This is a guest post from Belinda James. Belinda is currently attending Trident Online University and earning her master’s degree in business administration. In her spare time she writes automotive articles for Nissan Minneapolis.
A few years ago I had a regular administrative 9-to-5 job working for one of the three credit bureaus. It was an okay job with an annual pay of around $33,000 a year. In 1998 that was more than enough to pay for a tiny studio apartment, take care of monthly bills, and pay for my shopping sprees at Forever 21 (I still shop there, actually).
However, everything changed when I bought my first computer and started fiddling around the Internet. Somehow I ended up clicking a “Webmasters Click Here” link on a website and figured out that it was possible to make money online. After I received my first $20 commission check I was pretty much hooked.
It took a lot if trial and error but by 2006 I was pulling in around $10,000 a month from promoting affiliate programs online. I had high-traffic websites and would generally earn $30 or $35 every time a web surfer made a purchase through my affiliate link. In a great month I would make around $13,000 or $14,000 and in a “bad” month maybe $8,000. At one point I had more than $80,000 in the bank!
But I made a lot of mistakes that cost me everything. Eventually, my income dwindled so much due to the recession and industry changes that I was forced to look for a job again. Here are my hard-learned lessons that might save you a lot of grief if you’re running your own business (or think about starting one):
1. Pay your quarterly taxes on time
When you are self-employed you generally receive 1099s from the companies that you work for, and it’s your responsibility to file your taxes quarterly. I used to file mine yearly; I was making a lot of money so financial penalties (even in the thousands!) didn’t bother me.
One year I really overspent and I was wiped out once I paid taxes at the end of the year and never was able to recover from it financially. My income continued to plummet every year, but I was still responsible for income taxes for previous years. Paying your quarterly taxes in a timely manner ensures that you won’t get caught behind, because once you do it can be nearly impossible to catch up.
2. Find a good accountant
Having a qualified CPA in your corner is crucial if you want your business to survive. I never incorporated so I was responsible for self-employment taxes. I never found a solid accountant that I could trust. One CPA charged me $650 an hour and didn’t do anything for me that I couldn’t have done for myself. I was told that it wasn’t worth the extra paperwork for me to incorporate because my earnings weren’t high enough.
3. Don’t tie up a large chunk of your money in a car
When I was making a lot of money I bought a used Mercedes. It was certified pre-owned car, and I paid around $43,000 for it, in cash. Was it the smartest decision ever? No. But do I truly regret it? I would honestly have to say no (even though I know most people will disagree).
I like to enjoy life, and I’m not going to lose sleep over a purchase I made a long time ago. However, if your goal is to really get rich slowly, you will probably want to buy a used car instead.
4. Nothing lasts forever
When I was making six figures a year I was convinced that it would last until retirement and that I was financially set for life. Call it naivete or “sticking my head in the sand”, but I never thought that the money would run out. The truth is that nothing lasts forever, so enjoy it while you can.
Hindsight is 20/20
What else would I have done differently? I would have worked harder and smarter. I would have rented office space and ran things more like a real business. I would have hired employees to do the grunt work. I also would have expanded my business and not concentrated solely on doing the same thing over and over. My goal at the time wasn’t to get rich slowly, but to enjoy life, and that I did.
I do have a few regrets, but I still had a great run while it lasted!
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I heard “Can’t Touch This” by MC Hammer this morning and was reminded of how well he did making money, and then how he plummeted into bankruptcy because of some bad decisions and thinking it would all last forever. This is a great post because it’s a reminder, just like Hammer, that not everything does last forever so take advantage and make sound financial decisions when the gravy train is flowin’!
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Now he can’t touch the money! (my wife often says that it doesn’t take much to amaze me lol) That is so true. That is why one should treat those finances just as we do our businesses… in an organized and professional manor. Successful businesses all make plans. They have great budgets set up and a great plan to keep them growing. If you don’t you may end up like hammer, except not as many people will recognize you.
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Interesting. Talking about your significant mistakes, but defending them in the vein of “enjoying life”. So could you not have enjoyed life with a cheaper car? Or with a few less Forever 21 sprees? Maybe if you had, it still wouldnt have lasted forever, perhaps a bit longer though.
Lesson learned, great. Thanks for sharing. Those are tangible. I feel like there is some justification for those bad decisions that you arent quite ready to let go of.
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Yeah, somehow she makes losing all her money sound…fun?
