Don’t panic! Coping with financial mistakes and setbacks

When I was young and stupid, I became addicted to spending. I got my first credit card in college, and over the next fifteen years, I accumulated $35,000 in debt. I'm debt-free now, and have even begun building a nest egg, but I didn't reach this place without making a lot of financial mistakes along the way. And I still make mistakes. Dealing with mistakes and setbacks is an important tool in your personal finance arsenal.

Preventing Problems

The best defense is a good offense. I used to spend a lot of time reacting to problems: bounced checks, car repairs, soccer injuries, and — worst of all — my own dumb choices. I never could seem to get ahead.

Then I realized that the best way to defend against financial setbacks was to actually prepare for them before they arrived. Simple, I know, but it's the simple stuff like this that forms the basis of smart personal finance. Two methods in particular helped me deflect many setbacks:

  1. Education — I finally became frustrated with my lack of financial literacy, so I decided to do something about it. I read personal finance books. I read magazines. I read blogs. Most importantly, I talked with those friends that I knew had control of their finances. They were happy to give me advice. I was happy to listen.
  2. Preparedness — I started an emergency fund. Setting aside $500 or $1000 in an online high-yield savings account is cheap insurance. If you have cash cushion, your financial plans can't be derailed by a single stupid mistake. (Unless it's a big mistake.)

Picking Up the Pieces

Education and preparedness will only get you so far; you're still going to make mistakes now and then. You need to know how to pick up the pieces. Nothing will make things whole again, but there are a few things you can do to minimize the damage:

  • Don't panic. When you suffer a setback, or when you realize you've made a mistake, your stomach gets tied up in knots. It's easy to feel overwhelmed. Relax. Take an hour or two to distract yourself. Better yet, sleep on the problem — it's amazing how a little time can provide increased perspective.
  • Back out of it, if possible. Some smaller mistakes can be reversed. Did you just blow a wad of cash on an Xbox 360 or some new clothes? Are you feeling buyer's remorse? Return the items, if you can. Or sell them to recoup some of your loss. Did you sign up for a gym membership that you now regret? You may be able to cancel the contract during the grace period. If you make a mistake, first try to undo it.
  • Evaluate your options. Not all mistakes and setbacks can be reversed. If a little old lady runs a stop light and totals your car, there's no undoing the damage. Make the best of your situation. Focus on your long-term goals, and make a list the of options available to you. Don't make a rash decision. Be smart.
  • Don't let it get you down. When things go wrong, it can be tempting to ease the pain by spending more money. We buy things to make ourselves feel better, but the spending actually has the opposite effect. We feel guilty about what we've purchased, and this guilt makes us want to go out and spend more. Fight that feeling. Don't let one problem snowball into two or three.
  • Learn from your mistakes. Figure out where you went wrong. How did that traveling salesman sell you those over-priced steak knives? What can you do in the future to prevent yourself from doing the same thing again? It's a fine line to walk: you don't want to beat yourself up, but you don't want to keep making the same stupid mistakes, either.
  • Don't fall victim to the sunk-cost fallacy. I recently had coffee with Debt Kid and listened to his story. After some initial success with day-trading, DK found himself down $2,000. Rather than accept his losses and move on, he threw good money after bad. He lost $30,000 of his mother's money. Then he began to borrow to recover his losses. Ultimately, he found himself $250,000 in debt! This is the sunk-cost fallacy in action. Just because you've already spent $200 on a gym membership you never use doesn't mean you need to keep spending money on it. Cut your losses. Get out as soon as possible.

Stupid in Real Life

Although I make fewer mistakes than I used to, I still do dumb things from time-to-time. Last fall I was talking to a friend who worked at the corporate offices of The Sharper Image. He told me that the company's stock price had fallen, but management was certain they could turn things around. It was just a passing remark in a much larger conversation, but it made me think.

The next day, I bought $3,500 worth of Sharper Image stock at $3.14 per share. This was a bulk of my Roth IRA money for 2007.

