Over the past 10 years, my wife and I have paid off literally hundreds of thousands of dollars in debt on salaries that, except for one exceptional year, were well below $100,000 annually. We had three children as well, moved into a house that we now fully own, and currently have zero debt. We’re also well along the road to financial independence, where our investments produce enough income to pay all of our bills and expenses.
Without a lot of good choices, this kind of turnaround would have been utterly impossible. Sarah and I worked incredibly hard to make this happen. We drastically cut our spending. At the same time, we worked very hard to improve our income as I started side businesses and Sarah worked to earn a masters degree to improve her earning potential.
Still, along the way, we made a lot of mistakes. We were far, far from perfect in terms of our spending, saving, and investment choices.
Here are nine big missteps we’ve found ourselves making along this path to financial independence. I’m sure that we’ve made others and we’re probably still making others.
Along with each of these missteps is a description of what we did to fix the problem.
Misstep #1: We Underutilized Retirement Savings Options
As we dove into the path to financial independence, we were very concerned about financial flexibility. We did not want our money tied up in a place where could not access it. We wanted the flexibility to use it for things like buying a new home or launching a family business. We had a long list of dreams and retirement was only one of the items on the list, so we chose to hedge our bets and utilize an ordinary taxable account for our investments.
With those investments, the dividends earned go into our pocket (we actually just reinvest them) and we have to pay taxes on them. Similarly, when we sell those investments, we have to pay taxes on the gains on those investments. Not only does that eat up some of our gains, it takes some accounting work to keep track of everything (such as how long you’ve owned the investment, which can change your tax rate) though most investment firms help with this a lot.
The problem with this plan is that it’s shortsighted. First of all, if our goal is financial independence and we do plan on retiring as soon as we’re able, retirement plans make a ton of sense. We can start withdrawing from them at age 59 1/2, so if we retire early at, say, age 50, we only need to live for 9 1/2 years from our taxable accounts before we can start using the retirement accounts and their tax benefits. There are even some loopholes that allow us to start doing it early, though I am not confident that small loopholes will remain open through our retirement.
The only drawback that might occur from putting at least some of our investments into a retirement account is that we want to use all of it for some purpose prior to retirement age, and when we sat down and really looked at things, we quickly realized that we would never do that. We simply aren’t going to sacrifice our future in that way.
In short, in our desire to be flexible, we cost ourselves a few years of IRA contribution windows.
Solution #1: We Are Now Fully Funding Our Roth IRAs and Downshifting Other Options
Our solution was simple. We started fully funding our Roth IRAs and, to come up with that money, we cut back on the amount we were investing into taxable investments. My wife also contributes to her plan at work. I have also been studying 401(k) plans for self-employed people, but I haven’t been really satisfied with the options.
In short, we’re now putting much more money into retirement plans and less money into taxable investments. With reasonable investment growth, we look to be in pretty good shape from here going forward.
Misstep #2: We Made Awkward Choices About Child Guardianship
When we first had children, much of our focus in terms of deciding who would be the guardian for our children centered around money. We were very concerned about who would be able to financially care for our children should we be unable to care for them ourselves.
That viewpoint caused us to settle on one option. It wasn’t the ideal culture we wanted for our children, but we were very sure our children would be loved and well cared for and supported financially in whatever they might do.
Over time, however, we began to look differently at our financial situation. I have a pretty healthy term life insurance policy on me that would serve Sarah very well in the event of my death, and she has a smaller but still pretty healthy one. What we hadn’t really considered is that the money from those policies would care for all of our children in the event of our death, and care for them very well.
Once we realized that money wasn’t really a consideration, we began to rethink things.
Solution #2: We Focused on the Best Guardians, Not the Money
After some careful thought, we ended up changing our guardianship choice and selected a couple who we knew shared our values and would share a lot of our parenting style. Their career choices somewhat self-limit their financial resources, but with our life insurance, that would become a non-issue for our children.
Now, in the event of our death, our full estate becomes a trust for our children, with money coming out of that trust to ensure their care well into adulthood and money left behind to help them get started into adulthood. We now feel as good as we possibly can about the possibility of our children growing up without us.
Misstep #3: I Personally Dive Too Hard Into New Hobbies
Whenever I get into a new interest, I tend to really obsess over it. I dig in very deep for several months, discovering new things about the hobby, meeting new people, and so on.
And then, at some point… the bloom is off. I eventually move onto something else.
It happens over and over again with me. I’ve done it with more than a dozen hobbies over the last decade.
On the surface, there’s no real problem here, but if you look a little closer, there really is a problem. The problem is that I tend to overspend on those hobbies when I’m really getting into the groove, convincing myself that this hobby will be a really long-term one. I’ll find every reason and every excuse possible to buy the stuff I think I need to really sink my teeth into a hobby.
