My first financial mistake happened in my early 20s. Although last week I admitted that buying my house was a financial mistake, but not a personal mistake. So what did I really make a mistake on?
I was young, dumb, and just starting out. Truth is, my mom didn’t give me much financial guidance except “spend less than you make.” She herself knew next to nothing about investments, and had never saved a penny for retirement except in her state’s pension fund. She wasn’t even sure what a 401k was or if she had one. But other piece of sage advice “always have medical insurance.”
So I got a job with medical paying $25k out of college in 2000. Nice. I had just turned 21, graduated a few months before, and I was making “real” money. So I had heard about a Roth IRA, and decided I would try to start contributing. But I had wiped out my meager savings buying a new Toyota Corolla.
Typically this would seem to be my first financial mistake right? Buying a new car? Well it wasn’t. Why? Because my parents matched me dollar for dollar for a new car as a graduation present AND because they didn’t want me buying an el-cheapo used car. Thus they would only give me the match for a new car they approved off. The list was a Toyota Corolla, Nissan Sentra, or Honda Accord. So I bought a stripped down, demo model Toyota Corolla without power door locks, windows, or even a clock. So while buying a new car is bad (as I’ve since learned), I also got a 100% match my taking my parents up on their financial offer with strings!
So I was starting out and I had pretty much no money. I had to come up with a deposit for a place to live, since I had been in student housing. But I was given a 4 month grace period to move out. Thus I had subsidized housing from the university.
After getting together a few thousand, I was able to save $2k to invest in a Roth IRA in 2000. My other goal was to pay off my student loans around $10k. It took a little over a year, but I did it. Like I said I knew nothing about investing, and I invested my Roth IRA in tech funds. I lost most of my money.
In 2001, while finishing off my student loans I saved another $2k into my Roth IRA. Then I began to stockpile cash. Unfortunately I was unable to access a 401k because the company I worked for did not offer it, being a small company. So I began to save cash.
And in early 2002, I bought my first home. My financial mistake? From 2002 to 2004 (3 years), because I had bought the home and decided to back to graduate school, I did NOT save anything in a Roth IRA. During graduate school I did not have 401k access, but I could have saved $6-7k in a Roth IRA. Instead I used the money on my condo.
So my first big financial mistake of my life? Not saving for retirement. I am saddened when I think about my stupidity in losing out on those years contributions. It’s not like I didn’t have the money, instead I used it to pay down my house.
I lost sight of the forest for the trees. I was only looking at the tree in front of me (mortgage) instead of the bigger picture (forest). I thought “I have debt”, I should pay it off. It never occurred to me, I should stick my extra money into my Roth IRA.
Another reason, is my Roth IRA had lost most of the $4k I had contributed. When I really got into investing in 2005, and started contributing again, I had only $1200 left from my $4k contribution! Bummer.
But perhaps if had been investing annually, I would have become more aware and interested.
Moral of the story? Don’t lose sight of the forest for the trees! Always look at the bigger picture! Save for retirement as soon as possible, because you can never go back and put money in after the fact!
Tomorrow my second financial mistake…
27 responses so far ↓
1 Grace // Feb 23, 2009 at 10:53 am
I gotta say that the fact that you even knew about retirement saving when you got your first job puts you way ahead of me. I got out of graduate school at age 24 with my shiny new degree in hand. Then I signed up with VISTA (nowadays, it’s called Americorps) for two years. VISTA actually did save money for me, but as soon as they paid it out to me, I took it and headed to Mexico for three weeks. It was another 25 years before I woke up, took a look at my non-existant retirement accounts and realized that if I didn’t want to live on dog-food sandwiches, I’d better start funding an IRA or 403 (b). Your biggest mistake is also mine, but at least you figured it out sooner.
2 asgreen // Feb 23, 2009 at 11:30 am
My first financial mistake was similar. I decided not to participate in my 401k because I was planning to go back to school (and I had plenty of time). I made sure my sister didn’t make the same mistake!
3 Ellen // Feb 23, 2009 at 12:20 pm
I’m actually having this same sort of problem right now. I got my first job in 2007, and I’ve been investing $500 a month in my 401k (10% of my income). I just dropped my payments down to $200 a month because I’m trying to pay off $75,000 in student loan debt. Once I take out a decent chunk of the debt, I’ll increase my 401k amount again. In fact, at that point, I could increase my contributions by over $1,000 a month because that’s what I’m paying to get rid of this debt every month.
It’s a really hard choice to figure out what is more important to do first with finance, especially when you’re young (I’m 24). I just know I’ve been living with this debt for 2 years now, and I barely made a dent in it so far. I feel like that’s what I need to focus on to feel more financially stable. I’m just glad I’m still contributing even a little bit to my 401k so that I can still see that grow.
4 JoeP // Feb 23, 2009 at 12:43 pm
Looking back, it is always easy to be critical of financial decisions. The good news is that you will have some good lessons to teach your kids (whether or not they apply them is a different topic all together).
