Seven Ways to Ruin Your Financial Future

Often times the best way to learn a lesson is for someone to tell you what not to do.  While there are many people willing to tell you all the smart moves to make with your money, only a few are willing to share their own screw-ups.  Well, if you’ve been reading this site for any length of time, you know two things about me:  I’ve made my share of screw-ups, and I don’t mind sharing them if it will help someone else from making the same mistake.  So with that in mind, I offer up the following seven mistakes we made along the way.

  1. Lease a new car.  I was young and dumb, and actually believed that the car dealership didn’t care whether or not I leased the car from the them or financed it.  I mean, that is what the salesman said and he seemed genuine.  Wrong!  They saw me coming a mile away!  I had just landed my first professional job and had been eying a new SUV for a long time.  It never occurred to me to buy a used car, save and pay cash, or shop for an auto loan with better terms.  I would just lease it and turn it back in for a newer one a couple years later.  Well, in a couple years I had made virtually no dent in the residual payoff balance leaving me with an upside car loan, or lease in this case.  I had exceeded the maximum allowed mileage and sustained the usual dings you get from driving a car for a few years.  There was no way I could simply “turn it back in.”  So, I kept it, and paid for it for a few more years until I finally sold the thing for what I owed and got out.  What a miserable experience!
  2. Take out student loans.  I was raised by a single mom, and while we lived comfortably, there wasn’t much left over for a significant college savings fund.  However, when I graduated high school I wanted so badly to go off to school that I financed my tuition for the first two and a half years.  Big mistake.  I wound up transferring schools to return to my hometown, changed majors, and was stuck with a pile of student loan debt as my souvenir.  I should have worked a year to save up the money for the first year of school, and then worked my way through the remaining time, which I wound up doing for those final three years or so.
  3. Sign up for a credit card in college.  While I was in school I fell for the college credit card application trick.  It was at a football game, and those Discover people had drawn quite a crowd.  What started out as a way to get a free t-shirt wound up being a way to finance my lifestyle at college.  By no means did I live an extravagant life, but the occasional CD, grocery trip or late night pizza order went on the credit card and soon I was charging more than I could afford to pay off at the end of the month.
  4. Charge furniture on a credit card. For the first few years my wife and I were married we had a mismatched collection of bedroom furniture handed down from family members, or left over from our own single days at college.  We were content to live with it in the short term, but eventually fell for a Veteran’s Day sale at a local furniture store.  Of course we didn’t have the cash for a new bedroom set, so I charged it and paid on the balance for months.  We did eventually pay off the new furniture, but we have agreed that in the future we will pay cash for furniture.
  5. Borrow money to invest.  It was the late 1990′s and everyone was making a killing in the market.  I had no money, but I heard of this little thing called margin, where you could borrow money to invest and hopefully pay it back with your earnings.  I even heard a radio host say that the times were so good that he would borrow money to invest if he didn’t have any.  Sounded good to me.  I borrowed a little money, made a little money, and lost a lot of money when things headed south.  In the end I wasn’t hurt as badly as some, but I didn’t gain any ground, financially.  Had I been more patient and saved up the money to invest I would have made smarter decisions, and put in place the proper controls to minimize my losses.  Playing with your own money has a way of making you more conservative.
  6. Start up home businesses with virtually no cash.  First it was Avon, then a company that produced personalized children’s books.  Toss in a couple technology-related endeavors and we have probably spent twice what we earned from all side businesses combined.  The problem with most of these opportunities is that they require some type of up-front investment, or the purchase of sample products or brochures, etc.  If you need a “side hustle,” look for an opportunity that doesn’t have a lot of downside risk, and doesn’t require an up-front investment.  That way if things totally bomb you will have only lost a bit of time and energy.
  7. Stay in a dead end job too long. My first professional job was in a third-party customer service call center answering calls from banking and credit card customers.  I took the job to get my foot in the door, and while I did move up eventually, the company made a concerted effort to keep salaries low and promotions slow.  I lost a few years of opportunity to earn a higher salary had I simply moved on, but I did make some lasting friendships and learn a little about how not to run a business.

