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My $40,000 Mistake, ...and counting

My $40,000 Mistake

I was young, I thought I had things figured and had all the answers. But I didn’t know how big of a mistake I was making when I decided to pull money out of my IRA to pay off my credit card debt. I didn’t want to pay the 18% interest and so taking out the money that was earning 7% in my retirement account seemed to be a no brainer—heck I was saving 18% in interest. I also had to pay a penalty, but the credit card interest was high enough that the penalty didn’t look so bad. And so I took the money out and paid the credit card, what could possibly go wrong? Well, as it turned out, it was a $40,000 mistake and counting. Ten years from now, it will be even more, a $90,000 mistake. (Learn more about compound interest).

Compounding my mistake.

I compounded my $7,000 mistake in two ways. First, by losing out on compound interest. Second, by going back into debt within a year of paying off the card. I knew about the wonders of compound interest but I was focused on the 10-meter target and not the 100-meter target: 20, and 40 years down the road. I was razor focus on getting rid of this debt that I didn’t see the huge mistake. Compound interest allows your money to grow year after year based on the interest it earns. So had I just left the money and never put another penny in, it would be worth $40,000 today, 20 years later; and $90,000 ten years from now. This is one of those mistakes that I wish I had a do over on.

The second way I compounded my mistake was by getting back into debt. I had paid the debt off but I didn’t change my behavior. I didn’t get on a budget. I didn’t track my spending. I didn’t save a rainy-day fund or emergency fund. I kept doing the same things, over spending and relying on my credit card to cover any shortfall. It started easy enough with a $100 here and there. Soon it was a $500 balance. By the end of the year, the account was up to $1,200. Three years later, the account was up to $2,500. It was sad to see. Whether you’re pulling money out of a 401k, IRA, Home equity line of credit, debt consolidation, transfer balancing or doing a cash-out refinance of your home, if you don’t change your behavior around money, you will fall into the same trap.

I blamed it on not having a high enough income rather than not controlling my spending. To be fair, my income was pretty low, but not low enough that I had to use the credit cards to pay for essentials. Looking back, there was plenty of money for me to pay housing, food, clothing and transportation. There was even enough for me to have some entertainment money, albeit not every weekend. However, I didn’t control how much I spent on food, clothes and entertainment. I certainly was not living below or within my means. And so the balance on the credit card continued to increase.

Lessons learned

With every money mistake, there are lessons to learn. The goal is to not repeat them. And if you’re able to use it as a lesson so that others can avoid making the same mistake, then it serves a greater purpose. Granted, teaching others is not going to get me $40,000, but if another person can make a different choice, than good for them. This is one of those mistakes that I will never make again, short of a life-or-death situation.

What about you? Have you made a money mistake you wish you hadn’t done?

As always, if you have any questions or comments, feel free to drop us an email.

3 Steps you can take:

1-Don’t take the money out unless you are in the most dire of financial situations.

2-Get control of your spending now by getting on a budget and saving an emergency fund. Find information on how to budget here.

3-Get a side hustle before using your IRA, 401k or your home as a bank account. Use your talents to make extra cash, find a 2nd job delivering pizza, or work at a grocery store or Walmart. You won’t be at this job forever, but do it until you are in control of the situation. One of these days I’ll write about my side hustles as an Uber & Lyft driver and Airbnbeing my basement.

The easy choice is to just pull the money out, the harder choice is to stick to a budget and work those extra hours at your side hustle. Your future you will be in a much better place if you pick and stick to the harder choice.

For inspiration, check out my journey on growing my wealth to 900,000 in just 10 years.


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