Most people learn from their mistakes the first or second time. But this wasn’t the case for me.
I was the average American living paycheck to paycheck. I considered myself responsible, but I didn’t have a budget. I considered myself “un-average,” but I was in debt like most. I considered myself knowledgeable with money, but apparently, I didn’t know enough. I would’ve never admitted living paycheck to paycheck until I received a bill stating I owed $70 in interest. And on top of that, I’d realized how much my car loans had cost me.
I began searching for answers on the internet, article after article, book after book, desperate to escape debt. Although debt isn’t a good thing, it became my lesson in disguise. Debt forced me to step out of my comfort zone, change bad habits, and chase financial independence.
Here’s how I’ve accumulated 48K in debt, and three key lessons I’ve learned.
A Quick Path To Debt
Is your family good with money? Mine wasn’t. Yet, they weren’t terrible, either. I was 18 when I’d financed my first vehicle, a 2009 Honda Civic LX for $19K. I was proud and felt I owed it to myself after landing a higher paying job. Coming from a Hispanic family, I was told it was best to buy a car from the dealership to avoid maintenance issues. In other words, it was better to pay $300 for a new car vs paying $100 each month to a mechanic for an unreliable car. Makes sense, right?
For the 18-year-old who drove a 1999 Dodge Stratus with a dented door, it did. Life was good and the car was indeed “reliable” — until the transmission went bad in my senior year in college. The worst part was that I’d just finished making my last few payments for this car. And if this wasn’t bad enough, I’d eventually press the “reset” button for debt and start all over again.
Debt Sneaks In A Second Time
People learn from their mistakes right? With a month till graduation, my family again recommended me to go back to the dealership and grab a new car, except this time it made sense to lease. Deep down, my gut was telling me to avoid getting back into debt, but I also feared to have an unreliable car while transporting to school or commuting to school. So what happened? You guessed it. I signed a three-year lease contract for a 2015 Toyota Corolla. Although my gut was screaming at me to not sign any contracts, fear got the best of me that day.
I drove this vehicle for about a year and quickly realized that I’d eventually go over my annual mileage allowance. After crunching the math, I calculated that this would cost me anywhere from $2,000-$4,000. I researched for cost-effective ways to get out of this lease but had no luck. Eventually, I’d decided to buy out my lease for $4000. But despite this bad experience, I ended up making the same mistake all over again.
Third Time Is The Charm
I didn’t crunch the math back then, but by this point, I’d paid $29K in debt solely from car loans. Imagine how better off I’d be investing this money and letting compound interest do its magic. But here’s what happened next…
I’d decided to look for a different car after returning my leased car. However, without a strategy in place and the pressure I gave myself to find a car quickly, I’d end up making another costly mistake. The result? I signed some papers yet again to finance my 2010 Lexus IS 250, costing me $17K. It made sense at the time, because I’d financed my first vehicle for $19K when I was 18 and earning about half as much income, so I was actually saving money this time. (*shakes head*)
For the first time, I’d felt like I’d made a smart choice. I couldn’t have been more wrong. Although I wasn’t able to escape debt for the third time, I’d eventually improved my spending habits. It was around this period when I began reading finance books, and personal finance blogs that inspired me to improve the way I managed my money. Let me walk you through the lessons I’ve learned after paying down $48K total.
1. Invest Only In Assets
You may have already heard: “Invest only in assets, not liabilities.” In other words, don’t spend your money on items that aren’t helping you make more money. Here are some examples:
- Do purchase: 1. Real estate as a means to generate additional income
- Don’t purchase: 1. A vehicle that you can’t pay 50–70% of the principal cost.
List all of your current assets and liabilities on a separate sheet of paper. Then start investing more into your assets, and focus on eliminating your liabilities.
2. Constantly Invest In Yourself
You don’t know what you don’t know. This couldn’t have been truer in my previous situation. While you don’t need to become a “financial expert” to properly manage your finances, you do require an above basic level of understanding. Here are few things to consider:
- Do you feel motivated to invest 10%+ in your 401k?
- Are you aware of how much you’re spending each month?
- When do you plan to retire?
Chances are if you’re thinking like I did in the past, you can’t answer all the questions above with confidence. I’m not here to point out what you don’t know, but rather to prove that we can always improve in all areas. Invest in yourself by constantly reading books, personal finance blogs, and taking specialized courses. It’s good to become well-versed in personal finance but definitely explore other areas. You’ll find that once you start becoming more knowledgeable in personal finance you’ll naturally want to grow in other topics that interest you more.
3. Only Set Meaningful Goals
Have you ever wondered why you’ve had a difficult time-saving money? The problem wasn’t that you weren’t motivated enough. A big reason was that your goal wasn’t meaningful enough. If you’d decided to save up $3K in one year to finally have the courage to leave an unhealthy job, I bet you would’ve been more likely to stick to your budget. While not all goals may be this extreme, they should always be meaningful to an extent. Otherwise, you’d eventually lose motivation to continue saving.
Grab a sheet of paper and jot down three important financial goals you’d like to achieve by the end of this year. Here are some examples:
- Pay off $1,000 in credit card debt
- Save up $2,000 for your emergency fund
- Contribute 10% towards your 401k account
After you’ve jotted down your goals, create a plan. How much will you need to save each month to accomplish these goals? If your current income isn’t enough to help accomplish all three goals will you be willing to start a side hustle? Don’t settle for accomplishing your goals someday, take the initiative to make progress each day.
Chris’ passion for writing is to inspire other working Millennials to not just settle for “retirement someday” but to reaching financial independence faster than most. Grab his FREE 5 Essential Money Management Strategies Checklist.
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