You may think that there are people out there who’ve got it all together with their money—who never make a false move.
Well, you'd be wrong.
The truth is that hardly anyone is perfect when it comes to their finances. Even the most financially savvy of us make mistakes.
In fact, a report from the Consumer Federation of America and Primerica found that two-thirds of Americans admit that they’ve made a money blunder. And while the study found that the typical bad decision cost only $5,000, the average cost was $23,000. Translation: There are some costly lessons being learned.
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We asked five readers from diverse backgrounds to dish about their own major financial faux pas in the hopes that maybe you can avoid making them, too.
The Irrecoverable Business Investment
Back in the early 90s, Linda LeBlanc, 59, and her husband teamed up with another couple to open an indoor sporting business in addition to their full-time jobs. Together, the two couples contributed a total of $70,000 to finance the venture. LeBlanc and her husband funded their half by refinancing their mortgage, tacking on an additional three years of payments that would expire just as their second child entered college. “All in all, it wasn't too bad because we actually got a lower interest rate than what we had been paying,” says LeBlanc.
The problem was that business wasn't good.
The couples found that, while they were great friends, they had different working personalities—and contrasting expectations of the division of labor. LeBlanc also credits the location’s lack of visibility for its demise. After two years, the business went under, and both couples were out the initial start-up money.
LeBlanc and her husband were able to recoup some of it by declaring the loss on their taxes, but they were forced to eat the investment in the building, as well as the special equipment that they could not resell.
“It wasn't like we lost our life savings, but it was a big chunk of time, effort and blood, sweat and tears that could have been directed elsewhere,” says LeBlanc of the two years of long hours and no pay. “In retrospect, we should have hashed things out at the beginning, in a joint business venture contract or a partnership agreement, rather than just leave it up to our friendship to figure things out.”
The Endless Real Estate Transaction
In 2003, Pauline Paquin had $25,000 in savings and a dream of purchasing an investment property to rent. “I was picturing things back when there was no crisis, no bubble and easy lending,” says Paquin, 32. “I would buy my first place, and earn a 10% return on it. After two years, I'd go back to the bank to show that I was a successful landlady, ask for some more money and then repeat the process. By age 40, I would have a dozen properties, and live off my rental income for the rest of my life. Easy!”
So Paquin eagerly bought a small studio apartment on the outskirts of Paris, where she lived at the time. “I knew the price was low because the neighborhood was not ideal,” she says. But it wasn’t until after she purchased the flat that she realized just how bad the area was. “At night, there was drug traffic, delinquency and gang fights,” Paquin says, adding that other landlords were skipping out on maintenance fees.
In 2005, Paquin decided to sell the unit because she found that, each year, she was actually spending more to maintain the property than she made back in rent. But the neighborhood scared away serious bidders, keeping Paquin tied to the property for another seven years. Eventually, in late 2012, after years of low bids and delinquent tenants, Paquin finally sold the place.
Her net profit over nine years was $54,000—about $6,000 a year for a lot of stress. “My biggest mistake," Paquin says, "was buying my first property without doing any homework about the neighborhood.”
The Squandered Savings Opportunity
After graduating from college in 2009, Alyssa Jung, 24, spent months searching for a job before landing her first full-time gig. Since the position was far from her dream position, Jung convinced herself that she wouldn’t be with the company for too long. So when she became eligible to sign up for her employer’s 401(k) plan, she declined. “I kept looking for another job the entire time I was there,” she says. “I was convinced that I would get out of there quickly, but I didn't.”
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Jung’s employer offered a 50% match up to 6%, with an immediate vesting of the matched contributions. Had she been putting 6% of her income into her employer’s 401(k) from the time she was eligible, she would have saved nearly $5,000 for retirement, with nearly $1,500 of it coming from her employer by the time she finally left the company in 2012. “It’s a sad example," she says, "of missing out on lots of money.”
The $5,000 Break Up
John Peck, 34, and his girlfriend had been dating on and off for three years by the time she decided to pursue her dream of attending beauty school. Since she was short for the initial tuition payment, she asked Peck to loan her $5,000 with the promise that she would pay him back. Peck agreed—and then slowly began to see his mistake. “I realized that she was always asking friends to spot her, promising to get them back next time,” he says. “But she never did.”
A few months after loaning her the money, Peck felt emotionally and financially drained, so he broke things off. His girlfriend, in turn, refused to pay back the $5,000 she owed him. “I ended the relationship after realizing that she wasn't the kind of person who would honor her debts,” says Peck. “I should never have lent her money that I wasn’t willing to just give to her.”
The 401(k) Fallout
With three children under the age of 11, Mark Manley, 42, knows about the importance of retirement savings. “My goal is always to max out my contributions to my 401(k), and maximize the company match on top of that,” says Manley. So in 2011, when Manley was considering changing jobs, he decided to amp up his payments at the beginning of the year. The thought was that if he started at a new company, he'd likely have to wait six months before becoming eligible for their 401(k) program.
So when Manley got his bonus, he put a large chunk of it into his 401(k). That amount, plus his larger monthly paycheck contributions from the first few months of the year, brought his 401(k) contribution close to the $16,500 limit for 2011. So Manley stopped making contributions from his remaining paychecks that year.
“Turns out that was a mistake,” he says.
His employer's 401(k) included an 8% match on contributions. “I assumed that the match was based on the total contribution for the year,” he says. “Instead, it was the contribution per paycheck.” Manley’s misinterpretation meant that he missed out on $3,000 worth of company match. “The irony is that I work in the finance and valuation department, so I’m a numbers guy,” he says. His advice: “Do your calculations, and make sure you read your benefits language properly.” And make it a point to double check with your HR department before front-loading your 401(k) to make sure that you won't be missing out on any matching contributions.