This was dumb. (And it was a repeat of a similar stupid move I had made — but survived — earlier in the year with Countrywide.) I didn't research the stock. I was gambling, plain and simple. And I lost. The Sharper Image declared bankruptcy recently, cutting the value of my investment from $3,500 to around $200. There's a chance it will drop to zero.

I could let this get me down — and believe me, I think my choice was plenty stupid — but I've tried to put a positive spin on it instead. I view this as a costly learning experience. I believe that the average investor should steer clear of stock-picking and focus on indexed mutual funds (that's where 95% of my money is). This has only strengthened this conviction, especially for myself.

When I told my friend Paul about this experience, he had some great advice: “Until you can remove emotion from the decision, and until you have a basis for making a data-driven decision, you'll make mistakes like this.” He's right. Even after years of following the slow, sure path to wealth, there is still a part of me that looks for a quick fix. The way to counter that is to become better prepared and better educated so that I'm not tempted to make similar mistakes in the future.

Addendum: For more on this subject, check out Jim's follow-up at Blueprint for Financial Prosperity: Early mistakes are lessons in disguise.

This article originally appeared in slightly different format at I Will Teach You to Be Rich. Photo by Betssssssy.

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Hannah
Hannah
12 years ago

Very good post! I’m sure we’ve all made a number of financial mistakes in our day, and your “picking up the pieces” section is spot on! They’re some great tips everybody should take advantage of.

My.cold.dead.hands
My.cold.dead.hands
12 years ago

Good article.

I still kick myself for thinking that I was so smart and buying a whole life policy at 23, then after 3 years decided that being single and no kids I didn’t really need the insurance. The stupid thing #2 was going back a few years later after getting married and buying it again!!

A little education would have gone a long way.

Enigma
Enigma
12 years ago

Its a very good article. By sharing your tips especially “picking up the pieces”, you have just opened just blocked channels on my mind.
Thank you

Diatryma
Diatryma
12 years ago

Another thing to remember: Having an emergency fund does not attract emergencies, even though it may feel like it. The tax refund that was going to kickstart my first savings account as an adult? Went to new brakes. The thousand dollars I put in a savings account, knowing I needed the incentive of interest not to spend it? Besides being nearly impossible to withdraw (though the UFB people were individually very nice about it) it neatly fits the amount that I owe in taxes, plus a credit card bill. Correlation is not causation, correlation is not causation, money is just… Read more »

Mark Runta
Mark Runta
12 years ago

It is a hard lesson to learn but once you get it – life changes. You learn from your mistakes and move on. Excellent advice!

Andy
Andy
12 years ago

I think I got lucky and learned about personal finance before I had a chance to get myself into a lot of trouble. The nice thing is that the basics are simple (save, index funds, budget, etc), but the hard part is actually getting myself to follow through.

ongrowthblog
ongrowthblog
12 years ago

Very nice example of getting sucked into sunk cost JD. Mind game is a part one has to be aware of.

The Weakonomist
The Weakonomist
12 years ago

I bought Best Buy in college, lost 10% of value and sold off. I used that money to buy Microsoft which has done nothing in years. Sold it and bought Intel. It took about 3 years but I finally broke even last year on my $200! Here’s my big mistake. I bought a penny stock, and it tanked. The NASD forced them to do a 14:1 reverse split and the price tanked again. In total my purchase is worth about 38% of what it was when I bought it. Again, only a few hundred bucks, but lesson learnerd. I’ve got… Read more »

J.D.
J.D.
12 years ago

I had dinner with some other personal finance bloggers last night. I told them about my foolishness with Sharper Image. I was surprised to hear that all of them had a similar story to tell. And some of these folks are damn smart about money. “Everyone gets burned once,” said one blogger. The key is not to let it happen twice.

Yi Hui@The Simple Wealth
Yi [email protected] Simple Wealth
12 years ago

I had a similar story like Debt Kid’s. After I got margin call in trading forex, my hubby told me to put $20,000 into our trading account even though I did not feel safe about it, we lost that $20,000 too. It’s hard to manage money as a couple, you make your own mistakes and he makes his, things get worse. I have my opinions and he has his. Life is difficult, we have to accept such fact to transcend it.

