Welcome back to Part II of my top ten financial missteps! To recap, we are reviewing the top 10 financial mistakes that I made prior to starting on the road to financial well-being and independence. As a reminder, Mistakes 1-5 included: Spending Up To My Paycheck, Paying Myself Last, Not Paying Off Any Debt, Dipping Into Savings, and Buying on Credit.
Let’s Dive into Mistakes 6-10!
Mistake #6: Not paying attention to my investments
I mentioned that I had savings despite spending some of it unwisely. About 5 years ago, we decided to take what was left of those savings out of a high-yield savings account (the term high-yield is very relative since most high-yield savings accounts are less than inflation) and invest it in the stock market. We got a recommendation for a financial advisor from my parents (I’ll cover this in Mistake #7), spoke with him on the phone for about 15 minutes trying not to sound as clueless as we actually were, and gave him permission to invest our money.
That was the extent of my involvement. Each month, I got a statement that I had no clue how to read and largely ignored because I was too embarrassed to admit that I didn’t know what it all meant. This embarrassment led to ignorance and not paying attention to my investments.
Another story, as I was cleaning out files before moving at the end of my training, I found a paper for a retirement account from the public hospital that I had trained in. It had a website and a log in. So I went on the site and realized that I had been contributing money from every pay check into a tax free retirement account – and I had no idea that it existed and would have probably never realized if it wasn’t for that sheet of paper. It was a nice surprise but then I did some digging and realized it was invested in a high turnover, high fee fund. I was paying more than I should have and had less money for it. Bottom line: it’s your money, you should pay attention to it – you worked very hard for it after all!
Quick tangent on the topic of investing in the stock market. There are a ton of books that I will recommend that you read when it comes to how to invest your money (The White Coat Investor, The Bogleheads’ Guide to Investing, The Coffeehouse Investor). But, I’ll break it down real easy for your right here. When you invest in the stock market, you are investing in the world economy and the innovation of humankind. You are saying, “I believe that humans will keep innovating and growing and expanding the world economy.” This is a relatively safe bet looking at the history of humankind. In fact, over the long term, the overall stock market has always gone up. This is a very different approach than choosing stock in one company and riding it with all of your savings. One company can, and very well may, fail. If the entire world economy fails, you’ve got bigger problems than your portfolio.
Ok, so the stock market as a whole is a good investment. Can you invest in the whole stock market? Yes, you can! Index funds are collections of stocks that approximate aspects of the stock market. Choose broadly diversified index funds from low cost brokerages like Vanguard or Fidelity and you are placing your bet on the ingenuity of man and womankind rather than a company like Enron (yikes). There are even index funds with every stock in the US stock market. With this, you can rest easy that while you own the worst performing stock, you also own the best performing stocks! This strategy can be supplemented with bonds (a low risk investment), reconfigured based on simple math once a year, and boom you have a portfolio that is better than 80% of other people in the world (truly, it is). Don’t worry, there will be follow-up posts explaining this in a lot more depth but suffice it to say, it’s actually pretty easy. You can do it!
Mistake #7: Using a “money person”
I actually have no problem with paying a reasonable fee for good advice from a financial advisor. The issue is that when I was not knowledgeable, it was impossible for me to tell if I was getting good advice. And to be honest, I had no idea what we were paying him. If you are not sure if you are paying for your advisor, you definitely are. And usually it’s a percentage of money invested or worse, your advisor is actually a sales person and is making money off of commissions from selling you terrible mutual funds (broadly diversified index funds don’t generally have commissions because they don’t need to be sold – they sell themselves!). We were lucky in the sense that our advisor was charging us 1% of our money managed and was not selling on commission. He was an honest guy and helped us a lot as we became financially literate. This unfortunately is not the situation for many others.
So why did I list this as a mistake? Well, I really don’t think that anyone needs to have a financial advisor. Like I said, we will go more in depth but after reading the books listed above, I felt very comfortable managing my own investments. A 1% advisor fee does not seem like a lot, but its 1% more of your own money that you can keep and can actually become very significant (hundreds of thousands of dollars over time) as your portfolio grows. Spend $50 total and 2 weeks of your time reading the 3 books above and save yourself a ton in fees.
Mistake #8: Not having a written financial plan
A written financial plan is like a compass. When you aren’t sure what you should do in a certain situation, look at your plan and it will tell you. Just do that. This way, you are acting out of logic and reason (the state of mind when you wrote the plan) rather than emotions (what you are feeling in the moment). You won’t be surprised from what I’ve shared so far that my wife and I did not have a financial plan, let alone a financial clue, until recently. Not having one led to more confusion and uncertainty and stress.
Once you start on the road to financial well being, make a commitment to put a plan together in a month (with your significant other if you are in a relationship – being on the same page cannot be overstated in terms of importance). For all of my family, friends, and colleagues that I talk to, this is one of the things I harp on the most. If you come up with a reasonable strategy based on financial knowledge and research, formulate that strategy into a written plan, and follow that written plan, you are better off than most investors. It doesn’t need to and likely won’t be perfect, but a start is better than nothing!
Mistake #9: Not developing a side hustle
Time = money. This is the timeless equation. And that is what most of us, including me are doing. I give my time and someone pays me. Seems reasonable, but what if you could get paid without giving up your most precious and finite commodity, time? Too good to be true? It’s not!
