Learn from the mistakes of others. You can’t live long enough to make them all yourself.-Eleanor Roosevelt
Making mistakes is an inevitable part of stumbling through life, but you don’t have to make them all by yourself. Although managing your finances is a crucial part of growing up, unfortunately most people were never formally taught what to do and what not to do. Learning from the mistakes of others is a great way to guide yourself along your journey to financial freedom and to learn best practices without making the mistakes yourself.
Here are 5 mistakes that I’ve made on my financial journey and what you can learn from them:
#1. Trying to time the stock market
As a late millennial who grew up during the Great Financial Crisis of 2007-2008 and watched the massive drop in stock prices, the possibility of another crash loomed large in my mind as I began making big boy money and starting to invest. I expected a similar recession to occur about 10 years later (around when I began my career in 2017) and I didn’t want to be buying in at what I thought was the top of the market.
I thought that if I just kept waiting for the big crash, I would be able to scoop up stocks at a discount and ride the next bull market. It turns out that trying to time the bottom and the top of stock market is impossible and harmful to one’s long-term financial success. Over the years, the market has wavered, taking a brief dip in late 2018 and then experiencing a massive drop in March of 2020 because of the uncertainty surrounding the Covid-19 pandemic. In both of these cases, I panicked as I saw my retirement portfolio drop in value and sold some of my stocks, which was the opposite of what I should have done. In the heat of the moment, when markets turned sharply bearish, it felt like they would keep dropping so I sold off my shares and held off on buying, when I should have stayed the course and bought even more stocks.
Thinking I’ll just buy stocks when the market drops is problematic for several reasons:
- In the uncertainty of the moment, you will have a fear of catching a falling knife and it will be impossible to know where the bottom is.
- A massive market drop will likely have broader implications on the health of the economy and may mean that your company and/or job are in jeopardy. Will you be comfortable with using your remaining cash to buy more stocks when you just lost your job?
- Don’t try to time the market!
- Stay the course – follow your plan and have confidence in the long term returns of the overall stock market.
- Remember that when stocks are discounted, you may not be in a position to buy because the economy may have hurt your employer or industry.
Trying to time the market caused me to stay on the investing sidelines and make mistake #2, which was keeping too much in cash and money market accounts.
#2. Keeping too much in cash and money market accounts
By trying to time the stock market (mistake #1) and waiting for the next market crash before investing, I kept too much in cash and stayed on the investing sidelines much longer than I should have. While I think everyone should strive to save up a 6 month emergency fund, over the years I accumulated what was more like a 4 to 5 year emergency fund.
Keeping nearly half of my net worth in cash and money market accounts since I started my career in 2017 has caused me to miss out on huge gains that the stock market has experienced over the last few years. And when the Coronavirus Crash came in March of 2020, I didn’t have the stomach or the conviction to buy into the market. Even though I park most of my money in high-yield savings accounts, the interest rates I earned on my cash diminished while stocks continued to grow. As the Federal Reserve prints more stimulus money, it is likely that cash will continue to lose value relative to assets like stocks and real estate if interest rates remain low.
Going forward, I am implementing a strategy of aggressively using dollar cost averaging to put more of my net worth in the stock market beyond what I am investing through my 401k.
Dollar cost averaging is a simple technique where you invest a fixed amount of money at a set frequency of time which aims to reduce the impact of stock market volatility on your portfolio. The idea with dollar cost averaging is that it “smooths” out your purchase price of stocks over time and prevents you from buying in with all your money at a high point in prices. An example of dollar cost averaging would be investing $1,000 a month for a year instead of $12,000 all at once.
- Once your savings exceed a 6 to 12 month emergency fund plus any large upcoming expenditures (like a vehicle), you should move your remaining savings and income out of cash and into appreciating assets like stocks or real estate.
- Use dollar cost averaging to smooth out a move from cash to stocks and help prevent you from buying into the market at too high of prices.
- Even when using high-yield savings accounts, inflation is slowly eating away at the value of your parked cash to the tune of a few percent per year.
