Foolish money mistakes — and how to avoid them

Foolish money mistakes — and how to avoid them

At Get Rich Slowly, my goal is to help you make the best possible decisions with your income and spending. Having said that, we're all human. We all mistakes. We all do dumb things with money. And I feel like April Fools' Day is the perfect time to talk about some of the stupid things we've done in the past.

Let me give you an example (or three) from my own life.

To begin, I'll retell a classic tale of my financial foolishness, one that has delighted my readers for over a decade. It's all about how I paid $1500 for a “free” Frisbee.

The Not-So-Free Frisbee

Frisbee3.MeridianHill.WDC.13April2014On the first day of college, I opened my first bank account. The gym was filled with registration tables, not just for classes and clubs, but also for banks and credit cards. Since I was receiving a small stipend to cover living expenses, I needed a checking account.

The two banks vying for attention used different methods to attract students to their tables. A small local bank had a sign that promised “free checking”. A large national bank gave away a Frisbee to anyone who opened an account. The choice seemed easy: I wanted the Frisbee.

I signed up for my checking account, deposited my money, and got my free Frisbee. I spent the afternoon on the quad tossing the disc back and forth with my roommates. When it was time for dinner, I took the Frisbee up to my room, put it in the closet, and never used it again. Ever. But I had that checking account for nearly two decades.

Classes started. I forgot about the Frisbee and the checking account. The next month, I received my first bank statement. There was a $5 service charge. It didn't seem like a big deal. I figured it was part of the package, part of being a grown-up. My parents had always paid a service charge on their checking account, and I expected I always would too.

For the rest of my college career, I paid $5 per month to maintain my checking account. When I graduated, I continued to pay $5 per month. During the 1990s, that fee increased to $8 per month, but I barely noticed.

In fact, I paid a monthly fee for checking from September 1987 until June 2004. For 202 months — nearly seventeen years — I paid for the privilege of writing checks. Then, when I started turning my financial life around, I left the major national bank and moved to a local credit union. I've had my checking account at that credit union for nearly fourteen years now and have never been charged a fee of any kind.

One foolish choice as I entered college cost me nearly $1500 — enough to buy about one hundred Frisbees. And that's just one of the foolish financial choices I've made in my life.

The Wasted Windfall

By the mid 1990s, I had accumulated over $20,000 in credit-card debt. And I was digging the hole deeper every day.

On 21 July 1995, my father died after a long battle with cancer. Before he died, he managed to take out a very bare bones life insurance policy. (He hadn't thought to acquire life insurance before he contracted cancer. After he got sick, nobody would insure him. Or, more precisely, one company would — but only minimally.) When the dust from his death had settled, Dad had managed to leave each of his three sons $5000 in life insurance money.

A smarter man than I was might have taken this money and applied it directly to his $20,000 in credit card debts. That's not what I did. Instead, I put $1000 toward my debt and patted myself on the back. I took the other $4000 and bought a fancy new computer — a Macintosh Performa 640CD DOS-compatible — and lots of computer games. Then, to make matters worse, within weeks I maxed out my credit cards again, effectively negating the $1000 I had put toward debt reduction.

There's no question: The old J.D. was foolish with money. But even after I started reading and writing about money, I still made some foolish mistakes.

True story: I still owned that Macintosh Performa 604CD DOS-compatible personal computer until last autumn. After Kim and I returned from our cross-country RV trip, my ex-wife contacted me. “You still have a bunch of computer stuff in a shed at my place,” she said. “Can you get it out of here.” One of those computers was that twenty-year-old reminder of my foolishness. I gave it (and all of the other computer stuff) to a middle-schooler I know.

The Imbecilic Investor

As I began to manage my money wisely during the mid 2000s, I made sure to fully fund my Roth IRA every year. But I hadn't yet discovered the virtue of index funds, so I put my retirement money into individual stocks. But not just any individual stocks. I thought I was savvy enough to spot beat-up stocks that were bound to recover. Hahaha. I was wrong.

In the fall of 2007, for instance, I had dinner with a friend who worked in the corporate office of The Sharper Image, a company that manufactured fun and fancy gadgets. The company's stock was in the toilet, but my friend said that management was certain that things would soon turn around. It was just a passing remark in a much larger conversation — he wasn't trying to get me to buy the stock — but it planted a seed in my brain.

The next day, I had to decide how to invest $3500 of that year's Roth IRA money. I should have done some research. I should have put the money in index funds. (I had just begun learning about index funds, but hadn't yet become a die-hard proponent of them.) Instead, I bought $3500 of Sharper Image stock at $3.14 per share. I was gambling, plain and simple. And I lost.

Within a few months, The Sharper Image declared bankruptcy. Overnight, the value of my investment dropped from $3500 to $200 — and then to zero. It's still worth nothing today, over a decade later. It will never be worth more than that. Yet I keep those 1115 shares in my Roth IRA just to remind me of how foolish I was.

Money Mistake: Sharper Image

Everbody's a Fool Sometimes

It's not just me, of course. We all make mistakes now and then. Some of them are minor, but some of them are doozies. Last year, I asked members of the Money Boss group on Facebook to share some of their biggest money mistakes. Here are a few of my favorites.