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And what’s wrong with “justifying” bad decisions? As long as she’s not going to make them again – and it seems like she’s learned her lesson – what’s the problem?
I think her attitude is terrific. She made mistakes, learned her lesson, and has moved on. She’s not beating herself up about it. She’s taking the good – it was fun – with the bad – it didn’t last. Life is full of ups and downs. On the next upswing, she’s clearly be prepared to do better.
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Losing everything does sound fun. Shows the world (and yourself) that you’ve got a pair.
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Great lessons. I’m sorry that the story ended by you making less than you used to. That has to be a rough situation. There’s no doubt you learned lessons from it though. Thanks for sharing them with us.
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Perhaps you didn’t get rich after all?
You managed to get a nice income for a while but not enough to purchase (passive income generating) assets. Those assets might have got you rich somewhere down the line, or not.
Using the passive income from your assets would have been a more sustainable way to “enjoy life”. If the passive income wasn’t large enough to cover the expenses of your lifestyle, the enjoyment would have had to be got from other, cheaper sources.
Buying the Mercedes was a good thing if it was a lifelong dream of yours or something.
You’ve “done it” once and I see no reason why you wouldn’t be able to do it again. You now know that you have what it takes.
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Wow, for such a short post it was quite the emotional roller coaster.
Well, if you did it before, I believe you can do it again. This time you won’t fall into the same potholes.
Best of luck to you and thanks for sharing your hard-earned lessons with us.
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Great article and good points made about the lessons learned. Has this experience made you give up on entrepreneurship or are you getting your advanced degree to help in your next endeavor?
Shawn @ Managing The Money Wars
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So this is kind of a confusing article for me.
Most of the points the text seems to argue against their headline. Like 2, find a good CPA, then a story about how the CPA was useless. Or 4, nothing lasts forever, but she wishes she had invested in the business to last, if not forever, then at least longer.
The takeaway I got was that the main regret was she wishes she had better managed her business so that it would be still successful today and making money (except again for the contradition that she’s happy because she wanted to enjoy life rather than reinvest the profits)?
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So, how do you find a good CPA? Due to some changes in our finances last year, we decided it was time to get one, rather than doing our own taxes.
We’ve already filed an amended return, there have been problems every step of the way (generally found by our looking at something and thinking that doesn’t look right or wondering, hey, where’s the ____) and after I finish this comment I have to go deal with the next problem that popped up (wanted refund credited to estimated taxes but it appeared in our account instead).
Bleh. If I’m paying someone to do my taxes, I want to be reassured that someone who knows what they are doing and wants to do a good job is in charge. If it’s going to be filled with questions and problems and the like, well, I could do that for myself for a lot cheaper!
And we did ask around and had two recommendations for this person. sigh.
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Just to be clear, tax preparers often aren’t CPAs. I think what the OP is talking about here is having ongoing professional advice regarding the business, not just someone to do the taxes.
When my parents were self-employed, they often needed advice throughout the year, not just at tax time.
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Ask people for references, especially people who have similar financial situations to you, and who seem to have good judgement. If one CPA or accountant’s name keeps coming up, that’s the one I’d use.
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You’ll probably find the best CPA through word of mouth. You should interview the CPA also. $650 is about double what should have been charged for a CPA, at least in my area. http://entrepreneurs.about.com/cs/gettingstarted/a/choosingacpa.htm
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First, I just want to say – LIFE IS ABOUT LEARNING. Sometimes it is the hard way, but you did learn some things.
Second, reviewing your short bio, “Belinda is currently attending Trident Online University and earning her master’s degree in business administration. In her spare time she writes automotive articles for Nissan Minneapolis,” I feel I can make some assumptions.
You really like cars! I do, too. So I can relate to making an expensive car purchase. And it’s funny, because I get called out on contradicting myself. I feel a little silly because I loved my 33MPG Honda Fit, but I still bought a 23MPG Acura TL-S. And sometimes I reminisce about the good old days with the Fit and consider selling my TL and getting another. But I DO LOVE MY CAR! It’s a different love than the Fit. I love the 6 speed manual and I love the excessive power and I love the comfort and luxury and amazing stereo and dark sexy rims. But I also know that I value making smart money decisions. But the REASON I love making smart money decisions is because I want to be able to decide where my money goes. And since I love cars and I love the driving experience and I love long road trips listening to a million songs (on 6 MP3 cds…) and I love shifting and sometimes I even love eeking 27-28MPG out of my 286HP car… I am happy with my car purchase!
