Even the most accomplished financial professionals make money mistakes. Warren Buffett’s right-hand man Charlie Munger once said, “There’s nothing that produces wisdom more thoroughly than really getting your own nose whacked hard when you make a mistake.”
Ouch! You can avoid some of that pain and financial stress by learning from the blunders of others. Bottom Line Personal asked four of our top money experts to reveal their most memorable personal-finance mistakes—and what savvy lessons they took away from those whacks on the nose…
Mistake: My emergency fund was too small for a real emergency. I bought a house in Medford, Massachusetts. Just in case I needed to make repairs, I kept $2,000 in a bank account. My first winter, all the pipes froze in the bathroom…and the ceiling collapsed, destroying other parts of the house and causing $40,000 worth of damage. I had homeowner’s insurance, but I would not receive the full payout for six months. Where was I supposed to live with no bathroom, no water and no heat? I was forced to make money moves that I had warned my own clients against, including borrowing against my 401(k) funds and credit cards. I’ve since moved to Houston, but I’ve always maintained my “frozen-pipe” fund. It has $40,000 in it, which makes me feel that I can weather any financial storm.
Lesson learned: Conventional wisdom says you should have enough cash on hand to cover three to six months of basic expenses in case you lose your job. That’s a good starting point. But people need far more to really feel financially stable during a crisis. Emergency funds aren’t just about covering bills. There’s an important emotional component to it. Ask yourself, How much cash would I need to sleep well at night, maintain a normal life, and maintain my physical and mental health in a crisis? For many of my retired clients, that’s a year or more worth of normal monthly expenses. If you don’t want to keep that much cash in reserve, at least have a clear plan for how you will access cash in an extended emergency, whether it is renting out part of your home or accepting interest-free loans from family and friends. Always keep your emergency fund in an interest-bearing FDIC-insured account, especially if you hold a large balance.
Lauren Lindsay, CFP, is a fee-only financial advisor at Beacon Financial Planning, Houston. BeaconFinancialPlanning.com
Mistake: I splurged on a depreciating asset. In 2008, I spent more than $100,000 on a 35-foot J/109 racing sailboat. If I had put that money in an S&P 500 index fund back then, I would be sitting on nearly $1 million today. What’s more, I poured an additional $10,000 annually into the boat to pay for marina slips and winterization and repairs. I chided myself about it for years, but here’s the twist—it would have been a far bigger mistake if I hadn’t bought the boat. Since I was a kid, I had dreamed about sailboats. Doing 36-hour distance racing from Connecticut to Rhode Island or cruising around the harbor with friends and family has provided me with more joy and memories than anything I’ve ever spent on in my life.
Lesson learned: So many retirees who are in great financial shape live way too frugally, reluctant to spend on their dreams. I’m not talking about making reckless choices that ruin your financial future. You need to take care of the basics in life first (e.g., no high interest debt…having adequate insurance and a retirement plan that’s on track). But if all that is covered, go for it. Renovate the kitchen…take that trip around the world. You spend decades scrimping and delaying gratification in your work years, why wind up the richest man in the cemetery?
Jack Forehand, CFA, CFP, is cofounder of Validea Capital Management, an investment advisory that offers well-known strategies based on the work and writings of investment gurus, West Hartford, Connecticut. Validea.com
Mistake: I didn’t get “financially naked” with my husband. When I got married, I worked in finance…my husband was a CPA, an attorney and a former hedge-fund manager. It felt like a perfect merger of equals. We decided to buy a large house in Florida on five acres of property. When my husband told me his credit scores were too low to qualify for a mortgage, I didn’t think to ask questions and investigate. Even after he told me his money was his alone and not available for paying bills, I just wanted to plan our future together. So I took out a 30-year fixed mortgage loan on the house on my own and put both our names on the deed to the property. Eventually, the marriage broke up. The acrimonious divorce proceedings took years, and I wasn’t able to sell, rent or refinance the house even though I had to keep paying the mortgage. I walked away from the marriage $250,000 in debt.
Lesson learned: Money is the unspoken taboo in marriages. Many spouses share children and a bed but don’t even know how much the other partner makes in a year. Asking your partner for full financial disclosure of his/her assets, credit history, debts, investments and sources of income doesn’t show a lack of trust. It makes deeper trust possible. It lets you plan budgets, vacations and retirement more effectively and have a more satisfying life together. Any reluctance by either party to disclose such financial matters merits concern—and shouldn’t be waved off or excused.
Cary Carbonaro, CFP, is a managing wealth advisor at Ashton Thomas Private Wealth, a financial advisory that oversees $10 billion in assets for institutions and wealthy families. She is author of the forthcoming Women and Wealth, A Playbook to Empower Clients and Unlock Their Fortune. CaryCarbonaro.com
Mistake: I spent weeks trying to save a few hundred dollars on a car. Several years ago, I took over the lease of a Toyota Camry from a family member. I enjoyed the car, and when the lease ended, I wanted to keep driving it rather than switch to something new and unfamiliar. I asked the dealership for a buyout amount. It was a firm $16,000 with little room for negotiation. Nevertheless, I spent the next few weeks sifting through the numbers, trying to decipher the dealership’s offer and negotiating with the salesman. Even after it was clear I was only going to be able to knock a miniscule amount off the price of the car, I persisted in my calls and research. I justified all this effort by telling myself I was a savvy shopper and that one must be vigilant in buying a car. But the stress and mental frustration I endured was not worth the tiny amount I saved.
Lesson learned: Do a quick cost-benefit analysis when you are trying to save money or get a refund on a purchase. No one likes being taken advantage of, but the reality is there may be smarter uses of your energy and time. Apply the following litmus test—How much money is at stake?…How emotionally important an issue is this for me?…What satisfaction would I derive from winning?…What is the likelihood of success in the situation? I also decide ahead of time at what point I am willing to give up. This actually allows me to feel more focused, in greater control of the process and less agitated about the sunk costs of my time and effort.
Adam Kol, JD, is a certified financial therapist, certified mediator, tax attorney and former financial adviser. He is CEO of The Couples Financial Coach, a practice that provides financial counseling for couples, Miami. CouplesFinancialCoach.com