First up, Nate tells how he and his wife bought a timeshare…and wish they hadn't:

Money Mistake: Timeshare

Then there's Amy, who made the same mistake I see people make again and again and again: Cashing out their retirement accounts when they switch jobs.

Money Mistake: Cashing Out Retirement

Adam regrets not being more motivated when he was younger. Instead of working hard, he just goofed around. (Oh boy, can I relate to this one!)

Money Mistake: Not Working

Megan wishes she had started tracking her spending at an earlier age:

Money Mistake: Not Tracking

Richard's biggest mistake was buying into the traditional advice that you only need to save ten or twenty percent of your income for retirement. Life many of us, he eventually realized that by saving more, he could have more:

Money Mistake: Not Saving

A lot of readers mentioned they made mistakes by marrying somebody who had different financial aims than they did. But Tyler was the only one who realized his mistake was keeping his wife in the dark:

Money Mistake: Not Sharing

I'm sure you have made money mistakes in the past too. Maybe you're still making them — or suffering the consequences of past mistakes. Feel free to share your story in the comment section below!

Coping with Mistakes and Setbacks

As I said, even smart people make mistakes. That's part of being human. But smart money managers do what they can to minimize the effects of mistakes before they ever occur. Here are two ways you can mitigate the damage caused by foolish choices:

  • Educate yourself. The more you know, the better choices you'll make — and the better you'll be at anticipating problems. Read personal-finance books, magazines, and blogs. Most importantly, talk to people you know who have control of their finances. Learn from their mistakes so you'll be more likely to avoid similar pitfalls in the future.
  • Be prepared. Your work as CFO of your own life involves both offense and defense. You practice defense when you practice preparation. The best way to prepare? Boost your profit margin! The larger your saving rate, the larger the buffer between you and disaster. Maintain an adequate emergency fund. Keep your insurance up-to-date. Make use of barriers and pre-commitment so that you'll do the right things automatically. (The more you remove the human element from the equation, the safer you are.) Create a cash buffer to allow you take advantage of both emergencies and opportunities.

Even when you're prepared and educated, you're still going to make mistakes and suffer unexpected setbacks. It's important to know how to pick up the pieces after things fall apart. Here are some strategies for minimizing the damage:

  • Don't panic. When you suffer a setback or realize you've made a mistake, try to relax. Don't freak out. Take an hour or two to distract yourself. Better yet, sleep on the problem. It's amazing how a little time can help you gain perspective.
  • Believe in yourself. Though you may not know exactly how to solve the problem at hand, trust that you'll find a solution. You're smart. You're resourceful. You're competent. Stay positive, solve the problem, and learn from the experience.
  • If possible, undo the damage. Some mistakes are reversible. Suppose you just blew a bund of money on new clothes or are feeling buyer's remorse over your new Nintendo Switch. Return the items. Or, if that's not an option, immediately sell them to recoup some of your loss.
  • Evaluate your options. Obviously, some mistakes are not reversible. If you accidentally change lanes into another car and total both vehicles, there's no undoing the damage. So, make the most of the situation. Compile a list of options. Keeping your long-term goals in mind, figure out the best course of action. This will help you avoid making rash decisions.
  • Don't let it get you down. From personal experience, I know how tempting it can be to ease the pain by spending more money. But compulsive spending just makes it more difficult to reach your goals. It makes you feel worse, not better. Fight the urge to practice “retail therapy”. Stay away from your Amazon account. 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 convince you to buy those overpriced steak knives? What can you do to avoid making the same mistake in the future? Don't beat yourself up, but take a calm, rational look at how you can make better choices next time.
  • Don't dig a deeper hole. Money spent is money spent. Just because you've already sunk $200 into a gym membership you never use doesn't mean you need to keep spending money on it. Cut your losses by getting out as soon as possible.
  • Keep your goals in mind. A setback is just that: a temporary roadblock on your journey toward something more important. Make peace with the past and keep your focus on the future.

Setbacks are disheartening but remember: Failure is okay. Mistakes are lessons in disguise. There's a Japanese proverb about perseverance that translates as “fall down seven times, get up eight”. Successful people fail just as often as unsuccessful people; the difference is that successful people learn from their mistakes, get back on their feet, and resolutely march in the direction of their desires.

Becca on Coping with Rejection

If you've made some foolish choices or had some bad stuff happen to you — or both — don't give up. Use the mistakes to launch yourself on a new path. It's never too late to change direction and start making smarter choices. Build your future from the ashes of the past.

More about...Planning

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
16 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
dh
dh
2 years ago

Warren Buffett’s business partner, Charlie Munger, says there is only three ways a smart person can go broke: liquor, ladies, and leverage, with “leverage” referring to the practice of borrowing money to buy stocks.

Anyway, after 2 divorces, I know all about losing money to the ladies haha!!

Margaret L
Margaret L
2 years ago
Reply to  dh

You have my sympathy! My late husband lost his to his second wife… in the midst of the 1980s divorce debacles… (what I called them..) as almost any man getting a divorce during that time suffered.

