Mistakes Were Made


I’ve done my share of financially stupid things.

What follows are my four biggest financial fuckups.

#1 Overspending on Housing

Looking back, I’ve always spent too much on housing.

  1. First, I overspent on apartments.  I had a roommate for a only one year of my working life.  The remaining time I’ve rented studios and one bedroom places by myself because I “deserved” the quiet and privacy after returning home from yet another stressful day at the office.  Needless to say, this was incredibly stupid behavior.  Most of those years, particularly in my mid-20s, I was probably home fewer than 10 non-sleeping hours a week because the remainder of the time I was either working, socializing, exercising, or out doing life-maintenance/chore type stuff.    For example I spent 4 years in San Jose paying 1200/mo for a studio when I could have been renting a room for 600.    I also overspent for a one-bedroom close to Boston when working for a company in the downtown area.  Same deal – paid $1300/mo when I could have been paying $700 for a super-nice room somewhere.
    • Lost Savings over 7 Years:  About 80K.   I reach this number by assuming I would have invested the savings in Vanguard’s total stock index (VTSAX) instead.
  2. Second, I overspent on a house.  I was eager to get a place with my significant other, and at the time we thought we might have children together, so we paid a lot of money for a place with enough space to accommodate both if  we had 2 kids.   And we did this in one of the most expensive areas of the country.  The property ran us 650K.  We co-own so I consider my share to be 325K, on which I pay $800/mo in mortgage, plus $400/mo for taxes and insurance which comes out to a rent of maybe $1200/mo.   Fast forward six years:  We’re not having kids, and we want to downsize.  I’ve run the numbers and the cost of paying for the space we didn’t use is 5.5K each year for each of us.  It works out to even more when you consider you have to put 20% down into your house and that’s money that isn’t working for you in the market.  We should have gotten a house for half of what we did, clocking in around 320-340K.
    • Lost savings over 6 years:  About 60K.   This number is determined by taking the 5.5K/yr figure and investing it in VTSAX over the same time-period.  Then also adding hypothetical earnings on the 65K that was locked up in the house. (20% down payment on 325)

I do want to point out that we did not have a McMansion.  We have a 1600sq foot 3BR/2B.  The problem is that we live in the bedroom communities of Boston which are insanely expensive.  We also could have/should have chosen a different area.  There are alternatives.

Total Estimated Loss: 140K over 14 years.

Pissed away.  Blown to the wind, never to be recovered.  And I don’t think that living in those places did anything to improve or change my levels of happiness or so-called quality of life.  All it’s done is made me work several years longer than I have to.

Put another way, in many years, the money spent on housing prevented me from reaching my 50% taxable account savings rate goal, meaning I couldn’t put in 30K and settled for 25.

At any rate, my wife and I are working on downsizing within the next 12-15 months to correct this problem.  It’s likely that we won’t buy our next house.

Aside #1: I really wish jlcollinsnh was around and I’d read this post before deciding to purchase.

Aside #2:  I believe overspending on housing is the number one mistake that pretty much everyone makes.  It’s very difficult for humans, wired the way that we are, to avoid this pitfall.  The first thing almost everyone does when they get a “real” job is upsize their living arrangements.  And condos/houses are very visible status symbols.  So-called proof that you’re making it in life.  But numbers don’t lie — super-sizing your crib is the easiest way for most folks to spend a lot of money that should instead be saved for FI.

#2 401(k) Errors

They teach you a lot of things in college but they don’t teach you about saving.

When I entered the workforce, 401(k) training was not mandatory. It should have been.

Because the 22 year old version of myself took one look at the classes my employer offered and decided: That’s not for me. That’s waaaay too flipping boring.  Only an accountant would spent his/her free time learning about counting beans.  Yes, that’s how I thought of tracking finances, saving and investing back then.  Counting beans.  There’s a strong possibility that I was an arrogant little shit.

It didn’t help that at the time I was excited about my industry and thought I probably loved my job.  Why would I want to save if I would be working forever, doing something I would do even if nobody paid me?   Answer: I wouldn’t.  And I didn’t.

