While training and knowledge are critical to being a competent financial advisor, it takes first-hand experience to really be effective and identify with the challenges facing clients. Here are some common situations that have helped shape my philosophy and techniques, with a brief look at my “learning”.

Adjustable rate mortgages – The recent housing boom was partly fueled by the popularity of adjustable rate mortgages, which begin with lower rates and payments which are adjusted (almost always upward) in the future. At some points nearly 25% of all new mortgages were adjustable rate, and they can be a great tool if you are fairly certain that your income will increase to cover the increased payments or if you really do plan to sell the house while the payments are low. Unfortunately, many borrowers focus solely on the low payment and really don’t understand the implications of the loan terms.

Because lenders now “package” mortgages and sell them to investors rather than keep them on their own books, they have relaxed their standards. Instead of considering the highest level to which the rate can adjust, lenders often consider only the initial, low rate. As rates increase (which was very predictable when rates were at historic lows), many homeowners will have difficulty covering higher mortgage payments. While this won’t necessarily lead to foreclosures, it will force some homeowners to sell their homes just as the housing market is weakening, putting downward pressure on prices. To protect yourself, make sure the terms of the mortgage match your specific circumstances.

(In 1987, we moved to a more expensive city and were expecting our second child, so we went with an ARM to buy a bigger house. By sheer luck, the payments adjusted lower every year, but my income had also gone up.)

Vacation property – The recent housing boom seduced many people into thinking that any property was a path to riches, but in reality vacation properties only make sense to the extent that you use them for your own pleasure or to generate income. Upkeep on vacation properties can be much more complicated than on a principal residence, and it’s no fun to spend vacation time fixing things up. Keep any vacation property simple, and if it is primarily a rental property, make sure it generates a positive cash flow.

Timeshares are a particularly bad idea. The purchase price from the developer includes massive marketing expenses, so a timeshare immediately has a lower value. Considering the original purchase price, annual maintenance fees and “exchange” fees to use other facilities, you could easily rent vacation lodging for the rest of your life; indeed, most timeshare properties rent unoccupied units. If you must buy a timeshare, do it on the secondary market, where prices are one third to one half of original selling prices.

(This is my worst experience, because we knew better. After attending our share of timeshare sales presentations solely to get the free gift, we actually bought one 15 years ago. While we do use it every year, I kick myself when I pay the maintenance bill, and it is worth a fraction of what we paid.)

Purchasing cars – Car dealers love to sell cars based on the payment because they often make as much from financing as from the sale of the car, and a monthly payment is easy for consumers to understand. Unfortunately, that attractive payment is often loaded with unnecessary fees and many buyers are left owing more on their car than it is worth. Likewise, leasing can be an attractive option but only if the way you drive fits the lease terms, especially for annual mileage. And in exchange for always driving a late-model car, leasing usually means you will constantly have a car payment. With car quality much improved, negotiate the best deal on a vehicle you will want to keep for a long time and then decide on financing. (At one point, I leased a car for convenience and, because the car’s value at the end of the lease was higher than the amount I owed, I bought the car. Again, I was lucky, and this is usually the worst thing to do.)

Kids and money – If you have any doubt that the financial demands and expectations of children are different today, take a moment to compare your childhood experience to that of your children – and never do it again, because it will drive you crazy and nobody likes a nostalgic curmudgeon. There are plenty of specific techniques for allowances and other tools, but here are some general principles to follow with your children from the age of eight or nine.

Be honest – Assure your child that he will have everything he needs but that what he wants, or what other kids have, may be a different story. Explain your financial priorities, and don’t be afraid to say if you can’t afford something. (Do not, however, feel the need to explain or justify all the family’s finances to your child; you are still the parent and those are your decisions to make.)

Be consistent – If you have set limits or made decisions, stick to them even if your child is disappointed. Communicate with other family members to prevent being inadvertently undermined or contradicted.

Teach delayed gratification – This is the single greatest financial lesson a child can learn. Begin by explaining tradeoffs between buying now and giving up something later, and then introduce your child to saving and setting goals. As time goes on, let them be involved in larger spending decisions.

Set an example – All the teaching and preaching in the world is useless if you don’t practice what you preach. If you don’t display some maturity and discipline in handling your financial decisions, how will your child learn?

(As you know, I have two children in college. One is very aware of spending and financial limits – despite a fondness for buying shoes – and the other is making progress. I have made them both aware that my job is to prepare them to be on their own, and I am sticking to it.)

Some of my decisions over the years have not been the best from a financial management perspective, but they were all informed decisions and I knew the risks I was assuming. Being uninformed, or being blinded by a sales pitch, will leave you open to unpleasant surprises in the future. Do your best to fit your financial decisions to your specific circumstances. And it may help to remember the old saying, “Good judgment comes from experience, but most worthwhile experience comes from bad judgment”.