Another assumption I’ll make is that, for the most part, you realized that you’ve been learning by trial and error (and that’s all we can do until the day we die), but you’re also learning from *other people’s trial and error* by going to college now.
I’ll leave you with this advice. Never stop learning or think that you’ve got it figured out. Use the internet. There is a lot of very great information on blogs by authors and in excellent books that help you live an intentional life full of purpose and fulfillment, starting and running successful businesses that treat employees like adult humans and thrive because of it, and so much more. For me, I finally found a use for Twitter when I started following people living lives that sounded like the life I’d want. They set their hours and their spend their working hours on things that inspire them. They share awesome articles and help me discover more and more people and information that helps me learn and progress and stay inspired and motivated.
In everything you do, good luck!
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I had an ’07 Acura TL-S at one time so I know the feeling!
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I love my car too. I look hotter in it.
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I wouldn’t necessarily agree that everyone thinks you look hotter in your particular vehicle.
But I think it would be great to read a post related to how our perception of how we look boosts our self-esteem and even possibly affects our income & success in life.
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This sounds similar to someone that won the lottery and blew through their cash. Everything doesn’t last forever but it is possible to build a sustainable business and income that improves and grows over time.
I can’t imagine how thousands of dollars in tax penalty’s didn’t bother someone who never had more than 80k in the bank.
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Me neither. It only took one year of having a huge tax bill (thanks to *our* useless CPA) to teach us A) pay current estimated taxes based on last year’s INCOME, not on last year’s estimated taxes, and B) ditch that CPA.
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The taxes thing is crazy. My fiance has just started freelancing and dealing with the taxes on our own is really the roughest part of that.
Thanks for the reminder of how important it is to deal with them properly!
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Quarterly taxes are the gift from hell.
Good record keeping, however, leads to a properly filled-out Schedule C, which can be a gift from heaven.
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OP’s comment about how quarteries can really screw you if you mess them up and it can take forever to recover from, it’s true! 2007? i made about double my usual salary thanks to some extra jobs, i was in heaven! until i got the tax bill. been paying it off since, on a smaller salary now of course… its about 40% paid off? sigh.
but i have great memories of my time in fiji, and i still have my bike and the nice clothes. (NOT SELLING THE BIKE fyi). so i’m broke, but i still have some momentos of That Time I Thought I Had Money.
FWIW, i also travelled around the world, bought a motorcycle & gear, designer clothes, shoes, etc. it’s hysterical to me now because i am so broke
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At least you had lots a fun and still have a fully paid for Mercedes right!
Did something in the market place change for you to stop making money online?
Thx
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Thanks so much for this interesting post. I am very sure you are not the first and will not be the last to go through this but it is nice to know that you didn’t regret all your decisions.
The best thing to do I feel is to be cautious with your money and ensure you aren’t tied into anything for too long. Obviously Taxes are something that cannot and should not be forgotton about but other things like buying a new car or buying an office building, can tie you into long periods of consistent payments. It would be, as you suggested, far better to think about buying a used car or renting office space so that, should you need to, you can get out of them without wasting money.
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I think this goes to show that no matter how much you make, what you end up with depends on your own personal behaviors and ability to control money.
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This story illustrates the old saying: It’s not what you make, it’s what you save that counts.
Belinda lived rich for a while on her high income , but she never became rich in terms of financial assets, although the potential to do so was certainly there.
Thanks for sharing your experiences, Belinda. And good luck with future ventures.
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yep. live below your means and you’ll do okay.
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Great article! I love ‘nothing lasts forever’ or as my dad used to quote, ‘they are not long, the days of wine and roses…’ I admire your strength for learning from your mistakes and sharing that knowledge with us!
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I really liked this post too. Once we were out of our massive student loan and credit card debt, we spent foolishly. Not so much lavishly, just not consciously. I wish we had the money back from those years when we weren’t paying attention.
I’m glad to hear the author was able to enjoy her Mercedes. Since our money was more or less frittered away, we really don’t have anything to show for those first debt free years.
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My dad gave me some good advice when I paid off the last of my debt: treat myself for a month or two, then put the equivalent sum into savings.
It was a great strategy because it allowed me a couple of splurges, but I knew there was a limit.