Momma
Momma
12 years ago

Good morning!

I’m writing a series of articles, suggested by friends of my blog, and would really love permission to link to and discuss some of my favorite articles on your site.

Would this be ok with you?
Momma

Lisa
Lisa
12 years ago

Excellent article – great reminders – thanks!

FranticWoman
FranticWoman
12 years ago

Nice article J.D. – and thank you for your timing – it was really good for me. Past few weeks, after losing a bid on the only affordable housing in 20 square miles, I’ve been beating myself up and entrenched in self-loathing. Ya see, if I had been smarter 10 years ago to two years ago in all things money related, I could have paid cash for housing and been ahead other ways financially. I know it isn’t productive and the action I take today is more valuable – I still go thru periods of such regret. *sigh* I’ve done… Read more »

elisabeth
elisabeth
12 years ago

I continue to get burned by a variation on the sunk cost mistake — jumping into new enthusiasms too quickly, and ending up with having spent unrecoverable funds on stuff that is now sitting on a shelf not being used. This isn’t quite like chasing lost money with new funds, but it’s just as guilt-producing in the long run, and somewhat harder to stop doing. I’ve at least tried not to spend initially large amounts on new hobbies or ideas but sometimes you can’t try things out without significant investment, in which case I guess one should try to see… Read more »

Curt at PennyJobs.com
Curt at PennyJobs.com
12 years ago

Great post! Improving your financial education is perhaps the best method to improve your financial outlook – but few have it and the changing market makes it difficult to stay informed. Your friend Paul said, “Until you can remove emotion from the decision, and until you have a basis for making a data-driven decision, you’ll make mistakes like this.” Investors like to say pretty things like this, but it does not work, because all money decisions are emotional. No matter how much to know at the time of the decision, things change very quickly and your emotions are always with… Read more »

MITBeta @ Don't Feed the Alligators
MITBeta @ Don't Feed the Alligators
12 years ago

I’ve said it hear before: Past performance is not an indicator of future performance. Nobody can predict the stock market, and people are even worse at predicting individual stocks. 3/4 of mutual funds fail to match (not exceed) the S&P 500 index every year — especially once taxes and fees are taken into account. Few mutual funds can beat the S&P 500 over longer periods of time, and it is impossible to predict which ones will beat it ahead of time. It is only obvious in retrospect which funds were the winners, and most of that was luck. Buy index… Read more »

rstlne
rstlne
12 years ago

I’ve owned speculative stocks like Sharper Image too. I’ve made enormous multiples on some of them and lost on others. One safeguard is to limit your position size. I don’t like to have more than 1% of my investment portfolio in any one speculative stock. Usually, it’s less than 1%. That way, even if the stock tanks, I don’t lose much and I still get the excitement of watching it move.

Laundro
Laundro
12 years ago

“Until you can remove emotion from the decision, and until you have a basis for making a data-driven decision, you’ll make mistakes like this.”

Exactly the same can be said of poker 🙂

Adfecto
Adfecto
12 years ago

I’m certain that anyone that has “made it” wealth wise would certainly tell you that it has not actually been a continuous upward path. The road always has twists and turns and the market always gives you bumps and bruises. There are dozens of trite sayings to that apply but what really matters is that you learn from your mistakes and keep working to achieve your goals.

SavetotheFuture
SavetotheFuture
12 years ago

Great Article. I especially like the part on being prepared. One should always be well informed before investing their hard earn time and money. Also, having an emergency fund set up can be the difference between financial disaster and a minor nuisance. I just had an incident that could of set me back. Having the e-fund set up made all the difference.

Anthoney Grigsby
Anthoney Grigsby
12 years ago

Yep, I know I definitely made my share of financial mistakes to where I had to completely alter my livelihood. I’m glad I made the change or there’s a great chance I would’ve ended in a much worse position due to my setbacks.

Steve
Steve
12 years ago

Good post for today.

I just got notice from my landlord that I have two months to vacate my apartment.

Its Spring, there are places to be had. I will be paying much more, but I can afford it. I have an emergency fund.

