Money Lessons Learned Part 2: What Did Not Go Well
Welcome to Part 2 of 2 on money lessons I learned at an early age. This time around, I will be reflecting on the not so good financial decisions I made. We sometimes learn our best lessons when we make mistakes, right? Riiiiiiiight…
We were at the height of the housing market. Champagne bottles were popping and people were selling their homes above asking price and making record profits. No, I’m not talking about last year. This was 2006, right before we saw the biggest housing price drop in U.S. history.
I just bought a home in Phoenix, Arizona. My home’s value dropped in half practically overnight and never recovered as long as I lived there. Arizona, California, and Florida took the brunt of the housing crisis. I loved my house, but I had 2 terrible mortgages. I put $0 down (thank goodness!) because I could get a first mortgage for 80% of the value and a home equity loan for the other 20%.
The first loan was a 5/1 ARM, which actually worked out because interest rates dropped considerably after 5 years and my payment went down. The second loan was a 30-year fixed with a 15 year balloon. It’s essentially a 15 year loan amortized over 30 years. The interest rate was over 8%! To boot, I worked in the home equity department at Chase and trusted a colleague to help me finance the home. I also almost lost my job that year because banks were clearly not in the public’s favor.
Regardless, I was going to live the American dream and own a home! It was more like a stressful nightmare when I decided to move to Colorado 7 years later and the value never recovered. I couldn’t afford to keep it, so I opted for a short sale and ruined my credit for 7 years.
The lesson here is that buying a home isn’t always the best financial move. Alternatives like renting can help you ride out crazy markets.
Timing the Market
I think most of us get spooked when we see the stock market fall. When the housing crisis hit, aggressive portfolios lost up to 60% of their value! I know mine did. It was nerve-racking and it can be hard to keep your cool when you see red numbers flying across the screen.
While I left my 401k and similar accounts alone, I started a brokerage (taxable) account and bought a few stocks. I had the intention for it to be a long-term investment, but it turns out I was too anxious and stock fluctuations got the best of me. I was able to buy them at a good time and the stocks grew… at first. However, I made some bad decisions on deciding when to sell. I sold several stocks at a loss (and I did not need the tax deduction). Of course, many of those stocks I sold eventually recovered and I would have been in the black today, but I had no patience in my 20’s for a buy and hold stock strategy.
The lesson here is, you may make the right decision on when to buy OR when to sell, but not both. Buy good, quality companies and investments and hold them for the long-term. The fluctuations are a normal part of the game. If stocks are too aggressive for you, don’t buy them.
Credit Card Approved!
I was very excited to be a young, independent woman with a full-time job supporting herself (and her cat). Apparently, credit card companies also noticed how excited I was and how successful I was becoming and I received A LOT of credit card offers in the mail. So, I should apply for all of them, right? Well, that’s what I did. I had several cards, each with a few hundred dollar credit limit. My credit report read like a novel. Sometimes I would open a new card realizing it was better than one of the others and close that one. I did that a few times. It was like a game.
Thankfully, I was responsible and never maxed out a card or had trouble paying it, but these cards had no sign up bonus or incentives. These were basic credit cards with high interest rates and low limits. As someone with no credit history, this is how you start out. But, there was no reason to apply for everything. I still have 2 of the credit cards (I upgraded them) in order to have the credit history, but you can see how young folks who don’t manage the influx of offers can get out of control.
The lesson here is, open and keep only a few good credit cards, ideally with sign up bonuses, airline miles, or cash back, and use them responsibly!
Thankfully, none of these decisions had a permanent effect on my financial position. I would venture to guess that most of us can recover from many of the mistakes we made in our 20s. The key is to learn from them and share the lessons with others. We aren’t perfect and it’s okay to ask for help. A trusted financial planner, preferably a fiduciary, such as a CFP®, can help get you on the right track. It's also critical to help our younger generation get in front of a financial professional early on to avoid many of the money mistakes we've made.