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Self employment taxes are really just the employer’s share of social security and medicare taxes. Incorporating wouldn’t have changed that – you’d simply have been paying your other share as the employer instead of as self employed. Either way, the federal government gets 12.4% of your first 106.8k of income and an additional 2.9% on all your income.
Obviously, I don’t know your situation, and incorporating may have saved you money in other ways, but I just wanted to clarify the issue.
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Actually, the reason incorporating could have saved her money on self-employment taxes is that distributions from the corporation aren’t subject to self-employment taxes, just income taxes. As an employee of the corporation, the IRS would be looking for her to pay herself a “reasonable” salary, but above that level, she could take these distributions.
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More specifically, she should have incorporated as an “S-Corporation” since income flows through directly to the shareholder (i.e., only 1 level of taxation unlike the double taxation in a normal “C-Corporation”).
The same principle applies that only her salary (which from case law would be required to be a reasonable salary for services performed) from the S-Corp would have been subject to self-employment taxes and any remaining distributions only subject to income taxes.
- Chris, CPA
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Both of the above answers are on point. I had been a sole proprietor for years until I incorporated and became an S-Corp. Now save a lot of money by paying myself a fair and reasonable wage and drawing the rest as Distributions free of SS taxes.
That saves a lot of money!
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Very interesting account of making a large income and then losing it later. I feel for you on the “Find a Good CPA” part — I personally don’t know a lot about taxes, and a good CPA could be a lifesaver upon business expansion. Too bad your CPA was terrible!
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My advice? Get to a point where you can save half of your income—’cuz you’re gonna’ need it.
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I agree. Another lesson that could have been learned is to not allow lifestyle inflation to take over. I don’t know that the OP has learned this yet so maybe that’s why it’s not listed.
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Thank you for this post; its actually a really good reminder for me.
I’m currently self-employed/1099 and when I go to the bank to deposit the check (no direct deposit here!) I always take out a large percentage off the top for taxes and put it in savings. I haven’t considered getting a CPA, but its not out of the question given I had one when I had a business.
In terms of the car, at least you paid cash for it! You can always sell it if you need to.
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can someone explain about freelancing and paying quarterly taxes? I work full-time but also do some freelance editing work on the side (i am probably only pulling in a couple of thousand dollars a year doing this). how much must one be earning in order to have to pay these taxes quaterly? i have yet to receive a 1099 – and i assumed that i would simply report this money on my 2012 taxes next year and pay in one lump sum. any advice?
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With that small of a side income quarterly payments may not be necessary because you have a job and are making regular payments through your employer. If this is the first year of your side business you are exempt from quarterly payments as there is no basis from which to determine an estimated payment. Next year your CPA or tax program will tell you if you need to make estimated payments.
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Since you work FT you may also be able to increase your withholdings at your job to cover the taxes you have to pay for freelancing.
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I liked this post, and especially ‘owning’ that you do not regret your Mercedes purchase. If you’re not allowed to enjoy some of the money you make, why make it at all?
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I can understand your comment about not regretting a purchase. However, if the OP still owes IRS and is making large interest payments from years ago I’d say ditch the car!
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I say thanks for sharing, not always easy to put your mistakes out in the open.
I think that people who come into money quickly, i.e. get rich quick scheme, lottery, young professional athletes, big inheritance without a Trust, often run into the same problems you did.
Its easy to think you’ve got such a big chunk of money, i.e. lottery, or you’ve got a great stream of money coming in, your situation, that you think it will last forever and that it will cover all your needs, including taxes.
Some of the best advice I’ve seen regarding quick change or big change in personal finances is to not do anything, meaning don’t make any big purchases, i.e. pricey car, big house, investment in your brother’s great idea, etc. Put the money away some place safe, a money market or FDIC insured savings, CD, etc. and sit tight until you get yourself educated (6 mos or more). Put aside taxes first, not last, put aside savings first not last, pay off your debts, create a monthly budget and then after you do all that, take 10% of the money and treat yourself on whatever is special to you. That could be 10% of a lump sum or 10% each month.
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I wonder how many of the newly self employed people end up failing to pay quarterly taxes and unaware of self employment tax obligations? Probably most. Taxes shouldn’t come as a surprise to anyone and its something people ought to figure out before hand not after the fact. Of course I know thats easy to see in hindsight and most people are borderline cluless on how taxes work in general. But a bit of research before you start your business should prevent such problems.