It is my worst personal buying habit and it has been since we started this journey to financial independence.
The thing is, I can’t fight this with one single move.
Solution #3: I Now Actively Try Things First Using Several Smart Techniques
My strategy for handling this problem is actually made up of a handful of loose tactics.
First, I join social groups that are related to my interest. These are mostly online, but if I can find a face-to-face group via Meetup, I do that, too. I want to meet people and interact with people who are into this hobby.
I self-consciously dabble. By this, I mean that I intentionally don’t start buying things for the first month or two that I’m interested in something. Instead, I learn what I can from the outside, by reading things and listening to people and meeting them.
During that “dabble” period, I focus on the minimal stuff I would need to try out a hobby. I don’t look for the high-end gear. I look for just enough things so that I can actually participate in the hobby, but not the expensive “quality” stuff. My passion in the moment is going to overlook the low-end stuff and my common sense tells me that I’ll probably burn out.
The best part? I try to buy this “starting gear” from more experienced people. What I’ve learned is that people who are really into the hobby often have lots of beginner gear that they’ll sell to you for pennies or even lend or give to you at no cost at all. I’ve had people recently loan or give me things for making mead and for practicing calligraphy, just because I participated in the group for a while first and asked around when I was ready to buy.
Since I started following this, I’ve yet to try a new hobby where the startup expense has been significant. In fact, I’ve paid for all of my hobby “dives” with proceeds from selling equipment from older abandoned hobbies. This is a much better way to go as I get all of the thrills of diving in without all of the budgetary excuses and spending mistakes.
Misstep #4: We Kept Emergency Funds in Our Checking Account
Sarah and I are big believers in a cash emergency fund. Sometimes, life hands you lemons and you need to be prepared to do the best you can in those situations, and cash is the ultimate tool.
Many people advocate using a credit card for emergencies, but Sarah and I stick with cash because cash wins out when you’re dealing with a natural disaster, internet outages, identity theft issues, bank problems, and other things where credit cards can completely fail you. Cash is king.
Our problem was that we kept our emergency fund sitting in our checking account. Our emergency fund is roughly six months of living expenses for our family, and it sat in our checking account earning zero interest when it could have been earning at least a little bit with just a single simple move.
So we made that simple move.
Solution #4: We Moved Our Excess to Savings Except for a Reasonable Buffer
We moved our emergency fund to a proper savings account that earns a little over 1% interest on our money. While that’s not a lot of income, it is enough over the course of a year to take our family out to a few very nice dinners if we were to choose to do so.
In our checking account, we left behind a buffer that’s big enough to handle any check writing mistakes that we don’t notice, such as one of us writing a check while the other used an ATM card or something like that.
- Related: Best Savings Account in 2020
Misstep #5: We Overspent on Our Kids
Like most parents, we want our children to have the best life we can give them. Usually, that manifests itself through quality time spent with them, but when it comes to birthdays and holidays, we are both prone to opening up our wallets a bit too wide.
We don’t buy them a ridiculously large pile of presents. Our problem instead is that we buy them several very nice presents – nice sports equipment, game consoles, and so on. We sometimes run into similar issues when traveling when our children want some vacation treat.
During the rest of the year, we’re pretty good with sticking to an allowance policy, but there are times where holidays seem excessive, both in terms of our finances and the message it sends to our children. We are very cautious about having our children’s expectations raised too high.
Solution #5: We Locked Down Allowances and Minimized Gifts
Our solution to those problems is an integrated one. First of all, we stick pretty hard to our allowance policy, but we essentially “split off” a portion of their allowance for them to save for travel, so that they have money to spend on interesting things on vacations. We’ll give them a couple of dollars a week in ordinary allowance and put aside a dollar each week for their vacation spending money.
As for gift giving occasions, we’ve scaled back the number, not the quality. Our goal is usually to cap our children with three gifts per gift giving occasion with our previous standard of giving them something they actually want that’s of reasonable quality and provides some value to them.
Misstep #6: We Stayed in a Rut with Child Care Options
In 2008, I made the decision to leave my “nine-to-five” job and become self-employed. It was a tough decision, one that Sarah and I discussed quite a lot.
Initially, we tried several different strategies for child care. I was working from home and had quite a lot of flexibility with regards to my time, but I still needed to work a pretty healthy number of hours per week to fulfill all of my contracts. Meanwhile, Sarah continued to work at a job with pretty regular hours.
We eventually found an arrangement that worked fairly well and we stuck with it.
And stuck with it.