Your decision to buy a new car is not one I would have made. There are many very good used cars in excellent condition with warranties, so the argument that a used car is less reliable than a new one doesn’t hold. Of course, new cars are always in better condition, and some people Want A New Car. While your parents matched your contribution, it may have made the decision to buy a new car easier, but you could have had more available money to…
Invest earlier. Had you known about IRA’s and done some research on diversification, you might have been able to start compounding earlier. Looking at your current balances can bum you out, so just don’t look at them and don’t let it change your investment habits.
Your decision to buy a condo was what I would have done. There are always reasons to sell, but I’d try to stay in it for at least 7 years to build some equity.
Sidebar: I find it interesting that a second language is required for public schools, but finance is not. Being in command of 3 languages won’t help when one’s spending habits put them so far in debt. Not saying this is your situation, but I think we can all agree that understanding more about finances at an earlier age is beneficial to everyone (except maybe loan sharks LOL).
5 LAL // Feb 23, 2009 at 3:16 pm
Grace, I feel you. Sometimes I feel like I should have spent my money on traveling instead of being responsible honestly! You are only young once!
Asgreen, I plan on telling my kids not to lose sight of the bigger picture.
Ellen, you should reconsider downgrading your 401k. When you pay off your student loans you will have enough to maximize your 401k. I hope you are doing a Roth IRA or Non-deductible IRA if you make too much.
You cannot go back to 2009 and contribute. Thus taking longer to pay off your loans at the expense of maximizing retirement savings is a good idea. It is NOT a good idea to use debt repayment money to have FUN.
But if you are saying paying off debt with $500 but saving $1k it’s not a big deal.
JoeP, actually my parents were not giving me the money if you read carefully to buy a used car. I would have had $6k to buy a used car or a new $12k car. That is the scenario.
Which would you like to do? I have to say turns out the new car has lasted 10 years and going strong without ANY problems. Knock on wood.
The $6k match was only if I did what they wanted. It was not only a lesson in saving, but the golden rule. “He who has the gold, makes the rules.” My parents had the gold and I had to play by their specific rules to get the gold. That was the last time I got money from them with strings attached.
It was not going to happen if I had said “give me the $6k to buy a used car.” Or if I had tried to purchase any car not on the list.
Also the car list was specific down to specific Honda Civic Models (DX) and Toyota Corolla (VE). I learned a valuable lesson, if you take money, borrow, or been gifted money; there are always strings attached!
Perhaps you assumed my parents gave me the money up front? No way. My parents said these are your choices. You can pick from these two models of cars and we’ll give you the match. If you buy anything else, don’t bother asking for money.
And I had to buy it specifically as I was job hunting. My parents would not allow me to buy a car before I graduated. They would NOT have matched my money.
Like I said, I would have passed up a 100% match. So would you give up $6k to buy a used $3k car and save $3k? Or $1k car but save $5k? Realizing that a car that is $3k or $1k will take some repairs, that I would have had to foot out of pocket?
6 LAL // Feb 23, 2009 at 3:20 pm
By the way a new car is a bad idea. But it doesn’t mean it shouldn’t be bought. It should when you can afford it.
Also, my DH bought a new car. One reason for him was to build credit. He had no credit being new to the country. Again if you aren’t a foreigner you have no idea what it’s like to start out with nothing but two suitcases.
It takes a lot of cash when you come here. Huge deposits on everything.
7 Andrea // Feb 23, 2009 at 5:50 pm
Here’s how it worked out for me. I graduated college and got married in 1999 and after working for the summer I had saved 3.5k. I was still driving the old Dodge Omni my parents were graciously letting me drive. After we got married, my husband had also saved 3.5k and we bought a ‘97 Geo Metro for me for 7k. The Geo Metro lasted until 2005, and then we bought a Chevrolet Aveo which has been great, one previous owner for around 10k. I also had student loans of 12k. My husband had a good job though so we knocked those out pretty quick along with his car loan of 14k. Wow, it sure sounds like a lot of money now that I’m thinking about it. I know we maxed his 401k the year after. We did travel a fair amount though throughout our 20s. I didn’t have access to a 401k my early years either (through a series of crappy jobs) but did the Roth max so I have around 20k in Roth/401k now, mostly Roth. My husband has twice as much in his 401k though, the power of maxing out that first year I guess.
8 LAL // Feb 23, 2009 at 8:59 pm
Andrea, I noticed that a lot of people got hand me down cars from their parents. My DH and I did not ever have that option.
My DH was 22 before he bought a car. He biked in weather colder than you can imagine unless you live in Alaska all through college and high school.
So it’s not like we were spoiled. We did not have the opportunity to have a used car given to us. It was circumstances.
Thus I don’t think it’s unreasonable that my DH and I both bought new cars which have lasted lI have a 10 year old corolla and 9 year old focus.
No plans yet nor need to get rid of one. I think the corolla could easily last another 10 years. IF so, then what would the cost be of having bought it new?
I doubt the focus. Although that car has been pretty much rebuilt over and over.
