The Impact of Mistakes

November 14, 2022
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     I don’t consider myself a good golfer.  I’ll play and then think, if I just cleaned up my mistakes, I would be awesome.  That is what separates pros from amateurs.  I played with a friend of mine recently and I noticed that he was never in very much trouble.  But when he was, he was able to get out of it quickly and with wisdom.  He is better at every shot in the game than me and yet he never forces himself to hit the hardest shots whereas I will.  If I’m in the woods off my tee shot, I might think, I’m sure I can poke one through that tiny little 8-foot gap and roll it onto the green and be putting for birdie.  Why wouldn’t I succeed with that strategy?  It only has about a 10% success probability.  My friend though, would think, okay, I have a tough lie, a very low probability of getting onto the green so I’ll just get it back into the fairway and play for bogey and maybe get lucky and one putt a par.  

     So, here is what would probably happen, I’ll try to thread the needle, hit a tree and end up deeper in the woods and then think, let’s try it again since I need to save the hole and the same thing happens until I finally decide to hit it into the fairway and go from there.  A good golfer will hit it into the fairway, knock it onto the green, and worst case end up with a bogey when I end up with a quadruple bogey and at the end of the day wondering how I shot so poorly.  That is a minimum 3 stroke difference on 1 hole.  If we have 5 holes out of 18 like that, that is a minimum of 15 strokes behind my friend.  No good!  

     Sometimes, even the best of us gets in trouble whether it be in golf, finances, or something else.  The finance mistakes are way worse than making a quadruple bogey because I’ll just crack a beer and laugh it off and still have a great time.  The trouble I see in the financial space is thinking that people can just get out of trouble anytime they want.  And it’s always tougher than we think it’s going to be.  Before we dive into this, let’s first discuss trouble when it comes to money.  What is trouble?  Well, it could be several different things.  Here are the top ones that I see. 

  • Too big of a mortgage payment each month.
  • Too many financed items.
  • Using too much credit.
  • Spending too much money.
  • Not saving/investing systematically.
  • Running their monthly budget too close to the line. 

     Let’s break some of this down.  Let’s use a hypothetical family of 4, where the parents are 40 years old, and the kids are 8 and 6 and they make $150,000/year.  For easy math, let’s assume that they pay about 25% of their income in taxes and health insurance through employer deductions, plus 6% going into their 401k.  That leaves them with $103,500/year without saving/investing or spending a dime outside of the 401k.  They still have to live somewhere and eat, the kids have activities, they need to furnish a house, etc.  Here is where trouble can start. 

     Let’s start with a mortgage.  For this couple, they have an after-tax income of $8,625 ($103,500/12) and for the sake of this exercise, let’s assume they have no other debt at all.  According to nerdwallet.com, the max they can borrow would leave them a monthly mortgage (Principal, interest, taxes, and insurance) payment of $3,615.  

Which leaves them $5,010 leftover but the piece that often becomes a mistake is that this is almost 42% of their after-tax income.  Yes, they still have over $5,000 left each month but that mortage payment is a substantial portion of their income.  If instead of using the max they could qualify for, maybe they decide to cap their payment at 25% of take-home pay, which is $2,156.25/month.  That frees up almost $1,500/month from 42%.  But it doesn’t end there unfortunately. 

     When they get into their new home, they realize they have some rooms to fill, so they go furniture shopping and spend $10,000 on furniture and finance it at 0% over the next 12 months.  Well, they just added $833/month to their monthly expenditures.  

     They also must maintain the home and keep it up, that usually costs around 2% of home value each year.  Let’s for easy math that the house is worth $600,000, 2% of that is $12,000/year to make sure the yard looks nice, the roof isn’t leaking and all the other maintenance items.  That is another $1,000/month.  So here we are, these clients have moved into their new home and have lived there for one month and now have monthly payments of $5,448.  But wait, what about utilities, car insurance and maintenance, gasoline, gym memberships, internet, kid’s activities, food, t.v., vacations, and all the other items and one-off things that happen.  Let’s just assume all of that costs $2,500/month.  Well, now they are spending $7,948 each month and haven’t saved a penny outside of their 401k’s.  They have $677 leftover.  

     In 2022, this is a tough place to be.  If I could make just a couple tweaks to this couple, it would be to not have a mortgage over 25% of their take home pay.  That one tweak would loosen their cash flow up tremendously.  Because now they are stuck!  How do you get out of this?  Well, you can hope interest rates drop and you can refinance, but that costs thousands of dollars.  You can hope for a raise, but what if that doesn’t happen faster than the impact of inflation.  Then you are just stuck again.  Similar to trying to thread the needle on the golf course.  You probably will end up in greater trouble. 

     Anyone that knows me well knows that I am a huge fan of math and leverage.  But the problem with this is the same thing I mentioned on the golf course, the average person gets in trouble and thinks that if things go perfectly well, they can get out of trouble no problem, but more often than not, things don’t go perfectly well.  Hoping things just work out well isn’t a great strategy as it rarely works out long-term.  What if your car starts having problems and you need more money and the $677 leftover at the end of the month doesn’t cover it so you have to put it on a credit card.  No problem, I’ll just pay it off quickly, but then the dishwasher stops working, or the water heater goes out, or your daughter gets onto that travel soccer team and it’s $1,500 upfront, or your grandfather passes away and you have to go to the funeral in another state.  

     Again, if this couple had a mortgage payment of 25% of their income and EVERYTHING else remained exactly the same, they would have $2,136/month leftover instead of $677.  That is quite a substantial difference.  What if this couple committed to investing 5% of their gross income with that leftover money?  Now they are investing $625/month in addition to the 401k and let’s assume they get a 7% return on those investments over a 25-year time frame. That client would have over $500,000 invested in that account along with having paid less in debt service than if they had that maximum mortgage.  One more point to think through, is the lower stress levels they would have knowing they have funds leftover that are substantial enough so they could cover whatever life throws their way.  

     Once a hole is dug, it becomes increasingly challenging to get out of it.  I was a tennis pro before starting this career and I told my students going off to college to grind for the first month of each semester and make sure they got an A of their first exam because if they do that, they are playing ahead instead of playing catch up as catching up is harder than leading.  Same thing holds true with money, be disciplined and get in a winning position because it is easier to maintain a winning position than it is to get out of a losing position. 

     So, what is the true impact of financial mistakes?  It could be hundreds of thousands of dollars in investment value, tens of thousands of dollars in interest payments, and of course, STRESS!  Stress is such a killer and causes all sorts of problem with things like health, marriage, happiness, etc.  And keep in mind that the difference between these different outcomes is roughly 17% of take-home pay.  

     What is the solution, obviously, don’t get yourself into trouble.  Slow down, put pen to paper and think through what makes sense over a 10 year or longer time frame.  Every case is different but once a decision is made, you cannot go back, you have to live with it so make the right one up front. 

     What if you find yourself in trouble, how do you get out?  Slow down and play the high percentage shot.  In the scenario we mentioned earlier, you have a big mortgage, furniture payments, etc.  Slow down, live lean, get that furniture paid off to free up some cash flow, and take your time with some of the projects.  Maybe you want that landscaping done right away because it would look great and bring you joy when you see it, but would it be that bad if you waited 6-12 months or longer to get it done?  Maybe work these projects in phases.  See if you can negotiate a monthly payment with the car shop and the soccer league.  Or, hand wash dishes for a while, it’s not fun but our grandparents did it so we can do it.  

     So, in closing, take a deep breath, slow down, and think of the high probability way of getting out of trouble. 


Rory Hartmann, CFP®

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This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.