By age 25, reality had really settled in.  I learned the hard way that jobs that people start out loving can change quick, and turn into something that feels intolerable.  I started to think more about saving and investing because I needed to have a dream — a way out of the industry.  So in early 2002 I finally got around to doing my research and I signed up — about 2.5 years late.  Even when I started, for the first year I only put in 6% of my salary — enough to get the full company match.  It was only in year four that I finally started to max my contributions out.

If I’d maxed out from the beginning, I’d have an additional 65K or more after compounded earnings at 5% on the money I failed to put in.  Of course, that would have likely reduced the amount of money I was saving in my taxable accounts.  I remember that I had some significant money, more than 60K in an ING Orange savings account earning something like 3% and yet I wasn’t maxing my 401(k).   Wow.   The rule is:  always max out your 401K before saving a ton of money in a savings account.  Unless you have a family to feed and you need the savings account as your emergency fund.

Total Estimated Loss:  32K.  

#3 Unnecessary and/or Stupid Rebalancing

It makes sense for people with high incomes who want to retire early to have a large taxable account.  Assuming you have no debt, you’re generally supposed to take your net pay and  1.  Max out your 401(k), 2. Contribute to your IRA 3.  Put the remainder in a taxable account.

And it also makes sense to re-balance, if your asset allocations get too out of whack.  If you are aiming for a 70/30 stock-bond split, for example, and due to a market downturn, you’re now at 55/45, it may make sense to re-balance.

But you have to do the re-balance intelligently, or you will pay heavy tax consequences.

In your retirement accounts — your 401(k) and your IRAs — you can re-balance whenever you want, without consequence.  You don’t have to pay capital gains on any exchanges.  But in your taxable account, the minute you sell shares, it’s a taxable event.

Without going into too many details, I’ll just say that I created unnecessary taxable events some years and then had to pay thousands of dollars in taxes.  This is because I didn’t, at the time, properly understand loss and gain harvesting.  The Mad Fientist has some excellent posts on this topic which explain these subjects better than I ever could — Tax Gain Harvesting and Tax Loss Harvesting.

The bottom line is

  1. It’s much, much better to, in your taxable accounts, “re-balance” through investing rather than exchanging or trading.  So if you suddenly have that 55/45 stock/bond split and you want to get it back to 70/30, start making all of your future contributions to your stock funds and it’ll take care of itself.
  2. You should probably sell the portion of your funds that took a loss — in this example, it’d be your stock funds — and exchange them into another fund.  Take care to make sure that the exchange does not qualify as a wash sale and you’re good.  For this, you get a tax break.

So instead of creating an event where you pay taxes, you create an event where you get a refund, and you still get what you want over time — a re-balance — as you continue to pour money into the asset class which has taken a hit.   This is called having your cake and then getting another one served to you while you’re still eating the first.

Without boring you with the hideous numerical details of how I’ve botched this, I’ve paid at least 15K in taxes that I didn’t need to pay by not following this strategy.  And by failing to loss harvest until recently, I’ve missed out on about 60K of deductions — probably 18K of actual refund money — that I could have taken.  This is a real chunk of money that I’ve missed out on by not properly understanding how to best manage a taxable accounts.

Better a slow learner than a no-learner, right?  That’s what I tell myself, anyways.

Total Estimated Loss:  33K.

#4 First Year Spending Syndrome

I didn’t have a whole lot of money growing up.  Oh, I’m not going to bitch about it and I’m not looking for sympathy.  Just stating a fact.   And I held various jobs in college to help me to buy books and food and stuff without taking on even more debt.

But I never had enough money to get whatever I wanted.  I guess you could say that I felt deprived.  All around me I saw my peers — students with wealthy parents in high school, more students with wealthy parents in college, then co-workers at my first job — spend like madmen.  They bought everything they wanted.  They went out to eat whenever and wherever.