9 JoeP // Feb 23, 2009 at 9:19 pm
LAL, I didn’t misread, but maybe I should have been clearer. For a $12k car, your parents and you would both pitch in $6k. A used car that cost $8k would mean only $4k out of your pocket. So you could have kept $2k of your own money to do other things with, such as invest.
10 Double Journey // Feb 24, 2009 at 2:09 am
Sorry to post another link to my site but you keep writing on topics that I’ve gotten something to say and have written on my own blog.
I was lucky, I saved at the start of my career for retirement and even in this down market, it has paid off. I learned, thanks to my economics degree, the true power of compound interest and how important it is to save early.
http://www.doublejourney.com/2007/11/28/power-of-compound-interest/
11 Fit Wallet // Feb 24, 2009 at 8:12 am
Hey, that’s not so bad! I didn’t start saving for retirement until I was 26 (after I bought a house, no less), and I still only save $50 per month. Of course, I don’t totally regret starting late, since I only lost about $500 in the stock market crash! But now I have to ramp it up and buy as much as I can while stock prices are still so low. I’m planning to post about that later this week.
12 LivingAlmostLarge // Feb 24, 2009 at 8:48 am
Joe, the $4k car would have cost me I bet $2k easily in repairs more. I am not sure, but I’ll post about the car situation and ask readers what they think.
But I’m pretty sure a car that’s $4k like my 1999 Toyota Corolla, will be costing at least $2k soon enough. NOT because I don’t take care of it, but just sheer age.
13 LivingAlmostLarge // Feb 24, 2009 at 8:49 am
Oh and Joe, it was a $10k car and I would have saved $1k on the $4k car. Unless we want to go with an even bigger junker.
Double Journey, it’s fine.
FitWallet, why don’t you regret not saving for retirement?
15 Fit Wallet // Feb 24, 2009 at 9:37 am
I definitely regret starting to save for retirement until I was 26–it was stupid to wait so long. But on the other hand, I only lost about $600 when the market tanked. Now my dollar buys more, so it’s a good time to increase my contributions to 5% of my income.
16 Andrea // Feb 24, 2009 at 10:54 am
The Dodge Omni was never “mine”. My parents just let me use it the last year of college and the one summer after I graduated. I guess I don’t think of myself as spoiled because of it. And yes, I can imagine cold winters as we’re having one right now in MN.
I would have taken the match too. It’s just letting me use the old Dodge Omni was less expensive for them. I’m not sure what it cost then- maybe 2k?
I think I might have missed something. You say you doubt the Ford Focus? Well I do too. I’ve heard it doesn’t drive very well and is not as reliable as the models you suggested. I think my next car is going to be a Honda Civic. My husband is actually up next though. He’s got a 1998 Pontiac Grand Am, which will probably have problems before mine just due to it being so old. It’s still running great though so knock on wood.
17 LivingAlmostLarge // Feb 24, 2009 at 11:12 am
Spoiled in the sense that we bought new cars. a lot of people got to use their parents cars but the opportunity was never present for either my DH and I living away from our parents.
My DH lived farther north than MN! Go north another 1500 miles!
The ford focus has terrible reliability. We’ve spent a fortune maintaining the car. There have been problems with the brakes, the engine, tranmission, thermostat, etc. It is a wreck basically. We’re nursing it along, though its newer, it’s had a ton of work done.
Fitwallet, did you only lose $600 because it was conservatively invested or because there wasn’t much in there? What percentage did you lose?
18 Fit Wallet // Feb 24, 2009 at 11:53 am
Actually I invested very aggressively (being in my mid-20s) and lost about 35-40%. Since I had only been investing $50 per month, I had almost nothing in there.
19 LivingAlmostLarge // Feb 24, 2009 at 10:13 pm
So you had only been investing $2k Fit Wallet? Had you run the scenarios if you had investedfrom age 22 to 26 the maximum?
20 fengshui // Feb 24, 2009 at 10:23 pm
“So my first big financial mistake of my life? Not saving for retirement. I am saddened when I think about my stupidity in losing out on those years contributions. It’s not like I didn’t have the money, instead I used it to pay down my house.”
I made the same mistake….. we all live and learn.
21 Kristy @ Master Your Card // Feb 24, 2009 at 11:16 pm
Good lord, this was just one of the MANY mistakes I made in my youth. I was completely financially ignorant. I had no concept of how an account would work, nor did I understand the importance of saving for retirement. I didn’t really wake up on that front until about three years ago – and I’d been in banking for 3 years by that point. I knew I needed to get it done and get started, but I just never seemed to get around to it. But, once I did, I was pretty aggressive with the numbers. I’ve been contributing as much as possible since then.
22 LAL // Feb 25, 2009 at 9:50 am
Good to know I’m apparently not alone and with lots of company.
23 Fit Wallet // Feb 25, 2009 at 3:40 pm
LAL, with my salary there is no way I can invest to the max without giving up food, or going into foreclosure or something! Up until recently I hadn’t broken the $40k mark, and I live in a city with relatively high cost of living.
24 LivingAlmostLarge // Mar 2, 2009 at 4:34 pm
FW, I think that would be the way to move towards. Saving as much as possible in retirement and then other things.
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