Money Lessons Learned Part 1: What I Did Well
I’m sure many of us will agree that most money lessons are learned the hard way. Only recently have high schools started requiring students to take a personal finance course. IMHO, it should be part of the core coursework. So, while those of us in our 30’s, 40’s, and beyond have learned many of our money skills (good or bad) from our parents, I will bet just as many have learned by making their own mistakes. Without a proper financial education, young adults can easily find themselves making more money than they’ve ever seen while simultaneously spiraling into debt and living well beyond their means.
Recently, I took some time to reflect on the financial decisions I made early in life. This blog is Part 1 of 2. I will start with the good, which I am happy to say is a longer list than the bad. I believe this is mostly due to circumstance. I learned a lot from my mom and I also had an older friend and co-worker who took a personal interest in teaching me how to be a responsible, working adult. In each section, I will discuss what I did well and include who or what influenced me in that direction.
I Avoided Credit Card Debt
Besides applying for and ultimately closing many credit card accounts (because I didn’t know what I was doing), I never put more than a few hundred dollars between all of my cards. I learned this from my mom, who by no fault of her own, was trying to make ends meet after her divorce and the only way to feed and clothe two teenagers was to use credit. It clearly stressed her out because she is normally very frugal, so I knew I did not want to be in that situation. If I couldn’t pay off the credit card, I didn’t buy it. Plain and simple. This also meant I was living within or below my means at all times. I wasn’t making much money. I remember having $8 leftover at the end of one month, but I was still in the positive. If you carry credit card debt month to month, you are in the negative.
I Tracked My Income and Expenses
I am old enough to have used a checkbook register. For those who don't know what that is, it is a “spreadsheet” that came with your checks where you tracked everything you spent and deposited. I kept my receipts. I wrote everything down. Every… single… day. I then moved to an electronic spreadsheet. I know it doesn't sound like a fun task, but I knew what I was able to spend each month without going into credit card debt. This was also something I learned from my mom. She was diligent about showing me how to do this and why it was important.
I Opened and Funded a Savings Account
I opened a savings account on a recommendation from an older co-worker friend (who will be mentioned again). Her advice was, “don’t touch it unless you really need it. Pretend it’s not there.” This basically meant, it’s not a backfill for shopping, entertainment, vacations, etc. This saved me (no pun intended) when I lost my job not once, but twice. I had decided on a figure I wanted in that account. I did not calculate it based on ‘x’ months of expenses. I just had a number I felt comfortable with and if I used it in an emergency, I would make it a priority to replenish it.
I Tackled Debt Pretty Hard
When I graduated from college, I had around $33k in student loans and decided I should also buy a new car. This sounds like the start of my “what didn’t go well” list, but I had one, clear goal: Pay everything off… ASAP. I needed to pay for college on my own, so student loans were inevitable. I also wanted a reliable car, so I bought a Honda Civic that I ultimately kept for 12.5 years and had no issues. It was a good purchase, but I wanted to be out of debt in 5 years. It was a lofty goal. I doubled up on my student loan payments and paid them off in 5 years vs. 10. I also paid additional towards my car and managed to pay it off in 3.5 years vs. 5. I refinanced my car loan twice to get it to a reasonable rate, which helped me pay it off quicker. Again, I didn’t have much money leftover each month because my sole focus was getting out of debt. I also tie this lesson to my mom because I saw debt as a bad thing.
I Started Saving for Retirement Early
This required a huge push from my co-worker friend who, when I told her “I can’t afford it,” she responded with, “you can’t afford NOT to do it.” Then I said, “Well, I’m only 21. Retirement is too far away.” She said, “the earlier you start, the less you will have to save later (the magic of compounding!). You aren’t going to miss the money.” So, at 22, I picked an investment from every group (large, medium, and small companies, bonds, etc.) because the 401k consultant said something about diversifying. I decided I could part with 4% of my pay, and then watched it magically grow. Once my job ended, I told the financial advisor down the street that “I have an old 401k I need to roll into an IRA” (you don’t need to do this, by the way), and of course, they were happy to take my money and also suggested opening and maxing out a Roth IRA. My mom told me never to rely on anyone financially, so I paid myself first, and thanks to my friend, developed a “habit” to save for retirement.
I Did My Own Taxes
In the early 2000’s, most of us were still doing our taxes by hand. Yes, a paper and a pencil. A pencil because you needed an eraser. You were going to make a lot of mistakes. Up until that time, I was mailing my taxes to my mom because I lived in a different state and she would get them done by her tax person. Again, my co-worker friend told me, “you need to learn to do your own taxes.” “Why?!” I asked. “Because taxes affect every aspect of our lives and eventually it will get more complicated and you will want to have a basic understanding of how the system works.” Yep, she was right. This advice helped me see how the math worked and ultimately determine what I needed to withhold from my paycheck so I was able to breakeven most years. This was especially helpful once I bought my first home because the tax write-off would normally have resulted in a large refund at the end of the year, but instead I was able to keep that money throughout the year to invest and of course, have some fun!
When I initially set out to do this exercise, I knew I didn’t have many regrets and I was happy to see I had made many good financial decisions that I would do all over again if given the opportunity. I know that learning these skills on your own can be challenging. Our family, friends, teachers, and co-workers all influence us in good ways and bad and ultimately, it is up to us to take control of our financial futures. Please know that even if you have not made a lot of good money decisions up to this point, it is never too late to make a change. A CFP® professional can help steer you in the right direction.
Stay tuned next month when I talk about some things I did not do so well.