I started my first job after college in September 1999.  The starting salary was 60K.  And I was paying only $500/mo in rent so I had tons and tons of discretionary income.  I figured, hell, I’ll spend it.  It’s my money.  It needs to be spent.

I had my own pain points at the time.  I was really into music but couldn’t buy all of the albums that I wanted.  I wanted to own a nice guitar instead of the off-brand Epiphone POS that I had.  I wanted to make friends and do whatever they were doing.  And I wanted to buy basically every video game that came out for the newly released Sega Dreamcast.

So I did.  That first year, I took home about 44K after taxes.   I only needed 12K a year or so for base cost-of-living.  Rent, utilities, clothes, eat-at-home groceries.  And I paid about 3K into my student loans — the minimum payments only, of course.

But I managed to blow the other 29K  or so without any trouble.

Looking back, I still don’t know exactly how I managed to shell out 2,400 a month on stuff.  There are knowns and unknowns.  I’ll list out what I can account for.

  • 4.5K on 300 or so CDs.  I bought everything I was even remotely interested in.
  • 3K on a nice computer and monitor.
  • 3K on clothes.  Amongst other things, I finally bought a “nice” suit, and waaay overpaid for it, of course.
  • 3K on video games.  I bought everything.  Games, peripherals, systems.  I even bought a Nintendo 64.  New, of course.
  • 2K on an audio setup.  Hey, at least I’m still using the same receiver I bought back then.
  • 1K on a mall spending spree.  This is my greatest shame.  My friend Rich and I went to the local mall with 1K in cash just to see if we could blow it in a day.  We bought custom action figures, a boombox, expensive lego sets, some overpriced guitar tablature books, and god knows what else.  The only thing I still have is the boombox, which comes in handy if I’m going somewhere to do a lot of housework — like painting or something — and I need company.
  • 11K on eating out, bars, and taxi.  That’s right — I believe that I was throwing out nearly a thousand dollars a month — two fifty every single week — on transient, near-worthless food and drink items.
  • 2K on a trip to Vegas.  This was my experiment taking an expensive vacation.  I stayed at the Bellagio and ate wherever I wanted.  On the plus side, I barely gambled — I’m just not that interested in it, never have been.  But still.  It was 2K for about 4 days away.  Unreal.

After that first year of insanity, I started to reflect a little on what I was doing.   The spending wasn’t making me happy.  And I was running out of things to buy, anyways.  Sometimes I’m glad I’m not absurdly imaginative because in this case it served me well:  my mind literally couldn’t think of additional ways to continue to blow through this volume of cash week in and week out.  So I started to automatically tighten up a little.

Once I saw that I had money building in my checking account, my thoughts shifted.  What can I use that money for besides buying stuff?  I started to remember long-discarded lessons about saving and investing.  Feed the birds versus tuppence from tuppence.  And so the second financial year of my working life became significantly different from the first.  It was a transition year.  I hadn’t yet learned to be frugal, but I wasn’t spending nearly as much money, and I was starting to become interested in saving again. I opened an account with ING and started pushing funds into it.  And I started to pay down the 30K of student debt I’d graduated from college with.  I still spent a fair amount of money — particularly on restaurants — but my material purchases went down by 80% that year. I also didn’t go on any other expensive vacations, and I avoided buying a car or cellphone.

Basically, I’d come out of the other end of the First Year Spending Syndrome wiser.  I’d learned what I needed to learn:  Simply spending money doesn’t make people happy.  Before I’d only heard it from other people, but part of me hadn’t believed it.  Now I knew it firsthand and internalized the lesson.  Although I have regrets about that year, I also somehow think it was a necessary part of my journey, because I got a taste of life’s so-called luxuries and realized at my core that it did nothing for me.  In fact, I found that such wasteful use of resources made me feel dirty, like an oil drum was leaking somewhere my brain.  It’s still there, and I do believe that the poison keeps me honest.

Total Estimated Loss: 37K



Final Tally:  242K


Holy God.  This obviously an absolute boat-load, crap-ton, shit-pile of money, and it’s proof that someone with a similar income path to my own can retire at age 30 or 31 with a great standard of living, 24 to 30 grand a year of no-tax passive income, if they’re dedicated. Because I’ve just proved that I could have done it myself.

