I like to think that I have a pretty solid grasp on investing and personal finance concepts. After all, I have formal education in financial planning and write financial advice articles like this one for a living.
However, that wasn’t always the case. In fact, I often tell people that the reason I originally wanted to learn about personal finance and investing is because I used to be somewhat bad at both. Fortunately, I never made any irreparable money mistakes, but I certainly had some good learning experiences along the way. In the interest of preventing you from making the same mistakes, here are three of mine and why they’re important to learn from.
Waiting until my 30s to start (seriously) saving for retirement
I didn’t get my first job that offered retirement benefits until I was 26, but even then, I was auto-enrolled and contributed the bare minimum into my employer’s plan. It wasn’t that I didn’t want to invest — I just preferred to do it in a standard (taxable) brokerage account. As a fresh-out-of-school teacher in his mid-20s, I simply didn’t yet grasp the awesome power of tax-advantaged retirement saving, nor was I particularly interested in saving for something that was going to happen 40 years in the future.
Since then, I’ve done a good job of making up for lost time. I max out my self-employed 401(k) each year, and for a while, I was still teaching at a community college part-time and socking away every dollar in the 457 plan offered by that employer.
Even so, waiting to save for retirement is a big mistake. Younger savers simply have tremendous compounding power, and you might be surprised at how much easier it can be to hit long-term savings goals if you start even a few years earlier.
As an example, let’s say you want to retire with $1 million in savings by the time you’re 65. Based on 7% annualized investment returns, you’ll need to set aside $882 per month if you start at age 35. Starting at 30 drops this requirement to just $603, and if you can get started at 25, you’ll only need to put away $418 per month to retire as a millionaire — less than half of what you’d need if you wait a decade to start.
Using credit cards too much
I made this mistake especially when I was still in college. Now, I went to college in the early 2000s, before the CARD Act existed to help protect young and naïve students like me. Credit card companies were allowed to use some predatory tactics to get students to apply — for example, what cash-strapped student would turn down a week’s worth of free pizzas? And, they weren’t required to care whether you had any ability to pay the debt back.
These tactics are no longer allowed, as you now need to be 21 or have a documented income source or cosigner to qualify for a credit card. Also, credit card companies cannot offer free gifts within 1,000 feet of a college campus. However, it’s not difficult for young people to bite off more than they can chew even with these protections.
To be fair, I don’t totally blame the credit card companies. At the end of the day, it was me who made the purchases, and I had plenty of friends who had the good sense not to rack up lots of debt they had little ability to pay back.
Fortunately, I learned my lesson before any permanent damage was done, and I earned enough from working to repay the debt in a reasonable amount of time. However, I ended up spending thousands of dollars on credit card interest to pay for my purchases, most of which I didn’t need to make in the first place.
Not comparison-shopping for a mortgage
Okay, so the first two mistakes were mainly just youthful ignorance. Lots of younger Americans don’t see the value in saving for retirement, and over-using credit cards is still quite common among college students who can get them.
On the other hand, failing to comparison-shop for a mortgage, or any other type of loan, is way too common, even among adults who are otherwise quite financially savvy. When I bought my first home at the age of 27, I certainly didn’t think this was important.
There are a couple of main reasons for this. First, many people are afraid that applying with several lenders will damage their credit. It’s true that lots of credit applications can be damaging, but there’s a special rule in the FICO credit scoring formula that encourages rate-shopping. In a nutshell, no matter how many mortgages (or auto loans) you apply for, it will count as a single inquiry for credit scoring purposes as long as they take place within a two-week shopping period.
Second, lots of homebuyers don’t realize how big of a difference it can make. Let’s say you want to borrow $250,000 to buy a home with a 30-year fixed-rate mortgage. Your bank offers you a 4.75% interest rate, while the lender down the street will give you a rate of 4.70%. Thinking that it doesn’t make much of a difference, you go with your bank. However, that tiny 0.05% difference would have saved you more than $2,700 in interest over the life of the loan. That’s why it’s so important to shop around for a mortgage.
Save money and get on the path to financial freedom
Nobody lives a financially perfect life, but the more mistakes you can avoid, the better off you’ll be. My hope is that you can learn from at least one of these mistakes I’ve made so you can get a head start on investing, avoid giving your hard-earned money to credit card companies, or keep thousands of dollars in your pocket when you buy your next home.
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