Rather than sitting down and asking ourselves whether this arrangement was really still working, we just left it in place. The best solution for us would have been for me to wake up extra early each day to write and only use child care a day or two a week, but instead we stuck with a heftier (but not full-time) schedule.
That schedule ended up costing us quite a bit of money over the years.
Eventually, when our children started reaching school age, we re-evaluated everything and came to a much better plan.
Solution #6: We Re-Evaluate Our Needs Regularly and Revisit Them Twice Annually
At this point, we’re essentially child care free except that we’re on an emergency list with one child care place. We sit down a couple of times a year – usually around the end of the calendar year and at the start and end of their summer break – and talk about what works and what doesn’t. We should have done that from the start.
Simple communication. It’s so easy to do. The trick is simply doing it, and making it meaningful and action-oriented.
Misstep #7: We Were Overly Aggressive with Investment Choices
When we first made our decision about what investments to put our money into, we made the mutual decision to invest in a pretty risky fashion. We stuck to our principles of using low-cost index funds, but we intentionally selected index funds that really pushed the risk envelope.
Namely, we invested a healthy portion of our money in index funds that included international stocks.
For a long time, we contributed according to our initial plan – a 50/50 split between funds. Since 2008, though, the international funds have lagged far behind the American ones because, believe it or not, America has rebounded spectacularly well since the global financial crisis of 2008.
We’re not really worried so much about whether America or the rest of the world is the best investment, but whether America’s stability, economy, and governance really do stand out in the world.
What did we do?
Solution #7: We Reconsidered Things and Rebalanced with Later Contributions
Eventually, we sat down and had a long discussion about whether or not we wanted to invest in international funds. Did we do it simply to chase the dollars? Or did we do it for other reasons?
What we basically decided, after a lot of talking about our investing philosophy, is more of a 75/25 split, weighted more toward domestic stocks.
Rather than rebalancing by selling investments, however, we are rebalancing through further contributions. We’re basically lifting the domestic part of our investments up to 75% of our overall portfolio.
Misstep #8: We Started Our Youngest Child’s 529 a Little Late
With our first two children, we started their 529 college savings accounts as early as we possibly could. In fact, we started it prenatally by changing the beneficiary on the account from me to them when they were born.
With our third child, however, the task of setting up the 529 account just slipped through the cracks. With two toddlers at home at the time, the pregnancy and birth and first year or so of life of our third child was very harried and the 529 setup was just something we failed to get done.
We had to make up for those lost years. How did we do it?
Solution #8: We’re Accelerating His Contributions to ‘Catch Up’
It’s pretty simple. Now that he does have a 529 account, he’s receiving contributions at a faster rate than his siblings and will probably do so for the foreseeable future. We hope to catch him up to the approximate level that his siblings were at the same age, then slow him down. We anticipate reaching that level in about two years.
For the moment, he’s receiving double the 529 contributions as his siblings.
- Related: Six Biggest Myths About 529 Plans
Misstep #9: We Kept Riding a Long-Term Goal Even as We Changed
As I alluded to earlier in this post, as Sarah and I began walking along the road to financial independence we had a lot of big plans in mind. We talked about owning a big house in the country with a huge front porch. We talked about all kinds of ideas for businesses we could run as a family. We had a lot of dreams, and those dreams steered a lot of our early choices.
But things change quietly, even as you think you’re paying attention.
Over time, Sarah came to truly love the place where we live now. She loves that our children have established some very close friendships nearby – and she has a few friendships of her own. Sarah loves the area and the sense of community that she has around here. She loves our actual house, too.
On the other hand, my feelings have moved away from a big home toward a much smaller, more minimal home. The house I would want to build would be quite small and would minimize both our stuff and our time devoted to upkeep.
The thing is, we kept talking about our big country house goal as something we still shared, even as we both drifted away from the idea.
What will we do?
Solution #9: We Question Our Big Goals Regularly, Together
For starters, we’re now talking about goals in a new way, looking at whether or not our big shared goals are still things we each individually value and not being afraid to walk away from them as we change.
This involves recognizing that I married Sarah for life, even as she changes and grows as a person. She might not have all of the same contours as the woman that I married, but the backbone inside of her, those truest of values, remain the same.
At this point, we’ve backed up a bit and don’t have a real strong goal for our future other than financial independence, so that’s what we’re working towards as quickly as possible.
Over the years, we’ve made mistakes and missteps both big and small. That’s to be expected – as humans, we do fail an awful lot. Everyone does.
The question is whether or not you pick yourself up from your mistakes, learn something from those mistakes, and move on with life in a better direction with lessons truly learned under your belt.
All I can do is hope that we’ve learned enough along the way to guide us to a good place.