6 Financial Mistakes to Avoid
Everyone makes mistakes, all kinds of different mistakes and financial mistake is one of them. In this post, I will list all past mistakes that I made and I hope that you can learn from them and to avoid making the same mistakes that I did.
Financial Mistake #1: Racking up Credit Card Debts
Everyone has credit card debts but running up your credit card balances when you don’t have the means for it is a recipe for a disaster.
During pharmacy school, with limited funds it is easy to turn to your credit card to cover your financial shortcomings.
This is what goes on in a pharmacy student’s head.
“Once I get my PharmD and get that six figure job then I can pay back my credit card debt.”
This mentality is how we made our first financial mistake. Maxing out our credit cards to fund our lavish lifestyle (for a pharmacy student)!
That was my mentality and that’s how me and girlfriend (now wife) racked up approximately $30,000 split between all of our credit cards.
The credit cards paid for fancy meals at restaurants, trips to the Bahamas and other places.
We didn’t have enough money to pay the full balance at the end of the month so we just ended up paying the minimum that’s due.
The credit cards love it, we loved our meals, vacations, and other things we spent on but our net worth continued on its negative trajectory.
It took us a few years to pay off the $30,000 in credit card debts. At the time, I didn’t pay attention to the number of interests accrued but I am sure it is significant.
Financial Mistake #2: 20% Down Payment for a House
Everybody will become a first-time homeowner at some point. I am not arguing for and against homeownership. For us living in a small town, owning a house made the most sense for us.
When we first graduated from pharmacy school my wife got offered a pharmacy residency in a small town in Texas. At the same time, I was finishing up my pharmacy rotations so the only income we had was $40,000 per year from my wife’s residency position.
We stayed in an okay apartment for two years but since my wife was pregnant with our firstborn. It was time for us to buy our first house.
We picked a roomy house design and didn’t make the mistake of paying for more than we could afford. The house we bought was around $200,000.
I was a PRN (as needed) pharmacist at the time and my wife was a full-time clinical pharmacist. I had planned on working the PRN job to gain experience and move into a full-time job with the same company.
As a dual-income couple with one kiddo on the way (DONK) versus a dual-income no kids (DINK). Hey, I think I just came up with a new term.
We are a DONK!
Since the year we bought our house was the first year of our respective careers and we were saddled with credit card debts, we didn’t save up as much as money as we’d like to purchase our first home.
We didn’t want to live in our apartment any longer so we bought the house despite the fact that we only saved half of the approximately $40,000 that we needed to prevent the private mortgage insurance (PMI) payments.
We bought our house in 2012 and it took us 7 years before we paid down enough (80% of mortgage remaining) of our mortgage to take away the PMI.
Financial Mistake #3: Private Mortgage Insurance
According to Bankrate, typical PMI cost about 0.3 percent to 1.5 percent of a mortgage.
The dollar amount is between $30 to $70 for every $100,000 of loan principal.
There are several ways to get rid of your PMI but the two most common ways is to:
- Pay down your mortgage for automatic PMI termination. Your mortgage provider must automatically terminate your PMI when your mortgage balance reaches 78 percent of the original purchase price.
- Request PMI cancellation when your mortgage balance reaches 80 percent of the home’s original value.
While $70 to $140 per month doesn’t seem like much, this amount is easily avoidable and will lower your monthly mortgage payment.
The rule of thumb is to save enough for a down payment of 20 percent of the value of the home you want to purchase before making that big decision to buy your first home.
Extended Student Loan Repayment Option
As a pharmacy graduate or any other healthcare-related field, you’re going to owe student loans. As a fact, the latest figures released by the American Association of Colleges of Pharmacy pegged the average pharmacist student loan debt is $179,534.
When I came out of pharmacy school my student loans, including undergraduate loans totaled a whopping $188,000 and I paid it off in 8 years.
The bulk of the loans were paid off in the last two years where I allocated almost all of my financial resources to pay off my loans once and for all after I chose to refinance.
So far, the third financial mistake I made straight out of pharmacy school is delaying the payment of my pharmacy student loan.
I opted to go for the extended 25 years repayment plan because I thought I could not afford the standard 10 year plan.
Of note, if you work for the public sector, you might want to look into the public loan forgiveness plan.
This only lasted for a few years before I chose to tackle my student loan head-on. I started by changing back to the standard 10-year repayment plan and started making extra payments.
