Making Financial Mistakes Can be Good Too

by David Ning · 9 comments

Things would be different if I knew 10 years ago what I know now.

Whether it’s related to issues concerning our finances, career or even relationships, we tend to look back and wish we could do things differently. Opening a Roth IRA as soon as we got a job? Check. Not ever going into credit card debt? Double check.

But what if you were never in debt? Would you hate spending as much if you weren’t a debt slave for years? Would you still max out your Roth IRA if you already have $100,000 in the account? What if you had $100,000 saved by the time you were 25? I bet your appreciation for savings and borrowing is a little different than others around you.

The Beauty of Failing

With Sara on the way, I’ve been picturing scenarios of how I will actually teach her about money matters. The best I’ve come up with, at least for now, is to just let her make all the mistakes that anyone would make as long as it’s not permanent.

I will tell her the good with the bad of course, but it’s important for her to decide for herself and then live through the consequences. It’s one thing to be told, but it’s another to actually experience it first hand. Here’s an extreme example: what better way to learn about the harm of being in debt than someone calling your workplace looking for the next payment?

You Can Still Win

As evident with Miranda’s piece on 7 financial moves to make in your 20s, many people wished they knew some of the basics right from the get go. And justifiably so. 10 additional years of compound interest is hard to make up.

Yet, the mistakes you made weren’t a total loss. The lessons you learned by being imperfect was valuable too.

  • Not investing from the get go allows you to truly appreciate the power of compound interest.
  • Being in debt makes you think twice about getting a loan down the road, even when you are debt free.
  • And always believing that you’re behind may curb your spending forever.

If starting your Roth contributions five years later means you will put more into the account each year. If sending your last car payment helps you buy more affordable cars. And if dealing with a debt collector first hand keeps your lifestyle inflation in check, your situation isn’t so bad.

The past is behind us. You can still make the road ahead beautiful. The key is to start doing the right thing, and stop worrying.

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{ read the comments below or add one }

  • Frugal Babe says:

    I know I’m a lot more driven to max out our retirement accounts these days, to “catch up” from the early days of having our own business, when we weren’t contributing much of anything. I agree that learning from mistakes is a great motivator.

  • Cd Phi says:

    I know exactly what you mean. It’s like playing catch up to keep up. Ultimately, given the choice I’d just rather be ahead but if I were to make a financial mistake, I sure hope I’d at least learn from it.

  • Robert says:

    Speaking of mistakes, you made one in the title.

    But yes, making mistakes is good when it comes to finances. The burn you feel after wasting some hard-earned dough sticks with you for years….urging you to make wiser decisions in the future. You can learn all you want, but there’s no substitute for experience.

  • Alcoholic Millionaire says:

    (Carl)
    While the overall market was flat as a whole for the last 10 years this certainly does not mean that as an individual your portfolio would have been flat. When you factor in reinvested dividends than you more than made a profit over the past 10 years including management fees. Now keep in mind that the 10 year period ending march 2009 was one of the worst 10 year periods in history.
    …. Further, even if you didn’t make any money over a 10 year period what is more important is that you would be developing the long term skills necessary to succeed. It takes great discipline and determination to invest steadily over long periods of time. Even if you didn’t loose out on stock gains you did in some respect loose out on the experience of investing.
    All of that aside you were in graduate school during your 20’s. So instead of perhaps fully funding your roth ira you were investing in yourself which will yield many many returns down the road. I don’t think you were incorrect in pursuing school as now you will likely have the skills to secure a good paying job which you can use to save and invest more at a faster rate.

  • Carl Grace says:

    I think not investing in my 20s wasn’t that bad a mistake (I’m 34 now). Besides the fact that I was in graduate school for most of my 20s, the last decade was pretty much a lost decade for stocks. I think many personal finance books and blogs perpetuate what I call “The Myth of Compounded Interest”. The key fallacy is that people always say you should invest early to enjoy the benefits of compounded interest. This is only true in cases of a bank account or CD investment. Stocks DO NOT COMPOUND because they can rise and fall.

    If you look at the S&P500, it is approximately at the same level that it was 12 years ago at the beginning of 1998. Using any of the personal finance formulas would give annual gains of 5% to 8% or so per year when estimating what a person *could* have made if he or she invested young. In fact, there was NO gain in the stock market as a whole. Also, what little earnings you would make from dividends are largely eaten by management fees and taxes.

    If people really want compounded interest they must invest in bank accounts, CDs or government bonds. The downside is the interest rate is about 2% at best. So the models we use to see how we will all be rich and happy in retirement are deeply, deeply flawed.

    My point is that since we can’t control anything, we must let it go, save as much as we can, but enjoy our lives, hobbies, families and friends. Don’t postpone live today for a future that may not be what you expect. Stocks are a little like Real Estate in that the people who REALLY benefit the most are those involved in buying and selling.

    Carl

    • MoneyNing says:

      It’s true that the compound interest argument doesn’t take into account the volatility of returns, but I also think that the stock market has its place in everybody’s portfolio.

      Dividends and more favorable tax treatments versus other types of investments all play into more money in our pockets. Sure, it’s not 10% a year consistent returns that people talk about, but you still come out ahead.

      The key is to keep investing, and to keep it in a diversified, ETF/Index Fund portfolio unless you have a ton of time researching about individual stocks.

      • Arminius Aurelius says:

        When I was young and STUPID, a stock broker talked me into “investing” in penny stocks in hot companies. He said “get in on the ground floor” and you’ll make a killing. Since he was the vice president of the brokerage firm, I felt he was an expert. Bought over time tens of thousands of shares for 30, 40 and maybe 70 cents a share. Must have had 18 to 20+ companies that I “invested” in. Not one single company was ever a winner. All went down the tubes.

        When he spoke about making a killing, he must have been referring to himself, he did well. Now I do my own research and rarely listen to a broker. It is like Goldman Sachs back in 2006 when they were promoting “bundled mortgages” as A – 1 investments to the public when they themselves were placing bets against them knowing all too well they were a TOXIC asset. Heads they win, tails you lose.

        The game is RIGGED.

        I now buy when the market crashes and everyone is rushing for the exits.

  • Lakita (PFJourney) says:

    The absolute worst mistakes are the ones you don’t learn from.

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