S.G.
S.G.
2 years ago

I have always called those losses “tuition for the school of life”. Failure can really hurt, but ideally they protect you from bigger ones.

Sequentialkady
Sequentialkady
2 years ago

I’ll add, don’t compound a mistake by doubling down on it. — Local CUs aren’t what they’re cracked up to be. I keep my “walking around money” at a local B&M (the “big” money is kept at Capital One). This january I switched from “Bank of Satan” to a local CU (after finding one I was eligible to join that also had a convenient branch) and was presented with two (very meh) options: 1) Keep a minimum of $2500 in a non-interest paying checking account, with unlimited check writing and “free” teller access, or pay a $5 service fee. 2)… Read more »

FoxTesla
FoxTesla
2 years ago
Reply to  Sequentialkady

I second your caution on the “local CUs are always better than national institutions” advice that seems to be prevalent. 1) Poor service. In my case, the local CU we chose for our mortgage because of an offered 30-day close (essentially) lied about the rate, leading to a quarter percent surprise (not in a good way) at closing. 2) Lack of accessibility. After moving states for work, I contacted a CU in my previous location where I had an auto loan ready to pay off. When I asked for the procedure for closing my account after the payoff, I was… Read more »

Sequentialkady
Sequentialkady
2 years ago
Reply to  FoxTesla

Yes the “free” ATM scam drives me up the wall and through the roof. No, I’m not paying $2-3 dollars to access my money. I would find 5 or 10 CENT fee per transaction to pay for maintainance, restocking, and electricity annoying but fair on an in-network machine, but $2-3 is just rancid.

(And the cherry on the sundae is that my local branch has the *fussiest* ATM I’ve dealt with in decades. It’s like being back in 1986 — and not the good way. The machine rejects any bill with the slightest fold, crease, or tear.)

mary w
mary w
2 years ago
Reply to  Sequentialkady

Yes, but your credit union (or bank for that matter) doesn’t control what ATMs you use or what those providers choose to charge you. My credit union uses the COOP atm network which IME is in every 7/11. Generally easy to find a free one.

If the credit union reimburses you for ATM fees charged by others, that money has to come from somewhere – like fees charged to other customers. Also when ATM fees are reimburses customers don’t try and find the free or low cost. one

Gary @ Super Saving Tips
Gary @ Super Saving Tips
2 years ago

I’ve made some pretty big financial mistakes myself, but the most important thing is to learn from them. Hopefully that not only keeps you from repeating the same mistake, but puts you on the lookout for other potential mistakes you might make.

infmom
infmom
2 years ago

Someone I know often speaks wistfully of the golden years in his life, now long past. Those were the days when he was in his 20s and 30s, working an entry level job and spending his leisure time going to concerts and sitting around with his friends smoking pot. The idea of saving money never entered his consciousness. Sometimes he could make up for a budgetary shortfall by gambling. Sometimes not. Fiddle de dee, I’ll think about that tomorrow! Now he’s in his 60s and working paycheck to paycheck and hand to mouth at Z grade part-time jobs, which he’ll… Read more »

dh
dh
2 years ago
Reply to  infmom

Sad. He’s a victim of reality, to quote S.G. But the thing about America is even losers can get rich. If this guy would have just been throwing a few bucks into VTSMX here and there, he’d be good to go right now. He could have kept his entry-level, dope-smoking lifestyle going all these years and been just fine now.

S.G.
S.G.
2 years ago
Reply to  dh

I’ve always wanted to coin a phrase!

[Checks it off the bucket list]

freebird
freebird
2 years ago

Do you still have your SHRPQ shares? My broker removed mine as ‘worthless’ end of last May. I guess unlike you I don’t have regrets because I see such losses as a cost of doing business. I’ve been playing mean reversion speculations for three decades now. I spread it out thinly, and most end up wiped out but, but the relatively few winners can give awesome returns. My ‘secret’ if you want to call it that is I usually look at what Dimensional Fund Advisors holds in penny stocks (especially if they own over 2% of the float). There is… Read more »

Lady Dividend
Lady Dividend
2 years ago

I have a feeling I’ll be getting my first big lesson in a while, regarding stupid money mistakes, next week when I visit an accountant for the first time.

I’ve been managing my tax returns myself for the past 5 years, to save money! Meanwhile every year I’m taking out retirement savings loans to avoid paying taxes. More on this to come….

s17m33
s17m33
2 years ago

if I had invested half of what I spent on booze in my 20’s…
if I had not refinanced my home with the “local ‘hometown’ bank”…
if my wife never said…”but, it was only 5 dollars”…
if I had bought the land when I had the chance…
…and don’t get me started on vehicles…

Cindi
Cindi
2 years ago

I’ve made some BIG financial mistakes but as time went on, I realized those bad mistakes turned out to be blessings. So my question is”are there really things such as bad financial mistakes” then?
At 67, I have to say no. We do what we do at the time and we learn from them. No regrets.

JoeHx
JoeHx
2 years ago

I’ve made plenty of financial mistakes, but I’m not to sure I would want to undo them. While *maybe* I would be better off financially now, I definitely wouldn’t have learned what I did from those mistakes.

shares