Fast Ways to Pay off Debt
There are numerous ways to pay off your debt. There’re the debt snowball, debt avalanche, and debt snowflake. At first, I was experimenting with both debt snowball and debt avalanche. They both have their advantages disadvantages.
Debt snowball has a psychological component but debt avalanche is more cost effective and efficient.
the fastest and most efficient debt payoff plan in my opinion is the debt avalanche coupled with the debt snowflake.
Essentially this strategy involves paying off the loans that have the highest interest rates. Then find ways to increase your savings and throw all of your small savings (snowflake) into the account that you’re paying down.
Then move onto the next account that has the second highest interest rate.
Bought a New Car
Throughout my research, I found that a brand new car is not always the best car to buy. New cars depreciate values as soon as they are driven off the lot.
After approximately 3 years that’s when you’re getting the true value of the car.
On the other hand, if you buy a new car you’re taking the depreciation hit yourself. However, most people will own their car for a few years before they’re suckered into buying a new car.
They trade in their used car and buy a new brand new car just so that they will always drive a new car.
In my opinion, if you buy a durable car such as a Honda Civic (I’m a proud owner) and keep the car for the life of that car. If you squeeze all the value of that car even though you shouldered the depreciation up front you save on other things like maintenance and repair costs.
Fourth Financial Mistake
The fourth financial mistake I made is buying a new car. Not only did I buy a new car but I bought the car with zero down payment.
The silver lining is that I was able to get a good finance deal. I secured the car loan for a low rate of 0.99 percent interested. For the 5 year duration of the loan repayment, I only paid approximately $750 in interest.
Along with the family SUV that I bought with zero down. I saved $20,000 and put it as a down payment on a luxury car that I am still paying for.
For the above reasons, buying a new car or two is considered a financial mistake. Ideally, you should aim to buy a car that is still in mint condition and is at least 3 years old.
A good credit score is an important metric to keep track of. Having an excellent credit score allowed me to purchase these cars with very low-interest rates.
Did Not Fully Get 401k Match
The fifth financial mistake I made during my 9 years as a pharmacist is not contributing enough money in my 401k plan to get the full company’s match.
The company that I work for in the early years of my career automatically signed me up for a 401k plan and set it up so that I am only contributing 3 percent annually.
I was smart enough to know at the time that having a 401k plan is essential to my retirement. But since I was a PRN pharmacist with fluctuating income I let that 3 percent stayed that way for the entire year.
I grew wiser and made an automatic yearly 1 percent increase to a maximum of 10 percent.
Nevertheless, not fully taking advantage of my company’s 5 percent match was like leaving free money on the table.
As I was tinkering with my 401k plan, I decided to move my money from the default target-date plan, which is a good idea since these JPMorgan target date plans were charging more than 0.5% in fees.
Look Out for Fees
I decided to sign up for my company’s asset managed plan through Empower Retirement utilizing the forecasting power of financial engines.
This was a good move at the time for me since I know next to nothing about investing, portfolio, and index funds.
The downside to this was the fees assessed. Depending on the assets under management, the fees can be at or above 0.5%.
As a rule of thumb, when looking at which funds to invest in your 401k retirement plan, choose the ones with the lowest expense ratios, broad diversification, and no-load funds. Unusually these are Vanguard funds and you can’t go wrong there!
Did Not Save for a Wedding
The sixth and final financial mistake that I made was not saving for a wedding. Let’s be real, a wedding can be expensive. And like buying a house or a car, most likely you’re going to have one even if you don’t have your “better half” yet.
It’s a good idea to plan ahead and save up for your wedding.
Options to stash your includes certificate of deposits (CDs), money market funds and high-yield saving accounts.
As long as the returns is at 2% or more so that you can beat those pesky inflations.
My wedding ended up costing around $30,000. This is not including a honeymoon that we were going to go to but our plans got derailed by COVID-19.
We can have easily added on to our credit card debts with the wedding but we were lucky enough to have relatives that lent money for our special day.
Final Thoughts on Financial Mistakes
Financial mistakes are a part of life. I am sharing them with you in the hope that you can avoid the mistake that I made.
However, despite these mistakes, I feel like my financial life is at a very good point. Sometimes you do have make mistakes in order to learn from them.
Which financial mistake did you make? Please share with us!