Painful Financial Mistakes – Part 2

Welcome back for the second part of this series where I’m sharing my wonderful financial mistakes!

If you missed the first part, you can quickly catch up  here:

Buying Stock: Research In Motion (Blackberry)

My complete and utter failure on this one is a bit obscure because I ended up with an overall net gain. But if you look into the details of my trades, you’ll agree that I escaped on pure luck.

I hope my color-coding doesn’t blind you. Each stock has its own color so hopefully the transactions are easier to follow.

I lost almost $1,500 on three trades. One was mainly because I wasn’t paying attention to the news and didn’t understand the impact current events can have on stock prices. RIMM (maker of the Blackberry smartphone) was tanking due to a recent global outage and losing the smartphone battle with Apple. I bought Research In Motion (RIMM) at various, declining prices, all-in at $3,194.23, and sold everything for $2,128.20, losing over $1,000.

I did end up getting lucky by trading shares of Sprint. This ultimately saved my bacon. However, the experience of losing all that money is tough to forget. I wasn’t really in a position to be taking that much risk, and I needed to focus on paying off my debt, which I did magnificently in later years.

If you’d like to see more about my debt payoff story, please take a peek at these posts:

Getting Married and Buying a House

That’s right. Getting married was a mistake (for me)…when I was 21 years old. I knew it was the wrong decision at the time, but I was under a ton of external pressure (and my own ego) to go through with it. We were having some serious relationship issues which were obscured by not knowing what the hell we wanted or what we were getting into.

We bought a home for $123,000 in 2007 right before the real estate market crash. After an inevitable separation over a year later, we sold that home for $126,000 in 2009.

Quick tip on home sales. You don’t just make money because you sold it for more than you bought it. You have to count in closing costs ($3-4,000) and agent fees (6% of sale price, or $7,560 in our case). So, after those fees, we were left with proceeds of $114,940. Since our initial investment was $123,000, we lost about $8,000 on this transaction.

At the time, our household income was about $65,000, so I just gritted my teeth and tried not to think about the loss. Probably the biggest one of my life.

What I’ve learned since then about buying homes:

  1. You make your money on the purchase, so try to either buy during a recession, or buy a fixer-upper where someone is willing to give you their equity. There’s no reason to pay full price for a house.
  2. Related to #1, the more cash you tie up in the value of a home, the less you can invest in stocks, small business, or actual real estate investments (rentals, flips, etc). More reason to not pay full price for a home, and not to buy more house than you need.
  3. Selling a house is expensive. So, if you’re not planning to stay in an area for more than a few years, it might not make sense to buy a house. Just do the math on a future sale before you buy a house,and be conservative on appreciation. Maybe it works, maybe not.
  4. If you have any doubts about a marriage or long-term relationship, consider holding off from buying a house!

Sticking With the Target Date 401k Plan

At my first professional job, which lasted 2007 to 2012, I left my retirement contributions to the default Target Retirement Date plan based on my age. In my experience, I’ve been able to beat these plans’ performance pretty regularly.

My biggest failure here is just not managing my money and making informed decisions. All things come in time, but I wish I had paid more attention.

What I wish I had done? I like index funds so I would have made sure to find one or two within the available funds in my 401k plan. They’re passively managed (cost way less) and track the performance of a target section of the market. For more on index funds, take 6 minutes and listen:

Indexes Beat Stock Pickers Even Over 15 Years

The target date retirement plans do an OK job of spreading out your investments based on your age and risk appetite. But I prefer the performance and lower cost of index funds.

Converting a 401k to a Roth IRA

In 2013 – a year after changing jobs – I rolled over my 401k into a Roth IRA. Now, we’re not talking a lot of money here (because of the untold millions I lost). I rolled over $26,864, but here’s the kicker: I paid income tax on all of it.

When you convert money from a traditional 401k or traditional IRA into a Roth IRA, you have to count it as a taxable distribution on your tax return. Roth IRAs are after-tax retirement accounts, so you have to pay tax on any money contributed to it. Granted, all the gains going forward are completely tax-free, which is fantastic.

Our taxable income was $80,511 and already in the 25% tax bracket (between $70,700 and $142,700). The conversion of $26,864 was taxed at 25%, meaning we paid $6,716 in taxes for the Roth IRA conversion.

Thanks to my friend, David at Zero Day Finance, I discovered the Roth Conversion Ladder which is apparently well known in the early retirement community.

Long story short, you can roll over a Traditional 401k into a Traditional IRA, then into a Roth IRA (in smaller chunks during lower income years so as not to get annihilated on taxes). Five years after a conversion, you can access that money, tax and penalty free. Read more about that on MadFientist’s post.

There’s a lot of math and strategy to it, and it doesn’t work if you are in a steady, high-income job. But if you plan a year of lower income, like we are planning in 2019, you can move that money over and potentially avoid most if not all of the taxes.

