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The Biggest Financial Mistake I Ever Made
In this post I’m going to break away from the typical personal finance blog post. I’m not going to share a tip. This isn’t going to be some humble brag about how much money I’ve saved. It’s going to be quite the opposite actually. In this post I’m going to share with you my biggest financial mistake. One that cost me over 5-figures.
As a fee-for-service financial planner it’s somewhat embarrassing. Not many people know this story. This happened almost ten years ago, before I learnt everything I know about personal finance. I could have saved myself a lot of stress had I known what I know now. For that reason, I’m going to share my big secrete with you and I hope it inspires you to learn more about personal finance.
I’m going to share with you my biggest financial mistake and then I’m going to break down each of the mistakes I made… because like any BIG mistake there was more than one.
Bonds Aren’t Boring: The Psychological Benefit Of Holding Bonds
Bonds seem like a really boring investment. They’re low growth. They won’t make you rich. Plus, bond prices fall when interest rates increase. And if you use a bond ETF they usually pay a tiny monthly dividend, typically not even enough to buy another share via DRIP unless you have a lot invested.
So, why would anyone invest in bonds?!?
There are a few good reasons to invest in bonds but there is ONE reason in particular that I think is very important. It’s not a typical reason you see mentioned when people talk about investing in bonds, but I think it’s one of the best reasons. It’s based on investor psychology and behaviour and it can make a big difference during a stock market dip or a full blown downturn.
Many DIY investors may not realize it, but they are their own worst enemy. There is plenty of research around investor behavior, in particular how investors like to time the market. Timing the market means investors try to buy low and sell high, but this rarely happens, if anything they do the opposite, buy high and sell low. For most DIY investors time in the market is more important than timing the market.
Morningstar does an analysis that measures fund inflows and outflows. They use this to approximate when people are trying to time the market. Vanguard did a great summary of this analysis and they found investor returns lagged the market by 1 to 2%. They estimated that behavioral coaching can be worth up to +1.5% per year for the average investor.
So as a DIY investor how do bonds help you avoid timing the market? Let me explain…
Budgeting For Unexpected Expenses
Budgeting for the unexpected. Planning for the unplanned. It seems like an oxymoron, but it’s an important budgeting tool that can help you stay on track financially.
Unexpected expenses can be a real pain in the @$$. You can go months with a perfectly balanced budget only to have it blown out of the water by some unexpected expense.
Sometimes it’s car related, like a car repair, new tires, or annual license plate renewal. Or sometimes it’s home related, like a leaky sink, a broken window, a leak in the roof. Or sometimes it’s around the holidays when the gifts receipts are piling up.
Whatever the reason, unexpected expenses can be a real buzz kill. But are they all unexpected? Or can we budget for some of these expenses in advance?
A solid budget should include some room for these unexpected expenses. We’re not talking about adding “buffer” to your budget. Budgeting for unexpected expenses should be strategic and planned.
Many unexpected expenses fall into three buckets, vehicle related, home related, and life related.