But hey, we all make mistakes. It’s rarely too late to recover.

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9 Responses to Mistakes Were Made

  1. Aaron says:

    I know you wrote this post to show a bunch of mistakes, but it’s my favorite one so far. The spending sprees are awesome. At the time, I’m sure it was fun. Obviously it’s not fun now looking at all the money you missed out on. But still, spending like Lloyd Christmas on the ‘bare essentials’ can be hilarious at times.

    • livingafi says:

      Great reference, and yeah, that’s pretty much what I did. Just recently heard there’s a DnD 2 coming out. The real thing, with Jim Carrey and Jeff Daniels reprising their roles and the Farrely Bros. directing. If it’s half as funny as the first movie, it’ll be good.
      BTW, I don’t really regret most of the spending, as idiotic as it was. I mean, there’s a difference between recognizing that you made mistakes (check) and regretting the mistakes themselves (no check). What’s done is done-erer.

  2. No Waste says:

    I will say this – that Vegas trip was pricey but it was an experience that you’ll carry with you forever. That’s the only choice that I would never criticize.

    Also, you still own all of that music so if you like it, it’ll be in your library forever and will likely come in handy when you have so much more free time.

    I’m digging through your archives and enjoying the read.

  3. I live in the northeast. I also over paid for my house. It’s very hard to market time in a over inflated market. Thanks for the braking down the mistakes you made on your journey to FI. We all make some mistakes when we were younger. It’s the recovery that counts.

  4. lentils says:

    I feel like some of these expenses were incredibly valuable, worthwhile expenditures. You focus on the fact that you no longer own the things you bought during that first year, or bemoan the wastefulness of that trip to Vegas or the meals and taxis, but what you got to keep pl from all of that is the full, informed, internalized fact that the ability to spend as much as your brain could think of spending didn’t make you happy! How much has that knowledge saved you over the intervening years? Getting your spendiness out of your system early has empowered your frugality ever since, and probably helped contribute to your realization that FI was a priority. I’m a big proponent of the philosophy that the only mistakes worth regretting are those we don’t learn from.

  5. You are a quick learner. It’s taken me years to begin to catch on, both with regard to the intricacies of investing and putting my spendy ways behind me. One thing in this post that jumped out at me is that you might be holding bonds in your taxable account. This explains (better than I ever could) why you should hold bonds only in tax-advantaged accounts: http://www.bogleheads.org/wiki/Principles_of_tax-efficient_fund_placement.

  6. mies says:

    Good read. I didn’t blow through that much cash in my younger days, but I have a collection of crappy DVD’s I regret buying. I can’t even sell some of them back to Amazon.

    I also sympathize with the overspending on housing. My wife and I bought a $167,000 ranch promptly before the housing market crashed in 2008. We lost $32,000 in home value when everything tanked. The other mistake we made was not paying more aggressively on our mortgage. Our mortgage company allows additional principal payments without penalty. We didn’t make many extra principal payments. I think we flushed about $50,000 down the toilet on interest over 7 years.

    I also bought into a mutual fund I didn’t understand in 2008. I bought when its values were historically high. It tanked a few months later and still hasn’t recovered it’s value. I only lost a $1000 on that, but I could have put that money towards my mortgage principal.

    My final mistake was not taking advantage of 401k’s at old employers. I lost all of my 20’s and the first couple of year of my thirty’s because I was too short sighted to see the benefit of investing in the 401k’s they offered. I lost about 10 years worth of savings and I’m kicking myself now. Hindsight is 20/20.

    I guess we all have to make expensive mistakes. I cashed out the mutual fund this year and I should be able to deduct the $1000 on my taxes. I also refinanced my mortgage to a lower rate and shorter term recently. We will save close $70,000 in interest. I finally signed up for the 401k a year ago and recently bumped up my contributions to get the full employer match. Better late than never, but I left a lot of money on the table.

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