Happy New Year! One of our favorite things to do every January is to make goals or resolutions for the upcoming year. These usually range from savings goals, spending needs, to wants. Hopefully this list of five common financial mistakes will inspire you to make your own. Even small changes can make a big difference in the long run. We will have several upcoming posts detailing each of these mistakes in even more detail, but for now, enjoy!
1. Locking yourself into a two-year cell phone contract (and overpaying for it)
There’s almost nothing in the world we hate more than cell phone companies. They lock you into a two-year contract, often make you lease (or at a minimum finance) your phone, and charge an arm and a leg for it. Most people spend well over $100/month for their cell phone plan. When we got married and started paying for our own cell phone bill, we knew that we had to find another way. We currently use Cricket Wireless for our phones. Cricket is a company owned wholly by AT&T, yet operated in a completely different way. It is a month-to-month plan (no contracts), you can buy your own phone from outside providers (we typically buy off eBay), and prices are way lower than average. A longer post will come on our cell phone plan later, but the long story short is that we pay $52/month for our phones and have noticed almost no difference from our plan that was well over $100/month. Look around – there is more out there! Other companies such as Republic Wireless and Project Fi also offer great deals.
2. Buying more house than you can afford
When we bought our first house, Jake had not even started his first teaching job and Keli had been working as a CPA for less than a year. However, because we had relatively good credit and a modest down payment, we were approved for a loan of over $300,000. That’s just insanity. We didn’t need nearly that much house in our low cost of living city! We ended up buying one for less than half the price. Keeping up with the Jones’ is just not worth it. A good rule of thumb is that your house payment should be no more than 25% of your take-home pay. However, the lower the better. Our 1000 square foot house is plenty big enough for two people (and one furry creature). On top of that, we live in a safe neighborhood near downtown and the entertainment districts while still being in a good school district. It can be done.
3. Thinking of your car purchase in terms of a monthly payment
There’s a local car commercial in our area that has a tagline that goes something like this “I’m in a pickle, so you can drive for a nickel”. This kind of jargon makes us sick to our stomachs. One of the biggest financial mistakes to make is thinking of your car purchase in terms of what monthly payment you can “afford”. Sure, you may be able to swing $300/month until you need that money for an emergency. But have you ever considered what the opportunity cost is of buying that car instead of using your money somewhere else? Cars are one of the only assets you buy that go down in value. Always. Why would you ever invest so much money into them? Nice cars are mainly a status symbol for most people instead of a way to get from Point A to Point B. Next time you consider buying a new car, consider if you want to pay $25k for something that will be eventually worthless. If you instead purchased a $10k car and invested the additional $15k into the stock market, you would have $32k in 10 years with an 8% market return.
4. Not investing into retirement accounts
We know so many young people who tell us they will invest in their retirement “later” when they have more money. This is a huge mistake. The best time to invest in retirement is right now. Compound interest is a magical thing. If you put in $5,000 per year from age 25 to age 35 and never put any more in after that, you would have about $730k at age 65. On the contrary, if you put in $5,000 per year from age 35 to age 65, you would only have $611k. That’s pretty amazing to think about. You see, it’s not about timing the market, it’s about time in the market. If you are heavily debt burdened, we would suggest focusing on paying down the debt before investing a lot. However, you should always invest up to any percentage match you get from your employer. That is the definition of free money.
5. Paying for Cable TV
Isn’t it 2017? Are you really still paying for cable TV? How many more episodes of House Hunters can you watch before realizing it’s no longer worth it? We cut the cable back in 2013 and have never looked back. We now “survive” on an antenna, Netflix, and Amazon Prime alone. Total savings = >$100/month. While we are both avid sports fans, we have been able to use our parents’ ESPN logins on our Apple TV to catch most of what we miss on a regular network. If for whatever reason there is a big game we can’t get, we occasionally will go to a bar to watch. The cost of a couple of beers is a lot less than that monthly cable bill. If you don’t have the luxury of parents with cable like we do, there are many other ways around it. Sling TV and YouTube TV are just a couple of other ways you can pay significantly lower prices and not miss out on sporting events. Or, you know, you could always read a book.