Remember, sometimes the examples of how not to do things make more of a lasting impact.  Hopefully, these seven examples from my own past will help you avoid some of the same mistakes in the future.

Comments

  1. I agree with most of the list based from my personal experiences. I do think that leasing can be acceptable if you have favorable terms. While I purchased my current car on the used market, my previous car was a lease. I had about $5000 in discounts and a 0.9% interest rate. Mileage is also negotiable. At that time it made sense to me because the payments were low and that allowed me to put more money on my monthly mortgage payment. I had the option to buy it back, but decided to return it with no problems.

  2. Great list, Frugal Dad.

    It’s definitely preferable to have no student loans, but the reality is that for many people, avoid student loans would also mean avoiding pursuing their educational goals. If you want to do an undergrad program and have a local school you can work your way through with minimal financial assistance. However, if you want to pursue a professional degree or specialization, it may be unrealistic to do that without loans. Often times, the cost of delaying such education can be greater than what you’ll save.

    As for leasing a new car, I would just change that to getting a new car, period. Leasing isn’t necessarily better or worse than buying, it depends on what kind of terms you negotiate. But a new car is a bad financial move regardless of how you finance it- you’re much better off with an older beater that has already lost most of its value.

  3. I admit with chagrin that I have done half of these things. what is your opinon of student loan debt for an advanced degree, i.e. professional school? these are things that are hard to pay for without the elevated salary of a lawyer or or a doctor.

  4. I’d gotten financial aid, worked and still had to get loans. In hind sight, I probably could have gotten by without the loans, but I’d gotten into credit cards (they should be banned from campuses!). I graduated with $10k in loans, and it took me 13 years to pay off because I made minimum payments and they kept extending the term because I was so good about making payments.

    I do think education is a necessity for a lot people. Whether you get A’s, B’s or C’s, you still have a role in the workforce. My husband, who in a techy company, noticed that it’s mostly the B’s that lead and the A’s that do the work. And depending on where you work, having an degree (advanced or otherwise) doesn’t necessarily mean anything. I work in the government, and am paid equal to some people that don’t have degrees, because they worked up to it.

  5. I do not regret my undergraduate student loan debt at all. Of course, it was at a state institution (low tuition) and was at a low interest rate thanks to prevailing rates at that time.

    Now my law school debt is a good example of why you shouldn’t take out student loans. I have about $46,000 of those. Fortunately, they’re at 3.5% interest, which is not bad at all for a loan. Unfortunately for me, I burned out of practicing law after 4 years, so I’m now paying for an education I no longer use.

  6. Did a few of those myself.

    Probably the only reason for not doing #3 was they didn’t give too many credit cards to students back in the Dark Ages.

  7. I’m not convinced that student loans are bad. They are for students who enter school with a financially secure major and the will to see the education through until the end. Don’t take out a loan to “see if school is the right thing to do”. College is a major decision and shouldn’t be taken lightly. It takes willpower and planning to see it through. Almost like having children — you can’t have a kid and then all of a sudden decide that children aren’t right for you and leave them. (Well you can, but that would be very very bad.) People approach college using this mentality and I find it astounding.

    Leasing – Yea, no go on that one. Just purchase the car. As to whether you choose new or used is up to your specific circumstances and situation.

    College credit card – I fell for that too. And for a t-shirt! Obviously it works or else the companies wouldn’t do it. It goes back to the blog entry for yesterday — teach financial responsibility at a young age so that they would think before doing anything like this.

    Furniture – Yea, I don’t charge it to a credit card. I take advantage of those 12/24 month 0% interest financing and pay it off early. I only buy it if I can pay it off early and I dicker with the salespeople to get a bigger discount than they are offering. It works really well when you find something that has been discontinued.

    Borrow to invest – No way. Not gonna happen.

    Home business – Yea, did that one too. My GF (now wife) wanted to get into Mary Kay. We blew a grand getting into one of those “sales kits”. She found out quickly that attempting to break into an already crowded marketplace just wasn’t for her. She wanted something much more rewarding and we were left with a big bill. Thankfully she went out and got a job which paid off the debt in no time.

