3672: The Worst Money Mistakes I've Made by Mark Dennis with Financial Finesse on Money Habits

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[00:00:54] This is Optimal Finance Daily, the worst money mistakes I've made by Mark Dennis with FinancialFinesse.com. And I'm Justin Malek, your narrator, reading to you from the best articles online every single day of the year, with permission from the authors. So let's continue the tradition as we optimize your life.

[00:01:19] The worst money mistakes I've made by Mark Dennis with FinancialFinesse.com. What's the worst money mistake you've ever made? This question was posed to me recently by a fellow financial planner. His question certainly caused me to pause and think. Over the years, I'm fairly certain that I've made a number of unwise money decisions, but two in particular stand out as blunders I'm not particularly proud of.

[00:01:50] Borrowing from a popular late-night TV sketch, let's take a look at some of the silliest money mistakes we've all done or seen and see what useful life lessons we can take from those. Number one, buying a timeshare. While honeymooning in Mexico, my wife and I fell for the sales pitch and bought into a long-term resort condo timeshare. For those who like to travel frequently and also have the budget to support that lifestyle,

[00:02:19] vacation timeshares might be a reasonable move. At that point in our lives, however, young, early career, modest incomes, we were not the ideal candidates. We also did not pay attention to the ongoing additional fees often tied to timeshare ownership. Furthermore, we had no idea how illiquid these quote-unquote investments are. As anyone who has ever tried to sell a timeshare to someone else can tell you,

[00:02:46] the supply greatly outstrips demand. In other words, selling your timeshare is close to impossible. If you do find a buyer, expect to sell at a very deep discount to what you likely paid for the property. What I learned from this mistake. After many years and thousands of wasted dollars, we were eventually able to dump ours and walk away. What important financial life lessons did we learn?

[00:03:15] Ultimately, we learned never to make a major financial commitment driven primarily by emotion. We were young, on our honeymoon, in a beautiful location, and all too agreeable to an opportunity to repeat that experience. Marketers, of course, are very aware of this, and we fell for it all. Now we know it is much better to first say no, and then take plenty of time, days, weeks, or even months, to think things over

[00:03:44] before committing thousands of dollars to purchase something we may or may not use, or continue to enjoy, as much as we originally thought. As a result, we've avoided the purchase of numerous boats, campers, and vacation homes over the years. These days, when we want to vacation in a fun location, plenty of economical rental choices are available through sites like Airbnb.com or VRBO.com

[00:04:11] without the long-term commitment or expensive maintenance fees. And number two, student loans, sometimes. Student loans can be a good investment. You can leverage other people's money into an education that boosts your future income significantly, making the comparatively small amount of interest you pay in the short run well worth it in the long run. However, like any financial tool,

[00:04:40] student loan debt can also be abused or misused. For example, at one point in my career, I decided earning my MBA might be a good move, and I applied for student loans to help finance this venture. Along the way, however, my career ambitions took a different tack, and I elected to focus instead on earning my Certified Financial Planner designation, and subsequently, a master's degree in personal financial planning, a decision I have never regretted.

[00:05:10] Although I had abandoned my MBA pursuits at the time, the student loan debt used to finance that pursuit remained and still had to be paid. Fortunately, I not borrowed a large sum for this, and we paid it off fairly quickly. What I learned from this mistake. The financial lesson here is to carefully consider the commitment of time, effort, money, and ongoing personal motivation needed

[00:05:38] to make a particular career choice work. If a substantial amount of student loan debt will be necessary to obtain a degree, we need to be prepared to remain committed to that career choice, at least, until we repay the student loan debt. Otherwise, we will very likely be stuck with paying for a decision error over many, many years with zero return on our investment. Another consideration is whether or not the degree we are pursuing

[00:06:06] really has the future income potential to justify taking on large amounts of debt to finance it. To err is human. As financial planners, we have the benefit of working with many people from a variety of backgrounds and circumstances. This not only gives us a front row seat to many of the money errors and financial regrets our clients have endured, but it also enables us to share the related financial lessons with others. In no particular order,

