Wednesday, June 13, 2007

Money mistakes

One of my favorite genres of pfblog posts is the money mistakes confession. I was recently reminded of this by the money mistakes posted at Wise Bread and thought I would join in the conversation.
In no particular order:

1. I bought more car than I could afford. Even though on a cognitive level I know that the correct question to ask is “Can I afford this car (in its entirety)?” I got caught up in things and thought it was sufficient to ask the question “Can I afford these payments?” I could. Then I ended up moving leaving my job to move across the country with my husband. Life changes. Payments follow you.

2. I ate fast food and drank expensive coffee on borrowed money. I’m so diligent about not racking up credit card debt, but somehow I wasn’t quite as diligent when it came to my student loans. While my husband has debt from his undergrad degree, I went to a state school for undergrad, and got a lot of scholarships, so I only needed student loans to stay for a fifth year and get my masters. I don’t really regret taking out loans for that. What I do regret is that, while I was living on my loan rebate checks, I spent money on stupid things like fast food hamburgers and Starbucks coffee. I should have been able to refuse a big chunk of that loan, or at least keep it in a high interest savings account and repay principal as soon as I got a job. Instead I spent it simply because I had it. Now I’m paying 6% interest on those latt├ęs.

3. I invested money I shouldn’t have . In spring of 2000, when I was a 19 year old college freshman, I had a $3000 CD mature. It wasn’t a whole lot of money, but it was money that I didn’t really need. It was birthday money that I had been saving for college since before I was old enough to know what that meant, and here I was 19 years old and going to school practically for free, and this money was all mine. A friend of mine told me it would be a great idea to invest it, so I bout $1000 of a nice safe S&P index fund. In 2000. Yeah, that 2000. Six months later, after my initial investment was almost cut in half, I bought another $1000 worth because I was averaging down, right? Woo hoo.

Even if I hadn’t timed the market so badly, it was still a bad idea for me to invest that money. Why? Because I couldn’t really afford to leave that money alone for the amount of time it takes. I did end up needing some of that money while I was in college, and I had to cash all of it out within two years of when I graduated. If I had just put that money in a high interest savings account or money market earning 4%, when I went to grad school I would have had about 3500. That would have paid my rent for 10 months. Money that you will need within 5 years should never be invested in the stock market. I learned that one the hard way.

I’m sure I’ve made more mistakes than that in my life, but those are my big ones that come to mind right away. What are yours?


Anonymous said...

Good comments on the car purchase. In my opinion you get your best value for your dollar with a used car. There are a few techniques that can be used, including buying and selling for around the same price every couple years, or simply buying a cheap car and driving it until it falls apart.

On the other hand, I have to disagree with your second and third quotes.

On the second point, the only thing I can say is, sometimes luxuries are good. Variety is the spice of life. Sure, one could save a ton of cash eating rice every day, but who wants to? A treat here and then is good for one's sanity. There are a million cliches I can use in this paragraph. Everything in moderation, even moderation. And on the seventh day, god rested. All work and no play makes Jack a dull boy. Point is, 6% on a few lattes or beers isn't such a bad price to pay for your sanity.

So you timed the market badly. At least you did a good thing by averaging down on something as reliable as the S&P index. Where you went wrong was in cashing out! Downturns are short term and the market will eventually catch up to where it would have been. Don't through the baby out with the bathwater and say investing is bad, or that you shouldn't have invested it. The savings account alternative is a decent idea, but probably only works for extreme cases like yours where timing on entering the market is super bad. The 12% vs. 4% reward has to be taken into account as well.

Anonymous said...

I don't think she was trying to discourage investing at all. I thought her point was that it was unwise to invest when the money would be needed for short term needs and there would be no choice of whether to cash out. Savings accounts do make more sense if you won't be able to leave the money along long enough to ride out downturns.

Anonymous said...

That's a fair point, but I do think that her message was a little bit unbalanced to the end of not investing. Investing for the long term no matter when is generally a good idea. Indeed, if she was making 12% a year (probably more after a significant downturn), it's still more than her cost of money at 6% a year.

story girl said...

I totally understand your point about 12% being worth it, but you get that 12% by leaving your money alone for the long term. There are invariably peaks and valleys, and if you're going to NEED the money in less than 5 years, then you can't afford to ride it out.

But for long term goals, absolutely I still think investing in mutual or index funds is the best way to go.