    Dead end job – I’ve told this nugget of information to so many people that I’ve lost count. If you want to get paid more, GET A NEW JOB! Employers and employees suffer from “this is good enough”. If they hired you on at X, you seem to be ok with that so why pay you more? At most places, there is very little opportunity to move upwards. Typically vertical moves are performed by moving sideways first — into a new company. It is really the only reliable way to find more pay. I can tell you from experience — I’ve increased my salary by 90% in the last 5 years. Not by sticking with the same company but by moving around quite a bit. I’m well ahead of others who have stayed put and have gained a broader base of experience because of it.
    I say all of this with one caveat — DO NOT, I repeat, DO NOT use a job opportunity somewhere else to twist a raise or promotion out of your current company. There is almost nothing that will fast track you to a pink slip quicker than that.

    Hm, it appears we share a lot of common experiences here FrugalDad. Have to wonder if we’re related somehow and we don’t know it. :)

  8. I am not sure I agree on school loans, as others have posted. Especially for subsidized loans, the interest rates are generally competitive and they can be deferred until you are earning money. Combined with overall smarts about your educational choices (consider state schools, go to a community college and transfer to save 2 years of tuition, don’t borrow for a degree that won’t earn you any money, etc.) and applying for scholarships and grants, they are a great way to make higher education affordable for a large segment of the population.

    It took me 10 years to pay off my loans from 2 years at a well-thought-of school, and while I could have paid them off quicker the percentage rate was so great I couldn’t imagine why I’d bother. I paid less per month for my loans than I did for my car.

    Student loans shouldn’t be your first choice, and you should immediately subtract them out of your potential earnings for your first decade of your career to decide if they are worth it, but to dismiss them out of hand is a mistake.

  9. @David (and others): Allow me to clarify my position on student loans. I don’t like them. There…I said it. Look, I personally believe higher education is overrated in this country. We have some 22 year-old young adults graduating with nearly six figures in student loan debt. Regardless of the interest rate, that is an unbelievable amount of risk added to their lives. I would much rather see someone work their way through school, apply for 1,000 scholarships, attend a community college for two years, or do whatever it takes to avoid taking on these huge loans. The point is that we have options, but too often kids (and parents) go for the most expensive one because they are convinced it is best for their kids. Not always true.

    My student loans were small to compared to some, but even so they clouded my financial picture for much of my 20′s.

  10. I’m shocked that you think financing an education is a mistake that will ruin your financial future. Many people, including myself, who go to school for non-cupcake majors (and actually care about their grades) can’t, or don’t want to work their way through college because they want to focus on their studies.

    If you can focus on you studies, you can work hard and then apply for grants and scholarships in your field that can help you with educational costs if that’s a major concern. If you get done with school and you have student loan debt, oh well. It’s probably one of the lowest interest rate debts you’ll have, with the most flexible repayment structures out there.

    Oh, and guess what? Focusing on your education and doing well can get you a better, more high-paying job anyway! So if someone wants to take time off to save up money for college, and then work their way through college while scraping together some C’s and D’s so they can pass and get a degree, that’s fine. I’ll recommend that you should work hard, get the best grades you can, do some internships, and put yourself in a position where you are the most desirable employee coming out of college. We’ll see who gets ahead faster.

  11. @FrugalDad, it sounds like your opinion of students loans has been affected by your ability to repay those loans in your 20s. I’m not sure if you’ve said before, but did you finish your degree? I just wonder why your finances were so greatly affected by what should be a minor expense in your student loans. Do you think that you’ve gotten jobs that are commensurate with your level of education and skill?

    Being against student loans because a few people overspend is like being against mortgages because a precious few lost their homes due to buying too much house for their income level. It is ultimately a matter of doing what is best for you. Not everyone has the same idea of what higher education is for.

  12. @Jeff: Don’t misunderstand, I’m all for education. However, I hate to see people get out of school with tens of thousands in student loan debt. Everyone keeps mentioning the favorable interest rate. So what? It is the added risk, the weight hanging around your neck, that I’m most concerned with.

