Are you stuck in a financial domino effect?
As a kid I use to have a lot of fun with domino’s. I would stack them up in a long row with all kinds of fun little twist and turns to see what kind of unique ideas I could come up. Then after a few hours of preparation the big moment would come.
I would knock down the first domino and that would knock down the next domino, and then the next, and the next, creating a chain reaction that would eventually knock down all the domino’s following the cool little trail I put together.
If you’ve never done this as a kid here is a great video I found on YouTube that show exactly what I’m talking about.
How The Financial Domino Effect Works
A financial domino effect works in much the same way. It starts by knocking down one domino, that knocks the next one, and so on but what’s worse about this domino effect is that it doesn’t just know the next domino down but rather one that is twice the size of the next one.
Here is an example of how this has happened in my own financial life.
- My wife and I bought a timeshare for $4500 on our honeymoon.
- Soon after we realized the loan the resort gave us for the timeshare had a 16% interest rate attached to it.
- We then drained our emergency fund to pay it off so we didn’t have to pay the ridiculous interest rate. This left us with no extra money to deal with financial emergencies.
- To help cut cost we refinanced our mortgage to a Option ARM Mortgage that ended up adding $2000 to the principle balance of our home mortgage. You can learn more about how this mortgage works here.
- Finally a few years later we decided that we wanted to sell our timeshare and ended up losing $1100 to two different timeshare resale companies.
In total this one little domino effect ended up costing me $8000, all because I made one bad decision to buy a timeshare that I should have never bought in the first place.
Most domino effects happen similar to this one. We do something we think is harmless and before we know it it leads to another problem, which leads to another problem, and before we know it we have a financial crisis on our hands.
So the questions becomes how do avoid this from happening to us?
How To Avoid A Domino Effect
To avoid this from happening to you I’ve learned three really important lessons that have helped me prevent future domino effects.
Know When To Cut Your Losses. First, know when to cut your losses and move on. In my case with my timeshare I was able to get a buy back offer of $400. It wasn’t even close to the $4500 I paid for the timeshare but I knew that if I would cut my loses now I’d avoid future cost that I would have to pay down the road.
So how do you know when to cut your loses? I base mine on value. If I’m not getting the value from something I think I should be getting then I know it’s time to stop putting money into it and step away.
The thing is you can always get money back but what if it cost you more than that such as your home, your family, or even your life. To me these are the most valuable things and even though we may be losing a lot of money it could always be worse.
Stay Educated. Next it’s important to stay educated when making a buying decision, especially as big as the one I made. When I was buying the timeshare I had no idea of some of the problems I would face.
I didn’t know that timeshares were hard to sell or that they would cost me so much in things like maintenance fees. If I would have known all of these things up front I would have never bought it in the first place.
So before you make a big purchase make sure you do your research beforehand to know if what you are getting is a good deal or not. This could be as simple as doing a search on the internet or talking to someone who already has what you want.
Think Long Term. Finally, don’t just think in the present about what you want right know but rather consider the long term effects you might have to deal with. When I bought my timeshare I was thinking this would give us a great excuse to take a vacation every year.
What I failed to realize is how much money this would cost me in the long run putting me in a financially tough position making it hard for me to even use the timeshare. With my emergency fund gone and living on a fairly tight budget I didn’t have ability to take a nice vacation anymore.
However don’t consider just the financial aspects, with things like kids and work getting in the way I found it very hard to just pick up and go on a vacation. In fact most of my vacations at that time ended up being a long weekend at best.
Wrapping up take a moment to consider the 3 tips I’ve provided to help you avoid a financial domino effect in your life. When it comes down to it you have the power to change your situation at any time, you just have to be willing to take that next step and go for it.
Are times going to be tough, sure.
But this doesn’t mean you should give up. You may fail from time to time but this doesn’t make you a quitter in any way at all. To go to that next level you need take action and know that it will be tough.
Knowing when to cut your loses is so important. With investments we want to prove we weren’t wrong, but often the smarter decision is to cut and run instead of putting more money into a sinking ship. You’ll feel much worse continuing to lose money than you will to lose a little and jump. You lost but at least you didn’t lose it all. No one has a perfect record so knowing how to handle loses and recognizing when you need to change is a major part of investing.
I agree Lance, losing what I had really sucked but the last thing you want to do lose everything because of pride. The best thing you can do is quit while you are ahead.