Cocoa the dog with Sarah O’Brien the personal finance reporter
You might think that a person who covers personal finance would be naturally smart about the money in their personal life.
Uh no. Not at all.
Financial stuff for adults? My mistakes have been numerous. How long has this lasted? I’m closer to the first Social Security member to claim 62 than when I was a know-it-all, 20-something, Gen X member.
i am not proud of financial mistakes I did. Still, I’m sharing a few of the most important ones in the hopes of educating others – or at least assuring people that if you’re in my boat, you’re far from alone.
For those who are right, I salute you. And I hope you don’t cringe or suffer the horror of turning your stomachs upon reading my mistakes. (If you’re a glutton for punishments, however, there are plenty more where they come from).
It was 2015 and my car needed a repair that I couldn’t afford to pay for. My car had also driven many miles – somewhere around 120,000 – and it had died spontaneously on top of me on several occasions. In other words, I was no longer in love with my car after owning it for four years.
So I ended up exchanging it for a new one. It probably wasn’t that bad in itself. The problem was, the amount the dealer gave me on my trade-in was less than what I still owed on the loan.
So I transferred the balance – what is called negative equity – into the loan for the new car. This meant that in order to pay the monthly installments, I needed to extend the loan.
It is now 2020 and I will be making payments on the car until 2022. It has about 125,000 miles. And guess where this must-have car is as I write this: awaiting service at a dealership – it was towed there due to an engine problem.
What I should have done, assuming I made a commitment to buy a new car, was to buy something that I could actually afford and that would serve me well for the life of the loan.
Negative equity rollover is a growing phenomenon in the world of auto sales. Earlier this year, 44% of car buyers were doing so, amounting to more than $ 5,500 on average, according to Edmunds, an auto research firm and online buying guide.
Credit Cards and I have had a difficult relationship over the years. I would go into debt, realize I was in trouble, hide my cards (sort of) and focus on repayments. And then somehow the cards were pulling me back – and I would reload them again.
There can be many reasons to trust a credit card that have nothing to do with self-discipline. With so many people living on paycheck after paycheck, any unforeseen expense could be unmanageable from a cash flow standpoint. The Coronavirus pandemic has also made this reality sharper.
My mistakes with credit cards, however, are largely related to both a lack of self-control and a budget. In other words, I was spending my income, and if I was missing, one expense or another ended up on a map.
As a consumer, it can be difficult to resist the idea of immediate gratification – that is, purchase – and easy to ignore the delayed pain that is likely to ensue.
Yet when you look at how much debt costs, it can deflate. On a $ 5,000 balance at 15% and a minimum payment of $ 150, it would take 44 months, or almost four years, to pay it off, and you would have paid over $ 1,500 in interest during that time.
Transferring high interest debt to a 0% card can be just a reprieve. If you do not receive the balance during this introductory period, the rate will increase and the credit card company will have no mercy.
Experts generally recommend that you do not carry over a balance from month to month. Obviously, most of us don’t buy into this. Our collective credit card debt exceeds $ 900 billion, according to the Federal Reserve.
Those stories you’ve read about investors buying certain stocks after a rise for fear of missing out? Yes, I was one of them.
In early 2000, I watched the Nasdaq Composite Index – the barometer indicating the performance of technology stocks – climbed to just under 5,000 from around 2,500 in less than a year. It didn’t matter that then Federal Reserve Chairman Alan Greenspan warned in 1996 against investors with “irrational exuberance” in the stock market.
Mind you, the late 90s were an exciting time for tech stocks. As dot.com after dot.com went public – many with no income to speak of – and their employees became millionaires overnight on paper due to stock options, I suffered from ‘a desire to invest.
I had an Individual Retirement Account, also called an IRA, that my dad helped me set up when I was 21. I had put my money into a growth and income fund. By the turn of the century, I was convinced that I was lacking it and that I had to be in tech stocks.
I decided on all of this without any professional advice or guidance. I was just certain tech stocks were the destination for smart money.
Now, that cohort had been there before and was about to come out.
I transferred half of my IRA to a technology fund. In about nine months, its value had been halved.
Now notice that it wasn’t a ton of money that I transferred, given my relatively low IRA balance. Yet after seeing this part of my portfolio drop by 50% in value, I told myself, based on general expert advice, to stay invested.
I stayed there – for about 15 years. And then, with the balance having returned to my initial investment, I sold the fund and put it elsewhere. And guess what happened. Tech stocks started to climb higher and higher.
Not only have I chased returns, but I made my decisions in a vacuum. That is, I had no expert input and I did not place my investments in the context of my short or long term goals.
Bottom line: I encourage everyone to do better than me. Get professional advice.