I have yet to meet anyone who has a perfect financial track record. Most people make some degree of money mistakes, especially when they’re younger. Personal finance education in the United States is so-so at best, and there are many financial situations that are difficult to understand, even for knowledgeable people.
I’m certainly not an exception. My financial life is in good shape now, and I give other people financial advice on a daily basis, but learning from my own mistakes was actually one of my primary motivators to get my own financial house in order for good and to eventually become an expert in the field. With that in mind, here are two big money mistakes I made that you can learn from.
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Destroying my credit
My FICO credit score is well into the realm of what’s considered top-tier credit — about a 780 the last time I looked. However, that wasn’t always the case.
Like many Americans who destroy their credit, my story starts during college. To set the scene, there are some consumer protection laws in place today that didn’t exist back then. Credit card companies were allowed to give credit cards to 18-year-old college freshmen even if they didn’t have a job or any way to pay the bill. And they were allowed to use some pretty aggressive methods to get students to apply. I remember being offered a week’s worth of free pizza just for applying for a certain credit card — what struggling college student would pass that up?
To make a long story short, I ended up with several thousand dollars in credit card debt by the time I was 20 and no realistic way to pay it back. By the time I was 21, the accounts had fallen so far behind that my credit score was about 550 — too poor to qualify for virtually all loans and credit card products.
It took years to undo the damage. It wasn’t until I was 27 that I could qualify for an unsecured credit card and an auto loan with decent terms. And it took another few years before I was able to break into the realm of excellent credit. If it hadn’t been for misuse of my credit during my younger days, it would have happened years earlier.
The lesson? Protect your credit. Don’t borrow any money unless you’re almost certain you’ll be able to pay it back. Most bad credit information will linger on your credit report and weigh down your score for seven years, and despite what you may read in “credit repair” advertisements, there isn’t a quick fix for bad credit.
Waiting to start investing for retirement
Even after I got my first postcollege job and started to get my credit back on track, like many 20-somethings, I simply didn’t see the point in saving and investing for retirement. After all, I was making just enough money to pay my bills and occasionally go out with friends. And my employer didn’t have any matching-contribution retirement plan. Why set aside some of my salary for something that wasn’t going to happen for another 40 years?
Here’s why. While it can be quite volatile in the short term, over long periods throughout history, the stock market has consistently generated annualized returns in the 9% to 10% ballpark. So, if you invest $1,000 in an S&P 500 index fund or something similar, you can reasonably expect your investment to grow to:
- $2,478 in 10 years
- $6,142 in 20 years
- $15,220 in 30 years
- $37,720 in 40 years
The point is that the sooner you put away money for your retirement, the more long-term compounding power your money has. And bear in mind that these are the results of a one-time $1,000 investment. Imagine if you put away a few thousand dollars when you’re 40 years from retirement, and continue to contribute to your investments every year.
By the time I was 30, I started to truly understand the importance of saving for retirement as soon as possible, and I’ve certainly made up for lost time since then by saving aggressively. However, it would have been a lot easier to build up a reasonable nest egg if I would have started as soon as my paychecks started arriving.