There are plenty of ways to develop passive income (simple definition of passive income is it’s money while you sleep). Dividends from investments in index funds is one example. If you are invested in the stock market, you have passive income. Consulting, expert witness, coaching, podcasting, blogging, cash-flowing real estate rentals. These are all other examples of earning money while you sleep and money making money. There are plenty more. I was totally blind to this idea and wish that I had been aware sooner. Trading a finite (time) item for an infinite (money) item is a losing battle. If you can have passive income to supplement your time-paid income, you will begin to break the cycle of time = money. This money can be saved and invested and financial freedom is that much closer. Many people are doing it and there’s nothing special about them (or me) so why can’t you? Passive Income MD is a great starting point for physicians interested in learning more about passive income.
Mistake #10: Holding onto a scarcity mindset with money
I made this one my last mistake because I think it was a really big one. It represents a huge limiting belief and philosophy that holds me, and a lot of people like me, back. If we believe that money is scarce, we hold onto it for dear life. We become stingy. We are hesitant to donate or give money to others. We feel the stress of making ends meet seemingly all the time.
But money is not scarce or finite, money is abundant. Money is not a zero sum game where if you make a dollar, someone else lost a dollar. In most everyday scenarios, money represents a win-win exchange. You want coffee, you give someone a few dollars and they give you coffee. You, the buyer, and the seller are happy because you both got what you wanted. This can be expanded to much larger scales obviously.
When reading Rich Dad Poor Dad, I had a hard time understanding Robert Kiyosaki’s concept of “inventing money.” How the heck could money be invented? The problem was that I viewed money as scarce, not abundant. I was already working so hard and for so long, how could I trade any more of my time for money. I was blind to any other way of increasing my money through saving strategies, side hustles, and investing. Once I began to learn, I quickly placed $1750 into a Roth IRA. In a few months, it had increased by $500 – I had invented money. Change your mindset and you can change your reality.
A quick side note on this subject. I’m not sure that everybody will agree that this is a form of inventing money but I do. If I asked most people, including my past self, to save $1000 each year to invest, I bet they would say that they can’t, they don’t have/make enough money. They need that money to live. But if I asked the same people to save $3 a day, I bet they would find it possible. Do that for a year and BOOM, you have $1095 without changing your lifestyle in any noticeable way. Invest that amount yearly in a broadly diversified index fund with a return of 7% and in twenty years, you’ll have nearly $50,000. What would happen if you save $5 or $10 a day? I’ll say it again, change your mindset and you can change your reality.
Super Bonus AKA Biggest Mistake that I Have Made: Not learning (see below face-palm emoji)
This is hand down the biggest mistake financially that I have ever made. And I made it over and over again throughout my life. I did not learn. It’s not that I didn’t know that resources were out there, I did. I just thought that it was unimportant. Or, more honestly put, I thought it was confusing so I made excuses like, “I don’t care about money” or “I’ll worry about my finances later.” Many of you can relate to this I’m sure. Again, there is a fear and a bit of embarrassment about admitting that you have no idea what you are doing financially, I felt it very strongly. It makes you blustery or dismissive when people do bring up the topic. You don’t want to think about it for fear of realizing you are in a bad spot.
Luckily, there are a few easy steps to take to overcome this. Just buy a book on the topic. Even if you’re still feeling scared and don’t really want to read it and open the finance can of worms, just buy a book. Then, whatever day you get the book, carve out 10 minutes before you go to sleep to read the first chapter. I promise no chapter in any of those books that I recommended takes longer than 10 minutes to read. No matter how busy you are or what you are doing the next day, just read the first chapter, telling yourself that you will stop reading and throw it away if its not for you. I would be shocked if it didn’t grab your attention and pull you in. And once that happens, it won’t seem like work to read these books and you’ll be excited to learn as much as you can to get where you want to be!
There are many “first books” to choose from. Like I mentioned earlier, Rich Dad Poor Dad costs just about $5 on Amazon and is a great book introducing important financial philosophies. This is about a cup of coffee these days and certainly at least equal to the savings you will make if you bring lunch to work instead of buying for a single day. The Millionaire Next Door is another good one to start with. For me, it was The White Coat Investor that got me going, and I recommend this for any high income earners, medical or otherwise. And just to prove my point, I’m embarrassed to say that I was given the book for free and let it sit on my shelf for over a year before I read it. But once I read the first chapter, I was hooked. I wish I had read it right when I got it, I’d be in a better place now.
Again, I list these mistakes (and trust me there are more) to demonstrate that most, if not all, of you are likely in a better situation than the one that I put myself in. So you’re already at a healthier starting point! But most importantly, by acknowledging our mistakes and lack of knowledge, we free ourselves from the cycle of being scared to lose (which only leads to more losing) and can finally start playing to win, using past mistakes and past losing as motivators.
Congratulations for continuing to take these first important steps with me! I know from firsthand experience that they are the toughest steps to take. Open yourself up to accepting and acknowledging your past mistakes and you will open yourself to a world of opportunity, a world of making the right decisions leading to personal and financial well-being.
What do you think? Can our mistakes lead to our successes financially or personally? Can you relate to any of these mistakes? How did you handle them? Comment below!