My Biggest Financial Mistakes and MisconceptionsSubmitted by Castlebar Asset Management on January 28th, 2016
When I wear my financial planner hat, I give advice to clients, friends and via the Castlebar blog on a regular basis. I wish I had followed all my advice that I'm giving now to my clients throughout my entire life. I've made a lot of mistakes along the way and some were real gems. Fortunately, most of the mistakes were early in my 20s so I did not do any real damage to my personal financial future. Here's a few of the financial mistakes that I've made along the way.
Buying a brand new car: I made the mistake many people in their 20s make. Once I graduated college and had a good job I immediately went out and bought a new car. I had driven a used car my entire life and wanted to own a new set of wheels where I was the first owner. I probably overspent making sure the car had all of the bells and whistles. Now this did not crush me financially but it wasn’t smart either. I could have saved a few thousand dollars to invest or pay off student loans quicker. Since then I have bought used vehicles and avoided the depreciation seen on brand new cars. In each instance, I got all of the perks of a new car like new car financing and warranty as if I had bought a new vehicle.
Not saving enough for retirement right away: After college I worked overseas and was not able to contribute to a retirement account like a 401(k), IRA or Roth IRA. I should have put money away in a taxable account to start saving ASAP. This is a universal regret that I hear from so many clients. They all wish they would have started saving earlier to reach their long term financial goals. The biggest reason people don’t start saving is they were unsure how much they need to save and where to contribute. Saving too much too early is a great problem to have. Something I wish I had done.
Eating out too much: One thing that is a budget buster in our household and frankly for most households, is we eat out too much! I love eating out. Exploring new restaurants with my wife, going to dinner with friends or grabbing a bite to eat with buddies before a baseball game is something that I absolutely enjoy. We also get in a habit of being tired after work and not wanting to spend the time cooking so we take the easy route, dinner out. These habits are just a killer to a monthly budget!
Falling for the airline mile trap: Everyone loves the airline miles that they accumulate from frequent flyer programs, credit cards and other reward programs. If you use your miles these are worth it. Most people let their points, miles and rewards accumulate in their accounts for someday when they may take a trip. Airline miles are not like most assets; they will not appreciate over time. They depreciate because it costs more miles or points to go anywhere overtime. I have two credit cards that give me airline miles on an airline I hardly fly anymore. I have hundreds of thousands of miles and I pay an annual fee for the privilege to accumulate more. I either need to use my miles or switch to a different credit card that will give me a reward that I will use and that does not have a fee.
Late setting up an emergency fund: I am fortunate that I created an emergency fund when I did. I am lucky that I did not need to access one when I was younger. I did not set one up until I was in my early 30s and I had to scrap to do it during the financial crisis. When I got married in 2008, it was at the heart of the financial crisis, I was on my honeymoon when Lehman Brothers went bankrupt. At the time, I probably had a month of expenses in the bank, maybe a little bit more, but most of that money was going to payoff our honeymoon when we got back. In 2014, I actually needed to take money from my emergency fund when I was diagnosed with cancer. It was literally a life saver. My wife and I were never stressed about finances when I was going through my treatment because we knew we had money in reserves. Saving for an emergency fund is one of those things that people put off frequently but it's great to have and it's a blessing when you need it.
Paying off my mortgage quicker: This can be a controversial topic and I have written about this in the past. I do regret paying down my mortgage faster because I missed out on some investment opportunities. I am not upset that I have more home equity or that I will be mortgage free sooner, but I am confident that I could have gotten a better rate of return outside of my house.
Buying a bad life insurance policy: Shortly after I got married I knew I needed life insurance. A friend of mine who worked for a large AAA rated insurance company called me at the right moment. I was busy and wanted this checked off my to do list. He convinced me that a whole life insurance policy was the best long term fit. All I really needed was term insurance but I worked as a portfolio manager at the time and had limited knowledge of financial planning. I ended up surrendering my whole life policy a few years after I started it and all of the investment benefits had magically disappeared and so did my friend. He left his job six month after he sold me the policies. Mixing insurance and investments is an opaque mess where the insurance company is the one who wins.
Assume I will earn more in the future: Early in my career I thought that I would continue to see my income grow at a strong rate for a long time. This meant that I thought I would grow or earn my way to a better financial situation. Most people in their professional careers see peak earnings sometime in their early 50s. I'm in my late 30s, when I started a business I saw my income fluctuate during the first few years after it started. My assumption I had in my 20s that my income would grow forever was far from reality. There are some jobs where people will earn their highest income at the end of their career. When I updated my own financial plan several years ago I had to revisit my assumptions of income growth. I bring this up with clients all of the time and it is something that surprises most of them.
Confusing assets and investments: Our biggest asset for many of us is our house. I often look at my home as an investment which is probably not the best way to view it. Sure it will generate a rate of return for you but it is so much more than that. Your family will make memories there, but your 401(k) won’t. Other assets you may own might be a great guitar or a motorcycle that you get enjoyment out of. You can probably sell these down the road and maybe make a profit but enjoy your assets and focus on getting returns from your investments.
Short term focus: With maturity comes patience. I have become more patient overtime but I was extremely short term focused when it came to investing. A week seemed like years to me. I was stressed that investments would not move as quickly as I would have hoped. This caused me to sell some great companies just because my time horizon was too short. I appreciate being patient now and wished I could have told that to 26-year-old Andrew!
Micro cap or penny stocks: I am embarrassed to say that I have purchased some lottery tickets in my life. Sometimes I bought them when there was a big jackpot but other times I have bought lottery tickets in the form or penny stocks or micro caps. Penny stocks and micro cap stocks are small companies that are publicly traded. Some of these bets paid off while other were a complete mess. I have only owned five or six in my life and I did so in my twenties. I recommend clients don’t touch this asset class. It is filled with bad management teams, stock promoters and reverse mergers. I am lucky that I learned my lesson at a young age because if hope and opportunity are what your investment thesis is based on then you should not be investing in it.
Overconfidence: I earned my CFA charter in 2007 and worked as a portfolio manager early in my career. I did not necessary have additional insight or knowledge about the markets because of this but at times it lead to a sense of being overconfident. Surely because I believe that Company A is better than Company B, it will outperform. Keeping an eye on our behavior biases is important no matter what our past track record or pedigree we have.
Using rule of thumbs: Everyone loves rules of thumb. It is a quick rule that we can use to assume we know what is right to do. I constantly need to remind myself that you can't use any rule of thumbs, you've actually got to do the work and analysis. These little shortcuts that we program can get us into a lot of trouble because they become assumptions and just because we thought they were true at one time doesn't mean they're always true. It is something that we need to go back and retest regularly.
I hope you can learn a few things from past my mistakes or misconceptions I have had. None of these were financial catastrophes but I was fortunate that I either learned my lesson or was lucky that something bad never happened.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.