Society smiles on “good” decisions– decisions that often follow certain rules– decisions that seem “right”, “correct” or “normal”.
These collective judgments are made on everything from nutrition to relationships to money.
But sometimes, the logical, sensible decisions just don’t work in real life. For some, conventional wisdom is anything but wise.
In this series, Financially Dumb, Personally Brilliant, we’ll meet many bold risk-takers who went with their hearts/guts over their minds/wallets.
Today’s story comes from Ryan, author of Arrest Your Debt:
Young And Dumb
I was 21 years old at the time and I just started my career as a police officer. I lived with my parents and paid a small amount of rent to them each month. Needless to say as a grown adult in a career, I was made fun of quite a bit by my colleagues because I still lived with mom and dad.
After I started my career, I made much more money than I did as a server at a local restaurant. With my increase in income, came my increase in spending. I was “lucky” that I did not go into debt with my spending, but I certainly wasn’t saving anything.
After a few months, I decided I needed to move out of my parents’ house and purchase my own home. I had little to nothing saved but that wasn’t about to stop me. I decided early on that renting would be a waste of money (or so I thought) so I went to a lender and applied for a pre-approval loan.
My Bank “Helped” Me Make Financial Decisions
After the bank told me how much I could afford rather than deciding for myself what I could afford, I started to look at homes. After looking at a couple, I quickly fell in love with a 2 bedroom, 1 bathroom condominium. The condo was selling at the top of my pre-approval and I thought it was “perfect.”
The year was 2004 and unknown to me, this condo was priced at the top of the market which would later burst a few years later.
While most mortgages now require a buyer to put down some cash, in 2004, people could get around this by taking out a loan for the down payment. Since I didn’t have any savings, that’s what I did. To make things worse, in order for me to afford the monthly payment, I applied for an interest-only loan with a 5-year adjustable rate mortgage.
In plain English, I had two loans. My first and smaller loan was used to pay the down payment on my other, larger loan (my mortgage). My mortgage was an interest only loan meaning all of my mortgage payments went to interest, never touching the principal. In essence, I was “renting” because I was paying the bank to live there.
The Beginning Of My Failure
After 5 years in the home (5 year ARM), my mortgage changed. My interest rate skyrocketed which made my monthly payment impossible to sustain.
Long story short, I was unable to continue making the payments and ultimately was foreclosed on. This put a 7-year black spot on my credit and made me unable to buy another home.
After this embarrassing situation, I reflected back on how I ended up in this mess. It was obvious that I made all financial decisions based on emotion. I refused to rent and save money because I incorrectly convinced myself it would be a waste of money. I let a bank tell me what I could afford and let other people make financial decisions for me that I didn’t understand.
Rather than reading the fine print and thinking about long term effects of my decisions, I was living in the moment. Since I was so young, I wasn’t concerned about the future or about financial education.
Waking Up And Growing Up
The foreclosure was a huge wakeup call for me. It was embarrassing and something I never wanted to go through again. It forced me to take a good look at finance in general and what I needed to do in order to educate and protect myself.
During the time of my foreclosure, there were several people who felt sorry for me and felt that the bank took advantage of me. However, I refused to let anyone feel sorry for me because it was my ignorance and emotional decision making that put me in a bad financial position. I willingly signed paperwork I didn’t read and I put my head in the sand to any other opinions that didn’t support my own.
The lessons I learned from this situation have contributed to my financial success today. I now am in a great position financially and I save much more than I spend. After my 7-year “time out,” I purchased another home with a down payment in cash and applied for a 15-year loan. I am now 2 years away from paying off my home in full which will put me in an even more secure financial position.
The biggest lesson I learned was to avoid emotional spending at all costs. Often I find myself wanting to make a purchase because it’s something I just need to have. When I find myself wanting to spend money, I take a step back and sleep on my decision.
I make a conscious effort to fight the emotional need to buy something. I force my mind to make the decision rather than my heart. By slowing myself down and thinking through purchases and financial decisions, I have been able to avoid buyers remorse for the most part.
Would I Do Things Differently?
If I could go back and do it all over again, I would like to think that I would have been able to learn about personal finances without the pain of foreclosure. Unfortunately, pain is a great motivator and if I had not experienced it, I would not be where I am today.
Through my experience, I have been able to help others avoid similar situations by educating them on personal finance. My goal is to help as many people as I can learn from my mistakes and to make personal finance a common discussion in families rather than a taboo topic.
Ryan is a financial blogger over at ArrestYourDebt.com and is focused on educating others in personal finance. He is married with three children, a girl and two boys all under the age of ten. He has been a police officer for 15 years and is a lieutenant for a large police agency in Arizona. He currently holds a Bachelor of Science in Education Degree and a Master of Administration Degree from Northern Arizona University. In addition to blogging and being a police officer, he is an adjunct professor at a local community college teaching criminal justice classes to students.
Stay tuned for the next installment of Financially Dumb, Personally Brilliant!