[00:06:36] here are a few of the more common silly money mistakes that can provide helpful lessons for us all. Number one, carrying long-term credit card debt. The insidious evil of carrying credit debt month after month is the reverse compounding effect. Just as positive compounding helps us become wealthy by earning interest on interest, the reverse is true of debt. The negative compounding begins to make our credit purchases

[00:07:05] exponentially more expensive over time. Transferring balances to a 0% balance transfer card or otherwise refinancing to a lower interest rate is a good start to reducing our debt risk. The quickest way to get out of debt, however, is to employ the debt blaster approach we recommend at Financial Finesse and pay off the highest interest debts first, gradually rolling up those monthly payments until the last credit card in the list

[00:07:34] is receiving a monthly payment equal to the combined payments you were making on all of your cards. Number two, lending money to family. Money decisions driven by emotion rarely turn out well, and what gets more emotional than a plea for money from a family member. If you do lend money to family, most planners recommend formalizing the loan with a written agreement that includes at least a modest amount of interest. Practically, however,

[00:08:05] treat it the same way you would treat giving money as a gift. Make sure your family loan won't negatively impact your own cash flow if your family member borrower cannot or does not pay you back. These arrangements work best if you don't expect to receive the money back in the first place. And number three, borrowing from your retirement plan. On the surface, borrowing from your traditional 401k or 403b savings plan at work might seem harmless,

[00:08:35] but it has some obvious and not so obvious risks. On the positive side, you are borrowing your own money and paying yourself back with interest. Furthermore, doing this will not affect your credit score one way or the other. However, you will be paying your retirement plan loan interest with after-tax dollars. The not-so-obvious downside to this strategy is that the same after-tax dollars you use to pay the interest

[00:09:04] will be taxed again when you eventually spend this money in retirement. Financial planners are just as human as anyone else. And in many instances, we were not always professional financial planners our entire careers. We've made many of the same money mistakes our clients sometimes experience. Consequently, we understand and have compassion for the frustration and disappointment that comes from looking back on a financial mistake

[00:09:33] and wondering how on earth we could have been so foolish. Although our individual silly money mistakes may have been expensive, they do not need to be permanent and we can always learn from them. You just listened to the post titled The Worst Money Mistakes I've Made by Mark Dennis with FinancialFinesse.com And I'll be right back with my commentary. Support for today's episode comes from Square,

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[00:10:57] That's S-Q-U-A-R-E dot com slash G-O slash O-F-D. Run your business smarter with Square. Get started today. This episode is brought to you by Accenture. When your advertising operations fall out of sync, everything else follows. Spotify and Accenture are working together to reinvent the rhythm of ad sales. Using automation, analytics, and smarter workflows to simplify campaign delivery

[00:11:26] and access better data across the business. The result? Less time spent on operations, more time connecting brands with the moments and fandoms that matter most. Learn more at Accenture.com slash Spotify. Thank you to Mark. I appreciate his honesty. It's reassuring to hear about a financial planner admitting he bought a timeshare on his honeymoon and took out loans for a degree he didn't finish. It's a good reminder that nobody has this all figured out.

[00:11:55] And he has a good point about emotion. The timeshare mistake really came down to making a big financial commitment in an emotional moment. And I think that's where so many of our money regrets come from. We're happy or we're stressed or we're caught up in a moment. And someone who does this for a living is right there ready to close the deal. He has a good fix, which was simply to say no first and then give yourself time,

[00:12:25] days, weeks, even months before committing. Because the thing you want in that emotional moment almost never feels as urgent a week later. It's the same idea we come back to a lot on this show, just adding a little space between the feeling and the decision. So the next time something expensive is calling your name, especially when you're feeling something strongly, try saying not yet instead of yes.

[00:12:55] Give it a week or longer if you can. If it still makes sense then, I'm sure it'll still be there. So thank you to Mark for this one. And thank you for being here. Have a great rest of your day and I'll see you tomorrow where your optimal life awaits.