    I worked my way through school at night, made mostly B’s, a couple C’s, and a few A’s, and work next to people with a Masters degree and a 3.8 GPA who earn less than I do. Getting ahead is more about hustle, and less about GPA.

  13. Frugal Dad is dead on with the student loan arguments. Education is a large, hungry industry just like the housing market. If promoting debt financed education will drive more students to college, that’s what they will do (and have done) with government cooperation. The glut of cash-cow MBA programs is a prime example of this. There are a lot of “students” who have been brainwashed into accepting the student loan culture as a rite of passage. It’s a passage right into an extended period of negative net worth and poor cash flow.

  14. I definitely disagree with the student loans. Yes, they suck and I would love to pay them off but there is no doubt in my mind that they helped me advance. The life lessons and strides that I made becoming the person that I am today were worth it for going to college and getting student loans.

  15. Despite my mixed experience with them (see above), I can’t say a good thing about student loans: Debt is debt in my book.

    That being said, I agree with another poster that for some professional schools (such as law and medical schools), the tuition would be out of reach for many without student loans. I know first-hand that the ABA (the accrediting body for law schools) look down at students working during the school year. I would bet their are similar views held by the equivalent body for med schools. I know students do it, but the official position is that it is discouraged.

    Going to school part time and working is frequently not an option. There are few law schools that still offer a part-time option, and I know of no medical schools that do.

    There’s always the option of putting school off and working to save up the money. I think a lot of potential professional students would then not go on to get their education. “Life” would happen; many would find they’d like their present jobs; some would get married and not want to go to school married, etc. There would probably be much less student attrition in these schools if this was done because the students that made it to school would be much more serious about making it through.

    Don’t get me wrong, I think loans should be a last option. I, myself, am a walking advertisement of what can go wrong by financing a professional education with student loans.

    I think what some comments are saying is that student loans are bad; others are saying that they’re the least good option. I think we’re saying the same thing, just in different ways.

  16. Ah shoot, I don’t agree with the student loan thing or the credit card thing! But I agree with your other points.

    Student Loans: Don’t do what my friend did. Her dad was SO anti-debt that she actually turned down acceptances to 10 elite colleges (yes, 10!) and went to a state school that was mediocre – not bad but not nearly as good as Harvard or Yale! I can not believe she turned it down just because of money. And I think she got her PhD at a mediocre state school because her B.A. was at a mediocre state school – she would have had so many more opportunities at those other schools! I took on debt to go to an ivy league and am so glad I did it. My mom was single and putting five people through college (me, 3 siblings, and herself) at the same time so my debtload wasn’t huge though – lots of free cash from the school due to our poor finances.

    Credit Card in college – I’ll never forget that I had college movers come pack my stuff to ship it back home last day of Freshman year. I didn’t know they couldn’t take checks ahead of time! I didn’t have a credit card. Thank goodness I was able to get a hold of a brother who gave me his c.c. number over the phone for them. I got a c.c. after that immediately so I could always deal with such an emergency.

  17. Great post!

    I fell for #3 for sure. For years I refused the free t-shirt to fill out a cc application scam. While on spring break, I had the option to fill out a cc application to drink all night for free. Who could pass that up? Little did I know they would still send you a card even if your yearly income was $0.

    That will be lesson #1 when my kids go off to college :)

  18. “I worked my way through school at night, made mostly B’s, a couple C’s, and a few A’s, and work next to people with a Masters degree and a 3.8 GPA who earn less than I do. Getting ahead is more about hustle, and less about GPA.”

    Ok, that’s fine if you’re in a profession where that’s possible. In my profession you can’t get your foot in door without an M.S., and even then the options are limited.

    When I was in grad school, the department I was in would completely cut your funding if they found out that you were working. So as Tim mentioned, working through school is often not an option.

    I also agree with what David said about going to cheaper state schools. Even though employers are probably just as impressed with an Ivy League degree as a parent with money to burn, I would like to see some studies that show whether you’re getting a better education at the $25K per year Harvard, compared to $5500 for in-state tuition at UMASS.

