My 3 Biggest Personal Finance Mistakes
Published September 12th, 2008
This post will be one of two on personal finance decisions I’ve made so far. This week I’ll tackle my three biggest mistakes, and next week I’ll proudly talk about the three best personal finance decisions I’ve made. While you’re reading these posts, please think about your own life, and I would love it if you would share some of your experiences either through the comment section, or by writing a post on your own blog and linking back.
I believe that everything happens for a reason. Sometimes if it’s a particularly traumatic experience, we don’t see or understand that reason for a long time to come–if ever. In my life, I’ve learned to try to take away a lesson and grow as a result of every experience–good or bad. This is not as easy as it sounds–it’s a conscious decision, and it sometimes means that I have to dig down deep to do so.
I’m one of those people who is hard on themselves when they make a mistake, but I’m getting better with age. As I’ve said before, what you think at the time was your biggest failure, could potentially turn into your biggest success because you’ve learned from it, or it’s altered the course of your life. The three experiences I’m going to share with you today weren’t blunders of Enron proportions, but each one has altered the course of my personal finance journey, and has had an equal but oppositely positive impact on my overall financial health.
1. Pulling out my mutual funds early
At the age of 18, I read The Wealthy Barber, by David Chilton. This book taught me about the power of investing early and regularly. So I went in to see my personal banker and set up an automatic deposit of $25 a month into a non-registered account (this just means that it wasn’t part of a closed or government-affiliated retirement fund). Sounds like a good story right? Well, it could have been better.
The mistake: I went off to university the following year, and a couple of years later during my broke student years, pulled out the money in the fund, and closed the account. The obvious mistake here is that I shouldn’t have pulled out the funds at all. The other mistake was not making the money less accessible. Had I put the money in an RRSP (registered retirement savings plan), I wouldn’t have been as tempted to pull it out, since I wouldn’t have felt like I’d had access. Had I kept the money in there, I would have eventually rolled it into an RRSP so I could get the tax benefit, and the money could have grown tax-free until retirement.
The lesson: The biggest lesson I learned here is to try again, and keep trying. When I graduated at the age of 25, and started working, I did open up an RRSP, with automatic monthly contributions, and those contributions increase every year. I’m not yet putting away my goal of 10%, because we’re paying off huge loans from school, but making it a priority and starting at 25 is still a huge accomplishment. I look at that money as an investment in my future, and it is painless with the automatic withdrawals. I don’t lament about the interest I’ve lost out on, because this mistake fuelled my interest in learning more about personal finance, and has lead to many other good financial decisions.
2. Buying a stock because someone else thought it was a good idea
I used to be the proud owner of 500 penny-stock shares of Tahera Diamond Corporation (TAH), in the Canadian North–now they are in big fiancial trouble and I have given up hope on ever seeing my $131 investment again. This was one of two diamond mines in that area of the world that seemed like a surefire winner…or not.
The mistake: Jumping on a bandwagon, even if it seemed like a sure thing, and not much of a financial risk. Sure it didn’t cost me a lot of money, so it hasn’t ruined my financial future, but it was a mistake to go along with my parents and brother who also bought, based on a tip from a friend in the mining industry. I’ll admit that investing in penny stock can be a risky concept–although the actual money lost can be much lower than with stocks from established companies.
The lesson: No matter how small the sum, do your homework. After this lesson, I did a lot of research, and chose 4 criteria that I would use to make a decision on what stocks I will buy. I’ve learned to not go along with speculation–no matter how good the idea, and that for me anyway, making consistent decisions in what I’m willing to invest in, and also what my criteria will be for selling a stock, is the way to go. My consistent approach has served me well, and if it took a $131 lesson to learn it, then it’s a pretty cheap lesson…I’ve spent more money at Disneyland in one day!
3. Focusing on too many goals at once
The same year I graduated, my now husband went back to school to prepare for his second career as a teacher. A couple of years after that, we decided to send him off to England for teacher’s college, build a house, and get married–all within the space of a two-year window. We knew that we would be taking on major debt to do so, but as a result of having too many financial goals at once, there was a period where it felt like we were not really making any significant progress in repayment.
The mistake: I don’t regret doing any of those things at once, I worked very hard to save thousands on those three big goals by doing my homework and being frugal, so I don’t feel like any money was wasted. The mistake, is that after we were finally married, I didn’t come up with an aggressive debt repayment plan sooner. By trying to deal with too many goals at once, it didn’t feel like we were moving forward, which led to some frustration.
The lesson: One big goal at a time. While there are some tax deductible student loans that are on autopilot, we picked the highest interest loans that had no tax deductions, and have started paying them off first, one at a time. We are now well on our way to being debt free. The one big thing we did for the other debts–even our mortgage, was to switch from monthly to weekly payments. This does require us to be on top of our finances, but is saving us thousands in interest. By not waiting until the end of the month to apply the full payment to the loans it’s really cutting down on the compound interest they can charge us over the life of the loan. I won’t pretend this is a painless process, we try to live off of one income so that we can be debt free within the next 3 years. Since we have a plan, and focus on one goal at a time, we feel a real sense of accomplishment, and are able to enjoy a good quality of life as well.
Well, those are my three biggest mistakes, and what I’ve learned so far. Please feel free to share your experiences with us through the comment section below, or by making a posting on your own blog and linking back so we can all learn from each other!
Scott @ The Passive Dad on September 15, 2008
I sold a mutual fund when I was 20 to buy a new mountain bike. Had to have it, and it cost me. I spent $800 on the bike and owed on the capital gain. I have known a lot of friends that sold mutual funds early too. Also, many co-workers used the 401k like a credit card. Funny thing is they usually use the money to buys clothes or eat out and basically don’t have anything to show for it.
I found your post through the Carnival of Personal Finance and have also included a link on my blog.
karla (threadbndr) on September 15, 2008
Put me on the list for cashing out early - this was a fund that my late husband had set up before we got married, and when we were in those ‘broke student’ days, we cashed out.
The other bad one was that I didn’t sign up for retirement at my first full time job. I was only there for five years, so would have just barely vested and it probably would have been only $150 per month at retirement, but anything is better than nothing! It would have been walking around money at least. Darn it.
Amanda Milne on September 15, 2008
@Scott: Thanks for sharing, it’s funny how hindsight really is 20/20! It’s nice when we can learn from the indiscretions of our youth, and even help others through our posts.
@Karla: I appreciate you telling your story, it can certainly be difficult when we think about income that we’re missing out on from previous decisions. I try really hard not to be too hard on myself for those mistakes because they made me stronger, and pushed me to learn more about managing money!
Sincerely,
Amanda