Still, there is always the initial shock of bad news.

Still, you feel better when other people mention that they have problems.

Brint
Brint
12 years ago

Three words for the Sharper Image gamble – stop loss order. If a stock bet is speculative, and short term, keep a standing stop loss order on those shares at a loss level you would feel comfortable with. If the stock drops and you sell for a loss, but you’re still super sure this is going to pay off, buy in again lower. You’ll eat some trading fees, but at least the repurchase will give you a chance to see if you really believe in it. The corollary to this is to never be shamed by taking profits. Sure it… Read more »

Gnashchick
Gnashchick
12 years ago

I heard this advice once, from a very successful private equity manager. Buy 10 stocks. Hold them for 10 years. 2 of them will perform with spectacular results. 2 of them will flame out miserably. 8 of them will perform with modest, steady results. Sell the winners and take your profits, sell the losers to offset the losses at tax time, and hold the 8 steady gainers until you retire.

AJC @ 7million7years
AJC @ 7million7years
12 years ago

I once set a an automatic ‘buy’ order and an automatic ‘sell’ order on a stock then went on vacation. I thought that my position was covered until I came back two weeks later and saw that I had accidentally BOUGHT the stock in a dip and automatically sold it at a peak and made a bucket …

… still can’t work out how THAT worked … but, it did :))

Miranda
Miranda
12 years ago

I really liked this post, especially the advice on moving on from mistakes and trying not to panic. It can be difficult to forgive yourself and move on. But it has to be done. Since I finally got over the idiocy of the credit card debt I wracked up in college, I feel much better about my money situation. Even though I hadn’t had that debt for years, it still haunted me until I finally decided to let it go…

MrsMoney
MrsMoney
12 years ago

This is a great post! I know it’s hard not to freak out when you make a financial mistake. Thanks for the great tips! 🙂

Lisa
Lisa
12 years ago

Over the years I’ve done the same thing: not researched stocks, just bought them because I “felt” like they were good stocks.

I never hit it. Ever. $5k later I was not too happy with myself. This time around, I am starting slowly and researching wisely. I’m using a legacy spreadsheet: a variation of one used by investment clubs all over the country.
Makes much more sense!
Lisa

Dana
Dana
12 years ago

@Elizabeth: I’ve done the same thing. With me it’s often hobbies. I buy supplies with every intention of using them–and sometimes I do, and quite extensively–and then I drop them and the stuff gets put away and I keep thinking, “One of these days soon I’ll drag it all out,” and it doesn’t happen. Part of the problem is that I don’t have good storage for my supplies, so I have to stuff them where I can put them; part of the problem is I don’t have a lot of horizontal surfaces upon which I can *do* crafts; part of… Read more »

TosaJen
TosaJen
12 years ago

As other poster’s have mentioned, for some of us (me), the hardest part is admitting that something was a mistake, and figuring out how best to get over it, learn from it, and move on.

I’m Jen, and I’m a recovering perfectionist . . . ::)

RibEye
RibEye
12 years ago

Oops. Not so many people are buying overpriced, cheap gadgets in this economy. This stock has been dropping like a rock for some time. I would be leery of what the hawker of a fraudulent and dangerous air cleaner has to say about the company’s future stock prices. Sounds like that friend sold you a wallet cleaner too!

JonatsGonats
JonatsGonats
12 years ago

In investing/trading stocks you will need to sacrifice time and money to be able to become a better investor/trader because here you will know how to react and understand better the market situations.

