The money regrets you can avoid
Earlier in the week I posted on the money mistakes we make by decade which shared some commentary on a recent article/podcast in the Wall Street Journal. And today I have a confession to make...I'm not perfect...I know that probably comes as a surprise, but I too have made mistakes with my money that have cost me. And today I'm ready to come out of the closet and share my money mistakes and regrets.
Before I get into my mistakes though, I do think I've done many, if not most, things right in managing my personal finances (a humble brag). But I guess I'll let you be the judge of that. I can't complain too much or cry victim to any terrible scams or injustices. I didn't rack up tons of consumer debt out of college. In just 10 years, my wife and I have been able to amass over $1 million net worth which serves as a testament to our success. What are some of things that I think I've done right? I'll highlight those for you as well:
What We've Done Right
Nothing too earth shattering or difficult here...
We Invested Early – I started investing my senior year in high school with money I made by working summers at a local print shop (yes, I had tons of papercuts...and it sucked) and other part-time summer jobs. I began dating my wife after my freshman year in college and with money she too had made with summer and part-time jobs, I was able to convince her to open her first Roth IRA account before she began her junior year. Needless to say, even though it wasn't much money, investing early has allowed us to get our money to start working for us and to get the compounding started.
We Invested Often – We both made it a habit to tuck away and invest any spare money we could. We were comfortable with a "bare-bones" emergency fund and living the frugal life which allowed us to maximize investments.
We Invest to Win – I've already gone over this in fairly good detail, but we are fully invested in equities since we are long term investors and this has consistently been the best asset for long term growth. While it hurt quite a bit during the 2008 recession, we stuck with our investment strategy and it paid off.
We Diversified – Diversification is important, but it is also fairly easy with the help of just a few mutual funds. For more detail on where and why I invest in mutual funds, check out my portfolio composition.
We Took Advantage of Free Money – By this I'm referring to employer contributions to our 401(k)s. Both our employers have been generous in offering matches to certain degrees, which we took advantage of right away to the fullest extent.
We Were Careful with Debt – This may be the most important one, but we were cautious with debt. We both worked part-time in high school and college and also had the fortune to have our parents pay for some/most of our college. But even after college, we avoided the temptation of financing a nice new car and we also taught ourselves how to use credit cards appropriately.
What I think I've Done Wrong
Money Was Everywhere – When I first started to invest in mutual funds, I bought the mutual funds directly from the funds online platform. For example, when I bought an Oakmark actively managed fund, I did so directly from their website, and I did the same for Marsico, Vanguard, and others. This meant money was everywhere AND transaction fees were higher rather than if I would have just bought them through one low-cost brokerage firm like TD Ameritrade... Of course today we have the added benefit of Personal Capital, a free service to help track investments as well as income and expenses (check it out today if you aren't already using it...it is great!).
I Didn't Keep an Eye on Fees – Leading in from the mistake above, I was not focused on fees...particularly transaction fees. While I don't trade much at all and I make just a few contributions per year, the transaction fees can add up. After my initial mistake of having money everywhere, I aggregated my accounts at Vanguard without realizing they charge an unusually high transaction fee of $35. As mentioned above, TD Ameritrade and other low-cost brokerage firms are much more economical.
Not Maximizing Tax Advantaged Accounts – In 2014 I was just coming around to the idea of retiring early and ultimately I joined the FIRE bandwagon (Financial Independence / Retire Early). I was still in the early stages of understanding FIRE, but I failed to realize that I actually can access "retirement accounts" before age 59 ½ (as the Mad FIentist eloquently explains in this post and I have read elsewhere as well). Before having this knowledge, though, in 2015 I cut my wife and my contributions to our 401(k) plans to the amount necessary to receive the max employer contribution in order to put any excess in a taxable account which I could more easily access in retirement (or so I thought).
Thankfully it was only for 2015 as I was able to realize and correct my mistake; there are in fact a few avenues to access retirement funds early without paying a 10% penalty (withdrawing contributions is penalty free and the 72T SEPP method, etc.). This mistake resulted in approximately $25K less in our tax advantaged accounts than if we would have continued to max out our 401(k) contributions...bummer!
There are a few other things I've done that I wouldn't consider being a money mistake, but something I regret, may potentially regret in the future, or wish I would have handled differently.
Roth vs. Traditional IRA Contributions – In recent years, we have moved up a rung or two on the federal tax bracket to the point where, in all likelihood, it will be higher than our taxable income in retirement (basically just expecting investment income on our taxable brokerage account and withdrawals from traditional retirement plans for income in retirement).
Therefore, I probably should have elected for my wife and my contributions to our IRA plans to a Traditional IRA account rather than to our Roth account. Granted, there are income limits to Roth contributions and I even went the extra step to complete a "backdoor" Roth contribution without realizing it may be a better tax move to go the Traditional route. Even though there are benefits to Roth's such as being ideal for passing wealth to heirs and the benefit of not having to worry about how high taxes may be in the future, I think in 2017 I will be electing to make our IRA contributions to Traditional accounts.
Heavy Usage of Actively Managed Mutual Funds – Early on I bought into the benefits of actively managed mutual funds rather than index, and elected to split my investments evenly between the two. While actively managed funds are faux pas to many folks in the personal finance blogger crowd, there is a reason I've categorized this as a regret rather than a mistake. My actively managed funds have actually performed well and justified their higher expense ratios, as I previously detailed in the linked post. However, I've come to realize that I don't need to take the added risk of investing in actively managed funds to meet my goals, and therefore I have since scaled back my allocation to these funds and invested more in passively managed index funds.
I Never Focused on Tax Loss Harvesting – Similar to the others above, this is not a critical mistake, but something I wish I would have focused more on. I'm sure I could have captured some tax benefits during the great recession of 2008 and at other times where the market has dipped, but I never knew much about this or paid attention closely enough. I've begun to pay more attention to this and hope to do better in the future. And nowadays there are great tools available to easily analyze the ability to tax loss harvest including with the brokerage firm Betterment.
So there you have it! I've aired my dirty laundry. While I've done fairly well and I did number of things correctly, I certainly haven't been without my fair share of money mistakes and regrets. So how about you?
Thanks for taking a look!
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