My Biggest Financial Mistakes and Misconceptions

When I wear my financial planner hat, I advise clients, friends, and via our Beyond Wealth blog regularly. 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 in my 20s and seemed bigger at the time but have proven to be pretty lost cost life lessons. Here are a few of the financial mistakes that I’ve made along the way.

Buying a brand new car

I made a mistake many people in their 20s make. Once I graduated from college and had a good job, I immediately 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 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. I will have to admit that I may have relapsed on this and purchased a new car (or two) in the past few years.

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! Exploring new restaurants with my wife, going to dinner with friends, or grabbing a bite to eat with buddies before a game is something that I enjoy. We also get in the habit of being tired after work and not wanting to spend the time cooking, so we take the easy route, dinner out. If you like eating out, allocate some of your spending money to enjoy meals out, don’t let convenience dictate how we spend our money.

Falling for the airline mile trap 

Everyone loves the airline miles 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 to give me a reward that I will use, and that does not have a fee.

Late setting up an emergency fund

I am fortunate to create 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, most of that money was going to pay off our honeymoon when we got back. In 2014, I needed to take money from my emergency fund when I was diagnosed with cancer. It was literally a lifesaver. 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 return rate 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 who sold it to me. He left his job six months 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 healthy 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 early 40s and when I started Beyond Wealth, 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 careers. When I updated my financial plan several years ago, I had to revisit my income growth assumptions. I bring this up with clients all of the time, which 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. You may own other assets like 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 these items and focus on getting returns from your investments. 

Short Term Focus 

With maturity comes patience. I have become more patient over time 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 Andrew in his 20s and early 30s!

Speculative companies and micro-cap 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 PowerBall jackpot, but other times I have bought lottery tickets in the form of speculative or micro-cap stocks. Some of these bets paid off while most were a complete mess. I have only owned less than 20 in my life and I did so in my twenties. I recommend clients don’t touch this asset class. It is filled with lousy 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, you should not invest in it.

Overconfidence

I earned my CFA charter in 2007 and worked as a stock analyst and portfolio manager early in my career. I did not necessarily have additional insight or knowledge about the markets because of this but at times it lead to a sense of being overconfident. For example, because I believe that Company A is better than Company B, it will outperform. Sometimes this happens, sometimes it does not. Keeping an eye on our behavior biases is essential, no matter our past track record or pedigree.

Using rule of thumbs

Everyone loves rules of thumb. It is a fast rule that we can use to assume we know what is right to do. I frequently 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 right. It is something that we need to go back and retest regularly. 

I hope you can learn a few things from the past mistakes or misconceptions I have had. None of these were financial catastrophes but I was fortunate to learn my lesson or was lucky that something terrible never happened.

Andrew Comstock, CFA