Let’s face it. We are all human. We all make mistakes. I was thinking this past week on some of the worst financial mistakes that I have made over my short life, and I thought that I would share them with you. Maybe everyone can learn a little something the easy way through my errors.
Credit Card Debt. I used to have a lot of credit card debt. I cannot really tell anyone what is normal or crazy in your finances, but I can tell you what I have done and experienced in my life. I graduated from college at age 22 with about $30,000 in credit card debt. I hid how bad it actually was from my wife when we were married. I cannot even tell you what I spent all that money on. I think a lot of it went to eating out, taking vacations, and buying a lot of crap!
I learned from a young age exactly how not to manage my money, and I have been spending years and years trying to repair the damage that I did. I am happy to report now that my family and I are in the best financial health of our lives. We just bought our first house, have an emergency fund in place, max out our retirement accounts, save for our kids’ college funds, and have only $1,500 left to pay from my crazy credit card days.
Cash In a Roth IRA. Because of the credit card debt mentioned above, I cashed in a portion of a Roth IRA. Of course, I am not anywhere near 59½ years old. But, did you know that you can withdraw any amount of principal that you have deposited in a Roth IRA? You are just not allowed to withdraw interest and capital gains earned without an early withdraw penalty of 10%. Your principal was already taxed before you invested it, and so your withdraw is tax free too. By no means am I recommending this method. It is a mistake of course. By withdrawing money from your retirement account, you are foregoing future compounding interest which can cost you hundreds of thousands of dollars.
Take Out 401-k Loan. Because of my high credit card balances, I also took out a loan from my 401-k retirement plan. The same things apply to a 401-k loan as they do for a Roth IRA withdraw. The one good thing about taking out a 401-k loan is that you will pay yourself back with interest. You must also repay the loan right away if you lose your job or quit. So, you have to be careful when borrowing this money. If you miss a payment back to the 401-k, your plan will report you to the IRS, and you will owe taxes and penalties for early withdraw which can eat almost 50% of your retirement stash. Cashing out a Roth IRA and taking a loan from a 401-k retirement plan should only be used as a last resort.
Whole Life Insurance. Right after college, I made the mistake of signing up for whole life insurance. I paid the outrageous premiums for about two years before I wised up. I thought that the 2% I would earn in 30 or 40 years would be a great investment after I cashed out my policy when my kids were all grown. I figured that I needed insurance anyway that I might as well earn money while parking my money in the insurance policy anyway. Boy was I wrong!
Despite the recession we are currently in, I can save myself a ton of money by switching to term life insurance and investing the difference. For example, I bought $100,000 whole life insurance for about $100 a month. I just switched to a $500,000 30-year term life policy for about $20 a month. So, $100 a month at 2% annual interest will earn you approximately $50,000 in 30 years when you surrender your policy. The $80 per month difference invested for 30 years at 8%, the historical rate of return for the stock market, will earn you approximately $117,000 and still give you the insurance for the 30 years you need it.
So, What Now? I was lucky that I was young when I made all of my mistakes. But, even people closer to retirement can recover from making financial mistakes like I have made. One of the most important things is to identify the mistake, correct the problem and what is making it occur, and never giving up! We all make mistakes. It is what you do after making the mistake that really matters.