In 2011, I was a 28-year-old single, professional homeowner. Financially, my life was about to get better. Unfortunately, I didn’t know it. I was about to make a costly mistake; Overspending to the tune of $16,000.
The Setup: Where my overspending started
In the winter of 2010, I purchased a 3 bedroom/2.5-bathroom, 2,300 square-foot home. It was a beautiful house, and I fell in love with it as soon as I saw it. It was also a great time to be a homebuyer. There was plenty of inventory and many were selling at a discount. Consequently, I was able to get the house at a steal. By December 2010, I was officially a homeowner. I felt incredibly blessed.
Not too long afterward, a friend of mine asked if I was willing to rent out a bedroom to a good friend of his. She was a college graduate student and was living at home in a less-than-ideal situation. I thought about it for a moment and told him I’d like to meet her. A few days later we met, and she moved in during August.
And then just a month after gaining one roommate, I went from living alone to having another friend in need, who would become my second roommate.
Both of these ladies were a joy to live with. And in September of 2011, I had two roommates and an additional income of $900 a month.
I wish this was a story of how I saved and invested that $900 a month and three years later saw my investment grow to $47,000 (the average market return for that time was 20%), but it’s not.
I wish this was a story of how I saved and invested that $900 a month and three years later saw my investment grow to $47,000 (the average market return for that time was 20%) but it’s not. Rather, this is the story of how I blew $16,000 by not making the most of the additional income I received as a landlord. I had two roommates for a little over three years. Yet I spent and wasted a lot of that money.
Let's dig into the details of what I did wrong and the lessons I learned.
Take away #1: If you don't have a plan for your money, it will leave you
One of my roommates always prepaid her rent at the start of each semester. I put it directly into my savings account as soon as I got her check. Yay, gold star for me! My other roommate, on the other hand, paid on a monthly basis. In contrast, I have no idea where that money went.
Well, I have some idea. It went to buying clothes I never wore, buying shoes that were too uncomfortable to wear more than once, eating out at less than memorable places, and buying groceries that I threw out because they went bad.
I also wasted money on furniture I didn’t need and clutter that I eventually donated or threw out because I couldn’t sell them.
In retrospect, I wish I had treasured experiences over stuff. I also lament in not having invested the money. Especially now what I know about the magic of compound interest. Even sticking it into my savings account, with its abysmal interest rate, would have been better than literally throwing away thousands of dollars.
Take away #2: Be cognizant of what matters to keep your personal finances healthy
It’s interesting how easily lifestyle inflation crept up on me. I was living a perfectly good financial life. Earning, saving, spending and making do with what I had. I wasn’t rolling in the dough before I had roommates, but I was comfortable.
But as soon as I had additional income, I felt the need to shop more. Buy more, have more. It wasn’t like I was splurging on luxury goods. Instead, quite frankly, I bought junk. I had a small home office that became cluttered with things I didn't need.
I clearly remember having so much stuff I began storing things in my garage! With no children, no husband, and two bedrooms being rented out, the rest of the house was filled with my stuff. This was the first time I ever had a walk-in closet. But despite that, I had so many clothes I had to store my seasonal clothing in suitcases.
None of this made me happier or added value to my life. As time went by, I learned a couple of important financial lessons: spend less than you earn and invest that difference. It wasn’t a debt problem I had my life; I used credit cards all the time but paid the balance in full each month. What I had was a consumption problem.
I spent every dollar after all of my bills were paid. I knew nothing about investing and didn’t give much thought to retirement. Maybe there was a temporary or perhaps artificial joy I got from making purchases. But today at 35, I take inventory and realize that I have very few of those things I bought during my 20s.
Today, I no longer live in the home. I still own the home, and I still love it. But now it's a rental property and not my primary residence. A year and a half ago, my husband and I moved from the West Coast to the East Coast. We downsized from a 2,300 sq ft house to an under 400 sq. ft. apartment. I own a fraction of what I did back then, and I’m doing just fine.