As we step into 2019, I reflect upon the year that’s gone by. It was one of the most defining years of our lives. I have written about our debt free journey here and here. In 2018, we really got serious about our finances. I spent a lot of time educating myself about the basics of personal finance like budgeting, debt freedom, investing, etc.
For most of my adult life, I had very little to no knowledge of how money works. I often looked at wealthy people and assumed they must have access to some inherited money or they had the circumstances in their life lined up in favor of them or they were just plain lucky. Added to it, my own relationship with money wasn’t any good. I looked at building wealth as a selfish pursuit. I have written about some of the money beliefs that had kept me from building wealth and changing my relationship with money.
Top Mistakes And Lessons Learned
I would like to share with you all the highlights of one of the most defining year of our lives. I will walk you through the mistakes we committed and the lessons we learned along the way.
1. Not Paying Cash For My Car Purchase
About 4.5 years ago, I bought a 1-year-old Nissan Altima that cost me around $20,000 with 25,000 miles on it. I financed my car with an auto loan – 48 months @ 3%. My EMI was about $330 a month. It wasn’t a bad deal or at least I thought so.
By the time I realized my mistake, I had carried this loan for almost 40 months and still had $5500 in balance. Although my interest rate wasn’t that high, I had stretched my loan way too long.
We often overlook the true cost of car ownership. We don’t factor the insurance premiums and auto maintenance costs like car washes, tire replacement, oil changes, etc. All of these can add up over time.
Given my salary at the time of purchase was $72,000 I would have been better off buying a car worth about $10,000 and paid cash for it. I wish I had known better.
That $10,000 invested in a simple S&P 500 index fund until 65 years of age could have turned into $242,538.35.
Lesson – Don’t ever finance your car. Always pay cash for it. Those simple monthly payments can cost you a fortune.
2. Not Having A Mission For Every Dollar
Before learning about the merits of budgeting, I used to look at budgeting as constraining and something that takes away your freedom to spend money. This seems to be a very popular myth about budgeting. As I learned later it was quite the opposite. A budget is basically assigning every dollar a mission and telling it where to go instead of spending it and wondering where it went.
For most of my adult life, I have never budgeted and it was only in 2018 that I wrote my first ever written budget. I basically looked at my income as something that needs to be spent until the last dime is over. Although I had a vague idea about where I want to spend my money, I never wrote it down. As a result of this, I used to spend money with my credit card on impulse purchases and unplanned restaurant visits.
Before I learned about the basics of budgeting, I spent a lot of time trying to read about different budgeting techniques. I then considered a variety of budgeting tools like Mint, Quicken, YNAB, etc. I finally managed to zero down on Every Dollar.
Lesson – Always have a written budget. A good budget surfaces all the leaks in your wallet.
3. Not Taking Advantage Of A Roth IRA
This is one those places that have cost me the most in terms of my future wealth. I often heard the term ‘investment’ and translated to – I too will become an investor when I make enough money. How stupid! It’s akin to saying – I will exercise once I lose weight. Good luck with that one.
My whole understanding of investing was turned upside down when I started reading about personal finance books. I realized that ‘investing’ has nothing to do with large sums of money. I could begin with as little a $50-100 a month. I learned about different investment options like IRA, Roth IRA, Taxable accounts, HSA etc. Until then my only investment was my employer offered 401(K). For some strange reason, I didn’t realize that saving for retirement was also a form of investing.
Of all the types of accounts, I learned about, Roth IRA was the one I felt I should have started investing the earliest. The benefits of a Roth IRA are simply too good to be ignored. I urge anyone who is reading this and hasn’t yet started investing in a Roth IRA to consider investing in it.
I finally managed to fund my Roth IRA account for 2017 (in
Lesson – Roth IRA is one of the best ways to let your money compound over extended periods of time, even across generations. Since it doesn’t have any RMD requirements it is an excellent wealth transfer vehicle.
4. Avoid Credit Cards
Before 2018, I looked at credit cards as easy money. It provided a convenient way to spend my money and I hardly tracked it. The fact that it involves ‘very less friction’ when spending your money, credit cards are one of the easiest ways to spend more than you intend to. The credit card industry in the US works very hard to ‘de-sensitize’ debt and ‘normalize’ spending with a credit card.
Credit cards are the most aggressively marketed product on the planet. I receive an offer to open a credit card company almost every single week. There is simply too much money to be made in this business and everyone wants their share. A lot of effort goes into structuring an introductory offer on a credit card. They target all segments of customers from those who are looking at no annual fee cards to those who want to transfer their balances at 0% APY for 12-24 months. There is a card for almost every season of
I personally decided to close 7 out 8 credit cards in 2018 and decided to stick with just 1 card. The first thing I noticed with this dramatic change is that my spending came down automatically. I started “feeling the pain” of parting with my hard earned money. The money left my checking account immediately instead of the due date. I began to look at my purchases differently and my shopping became very planned and intentional. I rarely do impulse purchases now.
I am more than convinced that credit cards make you spend more than you need to and I am gonna avoid them at all costs.
Lesson – Credit Cards make it easy to spend money since they take away the feeling of pain. Switch to a debit card or cash for all your transactions. Use credit cards only as an exception.
Goals accomplished in 2018
We are very happy to start 2019 on the solid ground we managed to build in 2018. Here’s a list of goals we managed to knock off in 2018.
- Max out my 401K account.
- Max out my Roth IRA account.
- Max out my HSA account.
3 months ofemergency fund.
- Start saving for a house down payment. We have made great progress towards it so far.
How was your 2018? What goals did you manage to knock off? I would love to hear from you.