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I read a quote that 50% of businesses fail in the first year; 95% in 5. Not sure how accurate but I bet the % is pretty high!
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My story is VERY similar to yours. After being middle class most of my life, I started making real money in ’05 & ’06, to the tune of about $20k per month. I thought I was being smart with it at the time, but looking back I just want to kick myself.
I bought the big house – thinking I would live there forever & it alone could fund my retirement if I needed it to. Ooops, lost that in 2009.
I diversified my income streams, so that I would have multiple sources of revenue all paying me passive income. Ooops, they were all related to the same industry, and when the economy crashed, so did all my passive income sources.
I migrated into a decent office-job in 2010 and have been SLOWLY trying to put things back together, after losing just about everything I owned.
It sucks to have so much sage wisdom, so recently after it’s needed!
Watcha gonna do though – can’t go back in time. Can only keep moving forward, knowing I won’t make any of those mistakes again.
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I am always curious what people mean by passive income. Dividends? Rental properties? Royalties? I think a lot of people mean rental properties – and if you are doing it well – it is not “passive” – unless it is a REIT. Which I consider a regular stock investment.
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In this case, my 2 forms of passive income were:
1.) Multiple rental properties, being managed by a property manager. Not 100% passive, but my involvement was about an hour per month per property.
2.) A group of Realtors working together, where I was earning a percentage of their commission. Maybe not 100% passive, but pretty close.
Either could have withstood a stagnating market, or a moderate market correction. (so could have my income at the time.) But the gigantic crash and lingering recession was too much..
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Thanks for sharing. It’s not always easy to talk about mistakes.
I have always thought that money is transient, so it is best not to get too attached to having a certain amount of it. Things happen, sometimes we could have foreseen them, sometimes not.
I’m glad you took some joy in your riches while you had them. I do sometimes worry that people become so frugal and so focused on building wealth for the future, that they can forget about enjoying the here and now.
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Think you would ever get into affiliate management again?
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I love your point about the car. When my wife and i decided to get our finances in order. We sold both of our cars and bought 2 replacements for less than $5,000 total. It was amazing how much more money we had per month after we did that!
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I’m not sure that was her point with the car but I like what you did! It seems very wise.
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I quite like the last sentence. The poster learned some lessons, took some lumps – and had a great ride. Perfect? Hardly. But some of it sounds like a blast, and I don’t detect much regret.
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Letting go is a great feeling too!
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Good lessons! Years ago I made quite a bit trading stocks and thought I was untouchable. Within a year I was wiped out!
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Why did you ever need a $43,000 used car to “enjoy life”? Sounds kinda sad actually.
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“Enjoy it while you can”
No, completely wrong message. Save and invest so you can enjoy forever.
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I didn’t like the message of this article either. Its possible to get rich quickly by starting a business or by studying a highly specialized profession at university.
Study subjects like medicine so you can become a nurse, doctor, physician’s assistant or radiologist, or study accounting or finance, engineering, or computer science.
Its not just the degree but the SKILLS you learn while you study for your degree that get you a job. What good would it do me if I got a degree in computer science but then applied for a job as a cocktail waitress? There would be no way for me to apply the skills I learned in such a job.
As soon as you get a job, get enrolled in the company’s 401 (k) or whatever their retirement plan is and if they offer matching then please take that. Or if you own your own business set up an SEP. Then if you still have extra money, I also suggest going to your credit union or bank and getting an IRA.
Get a savings account and start saving your money. I learned my lesson during the great recession, I’m saving up money so when the next recession or emergency comes I won’t suffer like I did during this last recession and I won’t blink if an emergency comes up.
It sounds to me like you needed to do more research about entrepreneurship, basic saving and investing, etc. Never go into things blindly. Going into a highly specialized profession or starting a needed business will get you into the middle class, allow you to save, invest, and have spending money.
I didn’t like the article because it read more like, “I made a lot, spent it and C’est la vie (such is life).”
The last sentence of your article made it sound like you can’t have a nice profession, save and have spending money. Because you can, my parents did it for decades, and its because they were professionals.
My own mother worked for a university before she decided to start her own business. The thing is that you overspent and that’s not something that should be celebrated at a PF website. I feel this article was poorly written and poorly edited. I wonder if you learned anything at all.
What will keep you from becoming broke in the future?
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Wow – that story is mine, to the letter, hope things are going well now, I am rebuilding, you can to
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