For instance, as a family of four, our standard deduction + exemptions + child tax credits (with lower income) = ~$30,900. So converting $26K to a Roth IRA would likely end up shielding most of it from being taxed. We don’t know what our income will look like in 2019, maybe nothing, maybe $10,000. But I know I didn’t need to roll it to a Roth right away. I could have taken more time to strategize.

But hey.. hindsight is 20/20.

Using a Financial Adviser

I’ll never use an ELP again.

When I converted my 401k, I was looking for a good financial adviser, and I had read about Dave Ramsey’s “endorsed local providers (ELPs)”.

ELPs are normal financial advisers who have completed Dave Ramsey’s training and have been certified by him, and will use his investment strategy to help you invest for retirement. They get guaranteed referrals from him, and he gets a cut of their proceeds (or some fee for participating), no doubt.

I got in touch with one and began the process of rolling my 401k into the ELP’s system. My adviser happily presented four funds that matched Dave Ramsey’s investment advice, and I unwittingly agreed.

The funds were all managed directly by the ELP/firm. Some of them were less than seven years old, and when I asked about that, the adviser made me feel comfortable somehow. I know. I am kicking myself.

The funds also had dismal track records, but my adviser explained that this was due to the recession and most other funds were under-performing as well. Ok, sounded legit.

The ELP made it very difficult to see actual performance. Their website “lacked” the reporting capability to show the typical “My Rate of Return” metric.

I finally called the firm’s 800 number and requested to be given a report that clearly stated my portfolio’s performance during the last two years.

I just went out and downloaded the all-time stats, up to the point that I left that firm in early 2016. Enjoy:

Brilliant. Where’s a time turner when you need one?

For you visual graphic lovers, here’s a colorful representation of my failure. My portfolio is the pretty blue line to the left of the winners.

What I would have done differently is open a retirement account where I can manage my own funds and invest that money into index funds covering small, mid and large cap stocks. Today, I do all of this as a member of USAA.

Enjoy free checking with free ATM usage nationwide, easy online and mobile solutions

What About You?

Leave me a comment with one of your painful mistakes! Also, if you’d like your mistake to be featured on the site, I’ll write a Part 3 and include yours. Just send it via the Contact form.

8 Replies to “Painful Financial Mistakes – Part 2”

  1. Your story about buying a house then immediately selling it about a year later for a loss hurts. I had to sell one of my properties after 2 years and thought it was going to be rough financially, but ended up making a bit.

    My biggest mistake (I’m still pretty young) is not 1) maxing out my 401K right out of college and 2) not investing in a taxable investment account earlier.

    1. Yeah, I just blocked it out of my mind at the time so it wasn’t so painful. But definitely a loss. I hear you on the investing front. I started investing in mine right off the bat, granted it wasn’t much money, and the growth (as you saw) wasn’t great because I wasn’t managing it. But, $26K is $26K.

  2. Hey Chris,

    Great blog. I just started investing in Bitcoin last month and so far so good. It’s new and exciting and I only invested monies I was willing to lose. I sold a couple of losers from my portfolio and it’s been performing well so far. It’s worth taking a look.
    I purchased a new home last year at the top of the market so I’m not sure if it’s a financial dubacle yet. I’m hoping not but home prices are starting to plateau :/
    I know it’s cyclical but can’t help but feel nervous about it.

    1. CJ, BTC is potentially a great investment. Some people think it’ll be $100K per coin in five years. Seems crazy, but not a bad idea to invest a little bit (if you can spare it). I would just say to everyone that investing in crypto is VERY dangerous, as you have said. Just be willing to lose it outright, and you’re fine.

      Regarding the housing market, experts are predicting a correction in the next year or two, depending on what Trump does. I don’t know all that much about it, but as I look into real estate, I’m not analyzing deals thinking that the value will appreciate anytime soon.

  3. The worst financial decision that my wife and I have made is not tracking our expenses when we first got out of college. She received some money (approximately $10,000) from a land deal, and we immediately put $2,500 into our investment account, and put the rest of it into our checking account. Four months later, and our checking account was back to its normal balance, not even a hint of the $7,500 left.

    So, (somewhat expensive) lesson learned, and we track our expenses pretty religiously now! And every time we receive an unexpected sum, we put it straight into the investment account, and pretend we never saw it!

    1. Wow, that’s a great story of a lesson learned. We’ve found that even separating bonuses into a different savings account helps tremendously. Putting that money right into your main checking account makes it extremely easy use.

      I love the “pretend we never saw it” strategy. Just act like you never had it.

    1. Hey Kyle. Yea man, I’m a broken record when this topic comes up. I’m so glad I figured it out when I did. I’ve had some fantastic years since.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.