Because that’s how you get closer
I swore I wouldn’t center my writing around personal finance given the amount of garbage already in this crowded space, but my brain goes where my brain goes. In the pursuit of optimizing your life for challenge, growth, rest, joy, wealth, serenity, relationships, and purpose, getting your financial health in order (or at least getting it off life support) is the prerequisite for everything else whether we want to admit it or not.
I’ve learned from mistakes, large and small, and will undoubtedly make many more as I go. I’ve consolidated the most notable ones here so that 1) I grow from them to get closer to where I want to go, and 2) if I can help even 1 person from making the same mistakes, I can gain some altruistic value from my own setbacks.
I can divide my mistakes into 2 general phases: being a young stupid kid, and being an old stupid adult…
The earliest (and one of the dumbest) financial mistakes I can remember was in high school. I had 2 AP classes my senior year and never bothered taking the AP placement exams for college credit on either of them, which is the whole point of taking the classes. At 17 I was naive enough to think it was just nice to have AP classes on college applications. Avoiding the head start when it was practically being handed to me is beyond stupid. Taking the credits plus maybe adding a summer course or two and I could have easily graduated college in 3 years. That’s 1 less year of paying for tuition plus one year earlier to begin earning, investing, and compounding those investments. That impact over a career is tens of thousands of dollars at least.
Another pretty dumb one came a couple years later while in college. I had a minor health issue that I wanted to get checked out. I couldn’t get an appointment with my doctor for another 2 weeks and I really wanted to take care of it ASAP. I didn’t understand insurance, other than the fact that I had some, so I went to a community hospital assuming I’d be covered. A month later I get a bill for $600. I thought it must of been a mistake so I ignored it. It followed me for a couple years until it went to collections. If you’re 22 years old with an unpaid medical bill, your “risk factor” for any kind of insurance or loan flies up the red.
Driving mistakes were also costly. I had 5 speeding tickets by the time I turned 19 (have only had 1 in the 15 years since). I felt guilty, but only in the context of having to pay the tickets and do traffic school, never understanding what it would do to my risk profile for car insurance. That stung for a while, especially at that age where I didn’t have much money to begin with. Being able to pay the fees is one thing, but the opportunity cost of not having that cash available to grow in the market, especially at that age, was something I didn’t understand the magnitude of until years later.
As I got older and into my mid twenties, basic financial hygiene was better and my career was in a pretty healthy state and trajectory, but I was nowhere near the point where I felt I could manage the money I was making. I figured as long as I controlled for my income, the rest would take care of itself. That lead to 1) leaving most of my money sitting in a bank account earning no interest, 2) investing the remainder with a high fee broker, and 3) spending to consume rather than to create.
1. Leaving it in cash
FDIC-insured, is what I always used to hear as a justification for keeping money in a checking or savings account. Investments sounded way too risky for a novice like me, so what could be safer than cash? The answer I learned, is most securities, provided you don’t go all in on any one of them. Knowing that in aggregate, stocks hedge against inflation and bonds hedge against deflation while yielding income, was something that is so simple in retrospect. Cash only feels safe because the amount you cede to inflation isn’t an explicit transaction as it is with with selling shares or paying fees. Leaving it all in the bank is the new “crazy uncle storing it in the mattress” syndrome – anyone who has evolved beyond this strategy views it as self-imposed financial handcuffs. Keeping some cash on hand to buy opportune investments (i.e. during a market crash), or to cover emergencies is all good, but beyond that you’re just keeping your best player on the sidelines.
2. Going to a broker
I bit the financial media’s bait for longer than I’m proud of. Making investing appear so complex that only a seasoned professional is equipped to manage it. 1.5% management fee plus another >1% expense ratio on all holdings? Sure, sounds reasonable for knowing my hard earned money is in good hands, right? It’s embarrassing that I ever thought that way. The impact that these fees have on lifetime earnings is often hundreds of thousands of dollars, and often the results of the investments themselves don’t even match up to passive index investing. There may be value in a good financial advisor if you are late in life, have a massive estate and you’re considering how to best pass it on to future generations in a tax efficient way. But for the other 99.9% of us, we’ll be just fine with a little self-education.
3. Consumption vs creation – the conscious decision to depreciate or appreciate
Living in the San Francisco Bay Area, there is an overflow of people living like kings just because they make six figures. $200 bar tabs, fancy dinners, luxury cars, high rise apartments. If you’re a startup founder worth millions, have at it. But if you’re middle management making a very strong but not spectacular amount of money, this level of consumption is concerning. I was never an extravagant spender by most people’s standards, but I certainly didn’t have the mindset of acknowledging just how mindless my consumption habits were in my twenties.
Every spending decision beyond covering our basic needs is a conscious decision between something that loses value and something that gains value. “Stuff” depreciates in value over time. “Experiences” depreciate in value just after they occur. Investments, by contrast, appreciate in value until you need them (more or less). I started to view the purchase of appreciating assets as what I call “expense replacement”. As an example, if I have a streaming television monthly bill of $40 ($480 annually), an investment yielding around $500 per year in appreciation and dividends essentially pays for that monthly bill. This lets you view every investment as buying just a little piece of your freedom in terms you can relate to, all in the marathon toward financial independence. Even as a generally cost-conscious person, it took until at least the age of 30 to re-wire my thoughts to understand and value that choice.
