Financial mistakes, yes we made lots!

I’m a regular listener of the Choose FI podcast and a question they ask their guests each week is “What is your biggest financial mistake?”. This got me reflecting on my own life and, guess what – I’ve made quite a few!

I didn’t think we were “bad with money’, because we have always had a pretty good grip on the small stuff like managing day to day budgeting, avoiding credit card debt and saving regularly.

However we have made some pretty stupid decisions regarding the bigger material expenses. Needless to say these have been more impactful and damaging to our finances than, say, buying lunch at work each day.

I’ve read and listened to an enormous amount of material on personal finance and the FIRE movement over the past 12 months. As a result, I now have new role models, frames of reference, case studies and solid advice highlighting a better, more sustainable way forward.

Of cours,e it is easy in hindsight to say I would have done things differently. Instead of beating myself up about all the things we did “wrong”, I’m instead celebrating that I’m now more informed. Knowing what I know now, I wouldn’t make some of the same decisions. Hopefully sharing my big errors helps you avoid similar mistakes.

Financial mistakes aplenty

Big mistake #1 – Buying and leasing new cars

My wife and I have always had new cars, typically “upgrading” every 4-5 years.

Things got even worse recently when we started leasing brand new cars. Yes, there are some upsides to leasing, but at the end of the day we have been making payments on something we don’t own, aren’t building equity in and can’t sell.

New cars are a terrible financial decision for a number of reasons:

  • They are a rapidly depreciating asset – A 2018 AAA study suggests that depreciation accounts for almost 40% of the cost of owning a new vehicle and typically new cars lose one-third of their value within a year. Used cars also depreciate in value, but at a much slower rate.
  • They cost more. People also typically borrow to fund the purchase and insurance rates for collision/comprehensive cover are higher given the cars higher value.
  • The opportunity cost of that money is significant. If the difference was invested over the last 25 years, I’m certain the lifetime cost of owning a new car would be horrifying.

Part of our self justification was that new cars are much more reliable and we’d spend less in maintenance. This wasn’t factually based and in reality I think we were probably lured in by the “new and shiny” features, technology and prestige of a new car. Bad decision !

What would I do differently today?

As I get older, I think I’ve finally recognized that apart from finish and gadgets, a luxury car does exactly the same thing as a cheaper car. Used cars are also pretty reliable and often come with dealer and manufacturer’s warranties. None of my old justifications really hold true.

We plan on moving back home in a year’s time, from the US to Australia. We’ll definitely use the opportunity to drop back from two cars to one, and rely more on public transport and bikes. Needless to say we’ll be buying 2nd hand for the first time in our lives. Depending on where we live, I might even contemplate not owning a car.

For a more extreme view on car ownership check out Mr Money Mustache’s blog post Curing your Clown-Like Car Habit

Big mistake #2 – Renovating and buying a big house in the US

Two years before we left home we did a major renovation on our house. Our kids were growing up and we convinced ourselves we needed more space, another bathroom and a new kitchen. Thinking we were going to be there for the next 20 years we decided on quality finishes and really ended up with our dream home. As you can imagine the cost was significant.

Two years after finishing the renovation, we moved to the US. Compounding our property mistakes, we purchased an even bigger house, thinking we’d be constantly needing to accommodate family and friends visiting from home. More initial outlay and more maintenance costs!

We also didn’t count on property prices in our local US market plummeting, after a key employer in the region decided to move their head office. We sold the house recently and lost almost all of our downpayment. Years of work and saving gone!

What would I do differently today?

Firstly I wish we hadn’t renovated our home in Australia. With our kids leaving home soon it would have been the perfect size for my wife and I, when returning home. I don’t know that we’ll ever realize the value of the renovation either and we would have been better served putting that money towards the mortgage or investing it.

With the US property, I think we were unlucky. The maths worked when we looking at rent vs. buy options. The thing we didn’t count on was the rapid decline in property values. In retrospect we should have probably purchased something much smaller, lowering our exposure to market movements.

Beyond the financials, our big lesson when it comes to property is that we have realized that big isn’t better. The space and conveniences don’t make you happy. You simply end up with more rooms to furnish, more cleaning, more maintenance, higher heating/cooling costs and extra expenses everywhere you turn.

As documented in an earlier post (The benefits of subtraction – the freedom and happiness gains of owning less) we recently downsized to a much smaller rental apartment. So far everyone is loving it. Sure it is cozy, but we aren’t missing the big house.

In the future we’ll be looking for smaller, cheaper and more sustainable places to live. For the time being I’ve also been scared off owning or investing in property, so we will probably rent going forward.

Big mistake #3 – Very conservative with saved money

Generally we have always kept excess money in bank accounts or in an offset account against our mortgage. Yes, we have money in retirement accounts too, but we haven’t been big investors.

I guess this might be down to poor early investing experiences. We’ve made all the classic mistakes:

  • Attempted to picking individual stocks – Why did I ever think we were smarter than the market. Yes, we lost money!
  • Invested in individual stocks recommended by a financial advisor. Again we lost money, and this time paid for the privilege.
  • Put money into a mutual fund. We lost more money in this transaction too, as we needed to pull the money out relatively quickly. Knowing what I know now, it wouldn’t have been a great investing decision anyway given the high fees associated with the fund.

What would I do differently today?

I wish I’d found and read this book 20 years ago – The Simple Path to Wealth: Your road map to financial independence. JL Collins demystifies investing and argues very convincingly for using index funds. This is the future for us – building a simple, diversified, low cost index portfolio. Boring but effective.

Big mistake #4 – Spending on travel??

We’ve travelled all over the world, often for extended periods of time. It’s expensive and looks an even worse financial decision if you also take into account the opportunity cost of other things we could have been doing with that money.

What would I do differently today?

Not much !! I wouldn’t change those holidays for the world. The experiences and memories of our family adventures are irreplaceble.

Instead I would optimize better. Travel hacking is the commonly used term and involves leveraging credit card rewards and frequent flyer points to travel for free or a significantly discounted cost. In the last year we’ve got ~$1,200 of savings from a Barclays card, and are now steadily accumulating rewards via our Chase cards (primarily Chase Sapphire Reserve). All of our expenses go on our cards, which we pay off monthly. Don’t fall into the trap of racking up late fees and interest, which will totally negate the value of the rewards. If used sensibly though, these cards are great and definitely contribute to cheaper travel.

Experience is simply the name we give our mistakes

Oscar Wilde

Everyone makes mistakes; that is life. As you’ve seen we have made lots of financial errors and not so smart choices. They haven’t been terminal though. Even with those missteps we are still in a pretty good position and actively on the path to financial independence. It is never too late to correct course, try new approaches and improve. These mistakes have been lessons along the way but the future looks bright.

Thanks for reading

Mr Simple Life

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