Remember, we can never know success if we never tasted failure. Each failure makes us wiser and closer to success.

http://jonatsgonats.com

Tracy
Tracy
12 years ago

I’ve made more than a few mistakes in my own time…but what I’ve been looking for lately is not so much how to recover from my mistakes, but how to work with a life partner who doesn’t believe in reducing debt, building savings, or any of the recommended financial steps I would like to follow. He says “I don’t want a crappy life of misery and abstinence in order to one day — maybe — having a life worth living, when I’m ninety and have two teeth left in my head.” I’ve tried looking for a middle-ground we could agree… Read more »

Micah
Micah
12 years ago

Last weekend I was web surfing and came across a “melt value” calculator for certain US coins containing silver. Eg certain years of the Eisenhower silver dollar’s silver content is worth $5.65. It suggested looking on ebay. So I did. There were bulk lots of 10 Ike dollars (for those years) going for (After shipping) around 20$. WOW! I thought I had found a jackpot. I spent about 50$- not really anything to sweat over. After visiting another page- wikipedia- I realized that only Mint-Issued proofs (never intended for circulation!) had ANY silver. I got the cold sweats and concluded… Read more »

JW
JW
12 years ago

Hello Everyone – I’m just starting out in my quest to be debt free. Right now I’m in the denial/anger stage of the mourning process due to the death of my finances. Seriously though, Truth be told, I’m very concerned. My question is as follows: With regard to the snowball method of paying off debt, what happens when you have an account or two that are in an interest deferred (i.e., no interest if paid in 1 year, etc)? Assuming the balances are similar, which do you snow ball first? For example, a credit card APR is at 18%, but… Read more »

MITBeta @ Don't Feed the Alligators
MITBeta @ Don't Feed the Alligators
12 years ago

@JW:

I think the strategy depends on two factors:

1. Is the interest rate on the deferred account higher or lower than the other account?

2. Do you think that you will be able to pay it off in the deferred time, regardless of the order?

If you can pay off both cards within the deferment period, then pay the non-deferred one first.

If you can’t, then I would still pay the higher interest rate card first since either way you are going to incur the deferred interest charges.

Eddy J
Eddy J
12 years ago

I know the feeling of a huge financial mistake. I was very shrewd with my money, but became a bit too shrewd when i decided it was a good idea to save a bit of money and invest in 3rd party insurance on my expensive car. I had an accident 2 months after i brought the policy and wrote the car off – it was a total loss. Now I am $20,000 out of pocket. It’s very difficult grieving over this really silly mistake.

Kenny
Kenny
12 years ago

Well, I got out of YHOO at $29 last February and was extremely grateful for that. Last Friday I didn’t know what I was thinking and rebought those shares at the top. Greed took control I guess. Now today my automatic stop loss sell all off at $23. Could have bought a house and save a marriage but there is no turning back I guess. The irony is killing me, all because I got greedy in 2 minutes. Can’t panic any longer. Just me and my booze for now. Hard lesson learned: when Warren Buffett says earning >12% in stock… Read more »

Dan
Dan
11 years ago

your Sharper Image loss was Karma for the insider trading that you were utilizing!!

ManuelS
ManuelS
7 years ago

I invested some money in my high school years on bonds with 5% of interest per year. I thought my knowledge about the financial market i studied in some courses would allow me to make more out of my money. I thought bond sounds really safe and so 2 years after the company announced bankruptcy… I used my credit card often while traveling around and living abroad… mostly ending not good as well… Hence, I decided to talk to a coach(can recommend Your24hCoach) about financial issues to get more insight and to get a better feeling with money. It’s so… Read more »

Clara
Clara
7 years ago

Hi there, Great blog! Could absolutely identify with much of what was being said. Was already in debts because of a car I recently bought. Yet, I was so swayed by the salesman who sold us a $9k travel trip which was really crazy. However, I could see how my mum was interested in it. And, for that moment, I did not realise that I might not be able to fork out that amount. I guess, it was easy to forget how much I have spent especially when I am spending using credit cards. Always very proud of myself for… Read more »

Fred
Fred
5 years ago

I’ve lost about $2,000,000.00 since 2001 in real estate losses and stock market crashes of 2001 and 2008. Had a great idea in 2005 to stock up on real estate, which I did and lost big time. $12,000.00 a month in mortgages were covered by approximately $5,000.00 a month rents for 6 years. Threw additional money to pay down the mortgages that were eventually lost. I could not keep throwing money out the window to a condo I paid 172,000.00 for that dropped to $35,000.00 and another I paid $190,000.00 for that dropped to $45,000.00. That’s just two of several… Read more »

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