Admittedly, this is a tough one to write about. I wish the title was simply “Money Mistake.” If you didn’t catch the difference, the current title is plural and not so singular (I wish). The current title also indicates “early” money mistakes which will means there were also more current mistakes. The truth is, to get to this point, which as we consistently remind you, we’re a long way from FI and I have made many mistakes along the way. The harsh reality too, is that I am probably not done making them.
With that in mind, it is my Silver Lining that in writing about them, I can hopefully help others avoid them. If I help only one person with this article, I would consider it a MASSIVE success. So without further adieu, here is part one of how I have tripped, stumbled, and fell flat on my face, BUT also where I have learned….
The $15K that got away
This one is probably the toughest pill to swallow. Once upon a time, I lived at home following college. I had a little bit of student loan debt which I was determined to pay off. I had secured my first “adult” job making what was, at the time, a good wage. Better yet, this company was cranking out business and if you were willing to put in the overtime, it was all yours. So that is what I did. I put in all the hours I could. On top of that, I was still working my part time college job for a few extra bucks.
I had more money than I had ever had and very low expenses. For the first time in my life, not every dollar I made needed to go toward a bill. So what the heck was I supposed to do with it?
Fortunately for me, one of my best friends to this day was there to help me. This friend is my version of the man, the myth, the legend: Mr. Money Mustache.
This friend of mine was, and still is, brilliant far beyond his years in life. He has made so many intelligent decisions to put himself in a place of success. I have always made the joke that his first words must have been “entrepreneur” and/or “stock market.” He worked from a very young age, putting money away in a savings account from the get go. I think he might have even had a brokerage account before many of us had our first jobs or drivers licenses. He has been steadfast in his message to:
Keep your expenses low (live below your means) and get your money to work for you.
So here was his advice:
Open a Roth IRA and fund that
So that is what I did, and that is pretty much all I did. You see, when you fund a Roth IRA, that is all you are doing. Unless you use a robo advisor (a topic for another day) such as Betterment, Wealthfront, or Acorns, you have to actually choose your investments.
In essence, if you fund a Roth IRA, but do not invest the funds, it is like hitting a base hit, but failing to run to first base. I forgot to run to first base and just let my money sit in my Roth IRA earning nothing. Nada, zilch… If I had simply taken JL Collins advice and invested that money in the VTSAX – Vanguard Total Stock Market Index Fund, my money would have likely doubled. Instead of $0 to show for it, I would now have $29,507. That is a $30,000 swing!!
But it gets better… and much worse for me. Had I let that money sit for another 40 years, I would have had $224,616!! Wowowowowow! But the story gets worse…. Not only did I not invest that money, but I squandered it because I broke my (now) cardinal rule:
Never Pull Money Out of your Buy and Hold Accounts
When I took my friend’s advice to fund my IRA, I had not yet accepted the mindset that there are accounts that can be drawn from and accounts that I DO NOT TOUCH.
At that time, none of my accounts were off limits. This is a BIG, MASSIVE, nooooooooooo!! It is a Micheal-Scott-realizes-Toby-works-for-him-again kind of “NO!” (Please watch the video if you haven’t already.)
Retirement accounts are just that, retirement accounts. You buy them and you hold them. By their very nature, they should not be looked at more than once a year. Why tempt yourself to say, “Well, that account looks good. I can take a little here, and a little there, and I will still be fine.”
Withdrawing on retirement accounts has massive ripple effects that you cannot see, so please do not tempt that fate. When you view your retirement accounts the allotted ONE time per year, you should get everything done.
- Gather any information you need for your taxes
- Evaluate whether or not your account needs rebalancing (my personal belief is that you should set this up to occur automatically; the less time you are in your accounts playing Warren Buffet the better).
Rebalancing is a topic all to itself for another day. In effect, however, it forces you to “sell high” and “buy low,” a ticket critical to punching on your way to FI. As humans, our emotions tend to cause us to “buy high” and “sell low;” you don’t want to do this.
Blah, blah, blah, where is the money mistake Mr. TTF?
The money mistake is that I didn’t recognize the difference… Remember how I told you that I took my best friends advice, funded the heck out of my Roth IRA, and then never invested it in anything?
So yeah… I ended up pulling out every frickin’ penny of that Roth IRA within the span of a year’s time. Why you ask? Because I took a mini retirement when I had absolutely no business doing so.
At a time when I should have been crushing it and growing… What? What? Whaaaaaaa? Why the heck did I take this mini retirement?
Don’t get me wrong, I have heard of people using mini retirements effectively throughout their careers (a subject I am not well versed in), but I was certainly not at that point. Heck, I was just starting out in my career and still figuring out what I wanted to do when I grow up.
I was fresh off of two years of hustling, working a ton of hours every week, plenty of overtime, and socking money away like it was my job. And to that end, it really was. I was saving up to relocate to the beautiful state of Arizona. When I had finally reached that goal, I took some time off for the move out to AZ. When I arrived in AZ, I had convinced myself that I had been working really hard for two years and deserved a break.
That break was supposed to be a couple of weeks, a month max. And, needless to say, I was enjoying the breather. I found unproductive ways (which I convinced myself were productive… did I mention I was certified as a personal trainer?) to fill my days, and a couple of weeks quickly turned into a year.
While I thoroughly enjoyed that year, it set me back in a number of ways.
I was back to square one financially as my bank account was as good as $0. I certainly didn’t make any money as I was too busy spending my Roth IRA funds. Since I didn’t make any money, I didn’t save any money. I figure I could have safely allocated $5,000 to my Roth IRA that year had I been working. Not only is this a positive addition to my savings, but over 40 years that $5,000 would have turned into $74,872.
If you are keeping track at home, the opportunity cost of my mini retirement (spending all my Roth and not saving an additional $5,000 that year) with 40 years of compounding was $299,488 (assuming a 7% average annual return). OMG? Yeah, I would say so.
So there you have it, two of my earliest and clearly biggest money mistakes, $300,000 worth for just two decisions. And sure, it is easy to look back and be the Monday Morning Quarterback. But the fact of the matter is this, I LEARNED so much from these mistakes and our wealth building journey will be forever indebted to these early money mistakes as we punch our Ticket to FI. The lessons are invaluable.
Learn from My Mistakes
In the beginning, keep it SIMPLE.
Open a Roth IRA with a brokerage account such as Vanguard and contribute to the max in VTSAX – Vanguard Total Stock Market Index Fund or set it and forget it with Betterment. These may or may not be the best options for you, it is totally and completely a personal decision; one size does not fit all. But don’t delay starting. Keep it simple, START, and continue to educate yourself so you feel more confident in your decisions as time goes on.
Make sure you clearly earmark accounts for which you NEVER, EVER, EVER, EVER (did I mention EVER?) touch until retirement. I am talking working a second, or third job, before you ever even think about drawing from these accounts kind of NEVER, EVER. Then earmark accounts to which you can draw from should you need to whether it be for a car repair, vacation, or your gift fund. It is the mind set that is important and the second you withdrawal from a retirement account, it becomes that much more acceptable in your mind to do so.
You don’t realize that by doing so you could be making a $300,000 mistake like I did. Trust me when I say, it is not worth it. Alright, that is take one for The Chronicles of Mr. TTF’s Early Money Mistakes. Boy, do I wish that was all, but I will be back for more because I want you to know that the journey is imperfect, it is never to late, and we are in this together. Until next time, TTF friends.