#3. Not contributing to a Roth IRA once I started working
Although I did max out my 401k through my employer as soon as I became eligible, I still had a decent amount left over each month after expenses because I was saving over 50% of my income. At the beginning of my career, I thought that if I maxed out my 401k, then I was no longer able to contribute to my Roth IRA. But I was wrong! I did not realize that I could contribute to my Roth IRA even after maxing out my 401k through my employer. While this is a post-income-tax contribution, using a Roth IRA still helps to reduce tax liability in retirement, because you can make tax-free withdrawals from your Roth after age 59.5.
The only downside to contributing to your Roth IRA is that if you wish to access your funds prior to age 59.5, you may be subject to a 10% penalty, but there are ways around this like the Roth Conversion Ladder.
- If your annual income is less than $124,000, then you are eligible to fully contribute to a Roth IRA on top of any contributions you make to a 401k plan through your employer. For incomes above $124,000, you may be able to make a partial contribution.
#4. Getting hit with annual fees when churning credit cards
Over the last 3 years, I have used rewards credit cards with generous sign-up bonuses like the Chase Sapphire Preferred to stack thousands of travel rewards points which have payed for most of my flights. This strategy, known as credit card churning, follows a relatively simple approach:
- Identify and apply for credit cards that offer generous bonuses, typically with rewards programs that are especially geared towards travel.
- Once you receive the card, spend enough over the first few months to meet the spending requirements to receive the bonus.
- Stop using the card and cancel or downgrade the card to avoid the annual fee.
Where credit card churning caught up to me and I suspect many other people was with Step 3 – avoiding the annual fee. While I spaced out my credit cards and set automatic payments to prevent any hit to my credit score, I have been off my game and had a few cards renew before I could cancel them or downgrade. Overall, I have still benefitted greatly from the free flights but my lack of diligence has left me with several hundred dollars in annual fees over the years that I could have easily avoided.
- If you are going to churn credit cards with annual fees, you need to get serious with organizing your cards in a spreadsheet and be diligent about cancelling or downgrading them on schedule.
- Only use rewards cards with no annual fee or an annual fee that makes sense for your spending.
- Ultimately, credit card churning may not be worth the time and headache.
#5. Delaying my job search after being laid off
My last mistake on this list is a career mistake that I also consider a financial mistake because it did have significant financial cost to me. Back in late 2019, I was part of a mass layoff at a startup whose failure was highly publicized. Being part of the layoff was like watching a car crash in slow motion and I was well prepared for it. I was incredibly fortunate that despite my short tenure at the company, they provided a very generous severance package which I projected could cover my expenses for a year thanks to my low burn rate.
Given my situation, when I was laid off I didn’t rush to find another job and instead spent a few months learning coding and web development thinking that I might want to make a career shift or at the least pick up some new skills. During this period, I was approached about jobs in my field of mechanical engineering but didn’t really entertain any of the inbound interest that I received. I continued learning and building projects into the spring of 2020.
Then Covid-19 happened.
Immediately, mid to large companies implemented hiring freezes and startups went into conservation mode. In March 2020, the stock market had one of the most dramatic crashes in history, with the Dow Jones Industrial Average dropping roughly 26% in just 4 days. With companies like Uber and Airbnb laying off experienced engineers left and right, I realized that it was about the worst possible time to make a career transition and look for a job as an extremely junior web engineer.
So I fell back on my degree and my previous experience and I ramped up my mechanical engineer job search. I was incredibly fortunate to find my current mechanical engineering job at a promising company about 3 months later. Looking back, it all worked out, but I definitely think about how things might have been different if I had started my job search immediately after being laid off. If I had been able to find a job before the pandemic, I would have burned less of my savings, may have been able to negotiate a higher salary in a less competitive job market, and may have had more confidence to actually buy stocks on sale when the market crashed in March 2020.
- Never take the good times for granted.
- Always make finding a new job your top priority after being laid off.
- Take into account the worst-case scenarios when planning a career switch.