I still buy material possessions and experiences I don’t need, but the mindset shift keeps it well under control and in balance with the person I’m trying to become and the life I’m trying to attain.
MY LATEST LEARNINGS
As I’ve grown, the basics are pretty well locked down, but some of the more complex decisions still get dicey and I’ve made some mistakes on this front. I still feel the impact from some of these mistakes while I’ve been able to let go of others…
1. Missed opportunities and finding peace with them
Several years ago I worked for Adobe. I got equity from them at a company discounted ESPP program at around a $25 share price, held it for a year or two after leaving the company and then sold at, what I thought was a solid profit at over $60 a share. Fast forward to today and as of late, Adobe’s share price has hovered around $250. Oops! I could have had 10x my investment over about 7 years. Of any blunder I’ve outlined here, this one had by far the largest nominal impact. However, it’s surprisingly not one that makes me kick myself at all.
As I’ve already mentioned, I’ve consciously educated myself financially to structure my financial strategy around indexed investing instead of speculative bets. While Adobe is an example where putting more eggs into a single basket would have had a huge financial gain, it may have just as easily gone the other direction and I’d have lost everything. So this to me wasn’t necessarily careless, just an unfortunate result for me.
For every missed opportunity like this, there’s the guy who spent what would have been a future $100 million in bitcoin on a couple of pizzas, so I’m not beating myself up over it. I’m far more regretful of the AP course credit mistake I made at 17 because that was a bonehead decision entirely under my control and fueled by laziness.
2. Mortgage leverage
My wife and I bought our condo in 2014. The condo itself was a great investment, but as we applied for our mortgage with a private equity firm, they offered to give us a lower rate in exchange for holding an additional 10% of the purchase price under their management. Thus, we could effectively have the mortgage rate of a 30% down payment instead of a 20% down payment, with the 10% surplus invested in mutual funds and “working for us”. In theory this was fine, but this was of course a high fee broker, so any returns we got out of the assets under their management were heavily negated. Had this money been invested in passive index funds, it would have easily offset the slightly higher mortgage we would have received on the 20% down payment.
Knowing what I know today, our next home will have a much more comprehensive look on the opportunity costs of mortgage payments vs cash in the market. It may be a tougher decision now with rates much higher than 4 years ago, but our 2014 mortgage was definitely a lesson in getting swindled. Luckily the home itself has appreciated enough for me to value the lesson more than I was hurt financially by it.
3. Disparate investment platforms
There was a time when I was managing finances across at least 8 different platforms. Some with different purposes, and others simply A/B tested against one another for usability, returns, and transparency (I am after all a digital marketer by craft). This creates a couple of problems:
- Taxes become more cumbersome
- The wash-sale rule can more easily bite you
Taxes become more cumbersome partly because you have to file taxes for so many different sources, but also because you have to consider your tax withholdings on the earned income from your job against any income you may be generating from several investment sources. It’s more of a nuisance than anything else, but one where there’s not really much upside as far as I can tell which would justify this level of fragmentation.
The wash-sale rule, for anyone unfamiliar, penalizes you from selling a fund only to buy it back (or even to buy a separate but very closely correlated fund) within 30 days in an effort to lower your taxes and/or artificially lower the price of assets you already hold. This becomes really tricky if you hold the same funds in multiple accounts (including between spouses), because even dividend reinvestments can trigger a wash-sale. This has hit me several times over the years and was definitely an oversight from me testing into various platforms.
I’ve since whittled down my financial management to 3 platforms: Betterment and Schwab for investing, and Personal Capital for organization and allocation oversight. I use Betterment for automatic deposits, tax-coordination across taxable and tax-advantaged accounts, and tax-loss harvesting to realize select losses to offset short-term capital gains while maintaining the same risk weightings. I use Schwab on the other hand for more opportune investments (i.e. market downswings), avoiding management fees and strictly paying the expense ratios on low cost index funds.
The reason I don’t consolidate Betterment and Schwab is because I’ve held Vanguard’s Total Stock Index ETF (VTI) in both accounts for a number of years, each with unrealized gains tied to them. Consolidating into either institution would be a taxable event. Since Betterment has fixed portfolio allocations, I can’t simply roll VTI directly from Betterment to Schwab or vice versa without liquidating and paying taxes on the gains. Had I planned for this ahead of time I could have chosen one of the two major value propositions – either no management fee through Schwab, or tax-loss harvesting and auto-rebalancing through Betterment, instead of navigating against both. As a result, I can neither buy new VTI funds through Schwab nor reinvest its dividends because it would trigger the wash-sale in Betterment through its automated trades. Instead I’ve begun using dividends from VTI in Schwab to periodically buy REIT index shares for the solid yield, since there are no REIT shares in Betterment portfolios (as of now). Complicated, I know, but a little bit of planning and education could have helped simplify this from the onset.
I’m wondering what I’m doing now that I’ll only learn was careless 5 years from now (comment if you spot anything). But I guess consistently feeling like your past self was pretty stupid is the clearest sign of growth.
As I publish this on my 34th birthday, I’ll leave you with the best birthday quote on wealth, reflection, and growth that I know of…
“I try to make more cream
by every September 14th, that’s my dream
so I can be more clean, as I grow yearly
I can see things more clearly, that’s why they fear me”
– Nas – Hero
Happy investing. Take back control and live on your own terms, mistakes and all.