I graduated college with zero debt. One of the lucky ones. My parents saved for us their three children so we could start our lives on the right foot. I worked through most of college too, but that money escaped to extravagance. Movies out. Trips. Restaurants. Technology. I purchased anything I wanted at that moment, developing a have-it-now frame of mind. So when I graduated and received my first full-time paycheck, each day felt like a “treat yo-self” day with Tom and Donna from Parks and Recreation.
This belief in having-it-now led to five financial mistakes after graduating:
- Buying a house
- Buying a new car
- Using credit cards incorrectly
- Not starting a Roth IRA
- Not budgeting my funds
Each of the above also contained hidden costs that bled into other areas of life and dug that debt hole a little deeper, making it that much more challenging to climb out. So let’s get right down to it and break down each of the mistakes and what I should have done.
Buying a House
The age old debate battled in my head. Should I pay $900 per month in rent for a one bedroom apartment or purchase a house and pay $800 per month in mortgage? Seemed pretty simple, right? More bang for my buck with the house. Plus I would own the house, building equity and seeing the value of the house grow over time.
Two months after I began teaching, my realtor started the search. I armed myself with a down-payment-free mortgage, again playing into my have-it-now mindset, and found a foreclosure discounted from the comparable prices in the area. Cosmetic work and a huge mouse problem be damned. I purchased this gem in November 2007, thinking I struck a deal. Four months later the Global Financial Crisis occurred and the housing market collapsed.
When the market price of my house dropped with the crash, I lost all flexibility to move. Insert stressed emoji here. Losing my job or getting a new job no longer existed as options. At least not until the market recovered, and this crash would last a while. When the time came to move in 2012, I had two options: (1) sell the house at a loss, or (2) rent it for a year and cross my fingers an increase to market prices. So I rented it for a year, making this financial mistake less detrimental than it could have been.
The housing market finally turned a corner in 2013, allowing me to sell the house for a profit, or so I thought.
I bought the house for $104,000. The seller took care of the realtor’s fees while I covered my closing costs of approximately $7,000. Mortgage and interest each month were $800, or a total of $52,800 over the 5.5 years of ownership. Insurance totaled $6,600, property taxes were $11,550, and maintenance on the house finished at approximately $13,200. Buying the house full price could have also made this mistake much worse, but the foreclosure demanded approximately $10,000 in cosmetic fixes and to eliminate the mouse problem.
When I sold the house in 2013 for $124,000, the mortgage remaining was $95,000. But 6% realtor fees of $7,440 and another $2,000 for more cosmetic updates and fixes ate into those profits. Without the rental income for the year, I might still be recovering from this financial mistake. I charged the renters $1,150 per month, earning $13,800 over the year.
Those hidden costs add up quickly. Rent for an apartment already includes the mortgage, interest, taxes, insurance, and maintenance costs. Cosmetic fixes are minimal at best. I did not consider that prior to purchasing a house. In list format, here is the breakdown…
- Profit from Sale -> $29,000
- Profit from Rent -> $13,800
- Mortgage and Interest -> -$52,800
- Closing Costs -> -$7,000
- Cosmetic Fixes in 2007 -> -$10,000
- Insurance -> -$6,600
- Maintenance -> -$13,200
- Property Taxes -> -$11,550
- Realtor Fees -> -$7,440
- Cosmetic Fixes in 2013 -> -$2,000
After expenses, I lost $67,790. Let’s say I rented during that period starting at $900 per month and increasing 2.5% each year, then the total I would have spent on rent would have been $62,876. So owning the house over the 5.5 years cost me almost $5,000 more than renting (although for most people it would have been almost $19,000 more because of the lack of rental income). Also, without any money saved up for the purchase, I charged the closing costs and cosmetic fixes on a credit card, accruing interest charges. Also not included are the higher utility costs for the larger square footage.
What should I have done? Before buying a house, saved up a 20% down payment and 7% for closing costs. With that saved, then looked at houses where the price of the monthly mortgage and interest payment was 20% to 25% lower than rent in the area. On top of all of that, not spending more than 25% of gross earnings on a living situation. So with $3,000 per month, prior to taxes, then living expenses should have been $750 per month.
Buying a new car
On average, cars lose 40% or more of their value in the first 3 years of ownership. A large portion of that loss occurs the moment you drive the vehicle off of the lot because of the expenses it costs a dealer to resell a used vehicle. Sadly, with a full time position after graduating, I ignored that knowledge and stopped by the Ford dealership to buy a Ford Edge with a down payment charged to my credit card.