    Anyway, to each his own I guess. I still agree with the rest of your list. :-)

  19. I don’t know that I would agree with #6. I started my business with absolutely no cash. Just one client, a talent/love for what I do, a computer I already had and a prayer. 10 years later I am still doing it, and enjoying it and doing okay with what it brings in.

    I totally agree with the tuition thing. I am a firm believer that community college is the way to go to get your basic credits out of the way on the cheap. Freshman English is going to cost a lot less there and transfer over to the University no problem later. That is what I am recommending for my kids. I do, however, think kids need to pay for most of their own college. I, and most of my friends, were totally funded by parents and I completely blew off the opportunities that were handed to me in my lap because I didn’t appreciate them — as did many of my friends.

  20. Lisa – as a person who took a freshman English class at both my local state school and at an ivy league, I can tell you the classes didn’t even compare to each other in terms of level of material and amount learned. That’s why I don’t think it is okay to take classes at a community college if you are an above-caliber student. I also took a chemistry class at both schools and let me tell you the one at the state school was so SLOW compared to the other. And the students asked the most ridiculous questions! (They would ask things about how to do basic algebra, thus taking up the professor’s time teaching basic stuff they should have learned in high school.) That said, I did take Spanish classes at the state school and I thought those were pretty good. So maybe it is a matter of continuous quality across disciplines at a better school versus spotty quality at a state school?

  21. I worked my way thru college – and I’d advise it for anyone who wants to know the value of a dollar. I really cannot see where a college education tho had any outcome on my earnings nor my life. (except maybe that required freshman English course!) Frugalness as a habit, learned while working at college, had a lot more to do with my present financial situation. It’s really not how much you make – it’s how much you don’t spend :)

    I’d say I came out ahead… I’m debt free and have been for several years. The two rigs and the house are paid for. My retirement account is stocked. I could retire today if I so chose, but I like that free health insurance that the boss pays, – it appeals to my frugalness :)

    So – no to all but #5 above… I have borrowed money to put down on rental houses… and I consider that an investment. They all worked out well.

    Good post! Luv the comments back and forth!

    Oh – about the no college loans… I think my attitude rubbed off on my daughter. She’s in her 2nd year of college – at the local community college – working and a single mom of 2. Between scholarships and working, she’s managed to pay for it all so far, except for some textbooks she’s borrowed. And she’s made dean’s list, so working, motherhood, and fulltime college can be done – but it takes a LOT of drive and ambition – which luckily, she has! And she is determined NOT to get a student loan, unless it becomes urgent in year 4 of her nursing degree, which is what she wants to do. It can be done!

  22. Student loan a way to ruin your financial future? Only if you don’t pay it.

    The only way to ruin your financial future is to not repay what you’ve borrowed in the allotted times. Plain and simple.

  23. I did the student loan, which I paid off as soon as it was due using the savings I’d built up by working part-time since the age of twelve. Some (but not enough) of it was in accounts my parents didn’t know about. I opened my first secret bank account at age 14 and used it to stash extra employment income. Later I opened a retirement account.

    Also I did the credit card thing at age 17 to establish my own credit. It never became a problem because I always paid the balance in full.

    I’ll cop to the margin trading too, since I had a brief fling with day trading from ages 18-22. But I always had a strategy in place to cover my margins. I only made one really, really dumb trade while under the influence of caffeine and peer pressure. At the time I suspected I was doing it on bad advice, but I did agree to it. My bad.

    A couple big mistakes that aren’t on the list:

    - letting a parent or relative have access to your account, particularly if it means you’re locked out of money you earned yourself
    - co-signing on a loan for ANYONE

  24. Definitely a good suggestion on not co-signing anything for anyone by Sqeaky there. That’s a great way to get yourself stuck with some extra debt if the person turns out to not be as reliable as you know yourself to be. I know I wouldn’t and people seem to be smart enough to know not to ask me.

    A word of warning about the separate accounts before you are an adult. Legally, your parents have full control over your money whether you earned it or not until you are an adult. Opening an account in a child’s name is a commonly used way of hiding extra money or income from the IRS and can cause problems during an audit.

    Do you think trust funds were created for the good of the millionaire’s children? Na, it’s just another tax shelter.

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