Finding Some Good In My Worst Financial Decisions

October 26, 2015

Have you ever made some really dumb mistakes with your money? Perhaps your rational brain was screaming “No!” at the time but your emotional brain won the battle.Well, even though I may be a professional financial planner tasked with leading others to smart financial decision-making, I’ve had some major money missteps along this journey called life too. This week is the first in a series of blog posts about a few of my biggest blunders and how I tried to turn those mistakes into some good old fashioned life lessons. (Unfortunately, some life lessons can be quite expensive.)

One big mistake was signing up for my first credit card in college to build credit and for “emergencies.” It’s amazing how seemingly insignificant moments can have a profound impact on our future. Even though I had always worked hard during the summers to save up enough money to cover my expenses throughout the school year, the concept of spending future money was an easy sell for me. I just knew that I’d be able to pay off that credit card debt once I graduated college with an instant six-figure salary (hmmm, that was the plan at least).

My initial credit limit was probably around $1,000 and I started out with good intentions of always paying off the balance in full. Of course, we all know what happens to good intentions without a good plan and poor execution! Suddenly, the credit card started funding nice dinners at Charleston’s finest restaurants, bar tabs, concerts, trips to the MLB playoffs to see the Braves, and an incredible CD collection that has somehow vanished over the years. (Who listens to CDs anymore?) Over time, Citi rewarded me for paying on time and having a good credit score so they eventually raised my credit limit from $1k to over $35k.

My love/hate relationship with Citi lingered on for a few years after college and those seemingly minor credit card balances led to some major stress and frustration during the first few years of marriage. Finally, my aha moment occurred one day when I simply took the time to calculate how much money I could save in interest alone by ending the vicious debt cycle. When I plugged my actual monthly payment into an investment calculator and saw the opportunity cost of that debt, I had my instant motivation to start changing some spending habits.

How can I find some good in those poor credit management decisions as a student and early in my career? A major positive was that one of my credit card purchases was a cruise during college where I met my wife in the Bahamas. Also, as my longest open account, this card represents a major plus on my credit history now and my credit score in the 800’s has helped me qualify for low cost mortgage loans.

By far the biggest lesson that I learned from my early career struggles managing credit card debt was realizing that a credit card is not a valid substitute for a genuine emergency savings fund. The “save for a rainy day” financial lesson was always taught in my household growing up but on many occasions, I would turn to the credit cards to help pay for unexpected expenses rather than actually use money from my savings account. I also found myself redefining what that word “emergency” actually means while funding lifestyle choices that were not necessities.

As I reminisce about my own financial mistakes, I am reminded that the best pathway to take to get out of the debt cycle requires changing spending habits and improving saving behaviors. You have to focus on both to be able to truly move forward. This is the reason that it is often recommended that you build up some type of starter emergency savings fund ($1-2k) before aggressively paying down high interest credit card balances. Then once you have accomplished that goal, you can move on to fully funding your emergency savings to minimize the likelihood of reverting back to old habits.