I thought I could handle $450 per month, but those hidden costs again got me. I spent $125 per month on gas for an SUV, $125 per month on insurance, and about $100 per month on maintenance and repairs (those oil checks and small fixes like the AC add up quickly). So what I thought was $450 per month for a vehicle turned into $800 per month (I now realize that I could have taken 2 Uber rides a day for $800 a month, basically having a chauffeur for that price… only if Uber had been around then).
I paid the same amount for my car each month that I paid for my mortgage. And when the Edge started breaking down, I just traded it in for a newer Ford Explorer, because my payment stayed the same each month. When I stopped trying to impress the Joneses, and understood that a car gets me from point A to point B, I started seeing immense savings. Today I do not have a car payment, and instead I use those funds to take amazing trips.
What I should have done? Bought a vehicle that was 3 years old or older. Saved up for a down payment or even paid the full price of the vehicle up front to save on the interest expenses. Stuck to something cheap and reliable with little maintenance costs that did not total more than 15% of a monthly salary. So with $3,000 per month, then the total car expenses per month would need to be $450 or lower (this is a car worth $11,000 with a $1,000 down payment and 4% interest for 72 months).
Using credit cards incorrectly
Throughout college and after graduating, I used credit cards as my savings account. Want a new TV on Black Friday. Use the credit card. Need an upgraded computer. Use the credit card. Want to take a trip. Use the credit card. I built up a huge amount of credit card debt early in my professional career, incurring $1,000s in credit card fees, late fees, and transfer charges. Not only that but my poor credit score also led to higher interest rates on my mortgage interest rate and car loan rate, thus incurring higher costs on items not even purchased with credit cards.
Playing catch up with a credit card company sucks. I took two steps forward paying off $200 and then got dinged with $100 of interest charges, demoralizing me every month during the process. I had to factory reset my mind and realize that credit cards can be tools, but not savings accounts, and that took time.
What I should have done? Save the money first, use the credit card to purchase the item, receive a cash back or travel bonus, pay off the credit card immediately, and accrue 0% interest fees. The credit card is a tool to increase a credit score and build extra savings through their rewards system, so long as it is used in the right way.
Not starting a Roth IRA
The magic of compounding, where the invested money earns an increasing rate of return over time, is only heightened by more time. I could have used half my car payment to fund my Roth IRA. Or the money I paid in credit card interest expenses each month. Or so many other things. But I did not. I spent the money and lost out on time for my money to grow.
What I should have done? By investing $200 per month in an S&P index fund from August of 2007 to today, then that total investment of $29,400 would actually be worth $56,600 today, even with the Global Financial Crisis. And if it was continued until the age of 65, then that account would be worth $507,982. Not too shabby for $200 a month, or a total investment of $99,000 (gaining $408,982 over the 41.25 years).
Not budgeting funds
And finally the most painful mistake, and now lesson. I spent money without understanding what I truly had to spend. A simple algebraic equation, Revenue – Expenses = Profit or Savings (yes, you actually learned budgeting in high school if you paid attention during algebra class) can be used. The revenue is the total money brought in like a salary. The expenses are the “money-out-the-door” costs like housing, transportation, clothing, food, entertainment, etc. And the profits or savings remains. If profits dip negative at the end of the month, then the debt snowball begins. If profits move positive by the end of the month, then that money goes to work making more money in an investment or high interest savings account.
What I should have done? Created a monthly budget for revenues, expenses, and profits/savings. Set limits for each category within the budget. Then track everything. Ignorance of money spent leads to debt. To improve the situation, cut expenses, and more importantly increase revenue through a side hustle, education, or career switches. There is only so much that can be cut from a budget, but there is no limit to the amount of revenue that can be obtained.
In my first 5 years post graduation, I could have saved $5,000 and lots of stress with the house (again this could have been much worse), $20,000 on the purchase of a car, $10,000 in interest expenses on credit cards, and (if I had budgeted the way I do today where I only spend 50% of my salary) another $100,000 by budgeting and tracking funds. I could have also accumulated another $14,000 in a Roth IRA during those first 5 years. What could you do with an extra $149,000 after 5 years?
Please do not commit my 5 financial mistakes. (1) Buy a house for at least 7 years, with a down payment, and whose price is 20% less than the average rent. (2) Purchase a cheap, dependable vehicle like a Camry or a Civic and keep up with its regular maintenance. (3) Use credit cards as a tool for discounts and higher credit scores, not as a salve for an impatient consumerism itch. (4) Save and invest extra money as soon as possible. Treat those savings as a non-negotiable, and build a lifestyle around it. (5) And finally budget. Know what cash comes in and what cash is spent. See if expenses can be lowered to where they total 50% of revenues. And if expenses cannot be cut down any lower, then pick up a side hustle or change careers to increase that revenue.
Do not be me after graduation.