 3 of the 4 things listed. I regretted student loans for years – I finally had enough which led to our (my husband and mine) journey of paying off $100,000 in student loan debt in 26 months. It was a wild ride that led to SO many revelations about ourselves and who we want to be in this world.
Thanks for putting out such great advice! Keep up the good work!
Hi Kumito,
That were 4 points need to be known by the people who don’t care about their money.
That financial aid point is a great one. I was blessed to have my parents pay cash for college so I didn’t have to deal with this. In recent years though I’ve spoken with a lot of recent graduates (and some people 20+ year past graduation) dealing with student loans – and only then did I realize just how much can be borrowed and spent beyond “hard” college costs. It can really get out of hand if someone isn’t careful!
I used to overspent on mostly everything and regret later. But now I understand the value of saving. Thanks for the great tips.
Hey Kumito, Thanks for the post on preserving money to not regret in future.
The crystal clear information I have found, and everyone should aware of this, can I share this with my community? because someone could get the benefits right?
Great tips. I should apply some. Thanks for sharing!