Mistakes. We’ve all made them. I’ve made my fair share of mistakes over the years, professionally and personally. Sometimes, the best way to learn is to experience the pain yourself. It is funny, my mom and I were talking over the weekend and she told me that my grandpa always used to tell her that “learning is expensive.” This didn’t specifically relate to education, either. This related to different life situations her and my dad encountered over the years. This year, I’ll be turning 29. My 20s will soon be in the rear-view mirror. I’ve made plenty of financial mistakes over the years that have likely cost me a lot of dividend income. With the benefit of hindsight, I wanted to share my top 5 financial mistakes and calculate the true impact they had on my life and my dividend income.
Financial Mistake #1: Unnecessarily Expensive Rent Out of College – Starting a new job at a public accounting firm out of college, came with more monthly income than I have ever earned in my life. I was living large. Rather than live at my mom’s house for several months to figure out the best location to live, for the most affordable price, Young Bert decided to move out with one of his college buddies and rent an apartment that was way too large for his needs. Oh what it was like to be young and not focused on investing and achieving financial freedom.
Now, the rent expense really wasn’t that expensive. So many of you are going to read what I am about to write, think about a time where you paid much more money for rent in a large city, and think I’m complaining about pennies here. The point of including this in the article isn’t that the financial mistake was egregious, nor put me severely in the hole, financially. Rather, I made a mistake because I could have found a much more affordable rent option that could have saved me thousands of dollars.
I signed a 24 month lease that required me to pay $600 per month in rent and $10 per month for parking. In total, each month I was forking over $610/month in rent for this large under utilized apartment. To make matters even worse, my roommate and I were planning on terminating the lease after 1 year. However, we assumed we had to provide the landlord 30 days notice, the standard notification period in Ohio. You know what assuming does, right? If we would have read the lease, we would have realized that we were required to provide the owner with a 90 day advance notice. Since we missed this deadline, we were stuck in this place for 24 total months.
How Much Dividend Income did Financial Mistake #1 Cost Me? With the benefit of hindsight, I estimated that I could have rented a room for Lanny in his house or found a cheaper rental with my friend for $450 per month. I could have saved $160/month if I would have been more patient. Below, I calculated the potential income that this mistake cost me, assuming I invested the $160/month in dividend stocks with an average dividend yield of 3%. I will use an assumed 3% yield for every calculation in this article.
As you can see, this financial mistake cost me $115 in potential dividend income. Ugh!
Financial Mistake #2: Purchasing a New Car Rather than Used – Back in 2013, I purchased a shiny, new, black Toyota Camry. In fact, just last month, I made my final auto loan payment and now the car is officially mine! It sure was nice unlocking the extra cash flow, now that I no longer have to make those $360/month payments. The point of this article is to discuss the mistakes, not the fact that I’m now auto-loan-free!
At the time of my purchase, I used every available discount for purchasing a new car. Recent graduate, first time owner, etc.., you get the picture. My purchase price was ~$21,500 when all was said and done. At the time, I didn’t even consider purchasing a used car. Years later, when my wife purchased her Rav-4, we did intense research and found a certified used car, with 38,500 miles, that was over $6,000 cheaper than the new model. With the benefit of hindsight, I was kicking myself for not even considering a certified used car when I made my purchase 5 years ago.
How Much Dividend Income Did Financial Mistake #2 Cost Me? Since Camry’s are cheaper than Rav-4s, I estimate that I could have gotten a certified used Camry for approximately $18,000 (very conservative estimate). This would have resulted in $3,500 in savings, plus an additional $271.25 in savings once I factored in the sales tax savings. Yes, the sales tax in my county is insanely high compared to the rest of the state (an argument for a different day)! While the payments would have been evenly spread out over five years, I’m kicking myself for forgoing an estimated $113 in forward dividend income. Here’s the detailed calculation below:
Financial Mistake #3: Not Maximizing my Tax-Advantaged Accounts Earlier – Historically, I was always a Roth IRA person. Growing up, the Roth IRA, post-tax contribution and tax-free growth method, was beaten into my head. In 2016, Lanny put together this awesome three-part series discussing his change in thought process and how much he could save from making some major adjustments to his financial plan, and save a ton of taxes. This included taking advantage of every tax benefit he could. Shortly after, he began maximizing his traditional 401(k), HSA, and Traditional IRA (while he could). It doesn’t take a rocket scientist to guess that he sold me on the idea as well, and subsequently, I began trying to maximize my contributions. After he crunched the numbers and had a few phone calls with me, I was kicking myself for not maximizing my 401(k) and HSA contributions earlier.
How Much Dividend Income Did Financial Mistake #3 Cost Me? This conversation occurred in 2016 and I didn’t begin embracing this until 2017. I began working full-time out of college in September 2012. How much did waiting 4+ years to begin maximizing my tax benefits cost me? Let’s see. For the purposes of this analysis, let’s assume that my stupidity cost me a lot of money in the years 2013 through 2016. In the table below, I’m going to calculate the tax savings I could have had during the time period if I would have maximized these two accounts.
See that, I could have saved over $23,000 in taxes over the years if I would have maximized my tax-advantaged accounts earlier! Assuming I would have invested all of the tax savings in dividend-growth stocks with an average yield of 3%, this financial mistake cost me $695.06 in potential dividend income. Oh yeah, that doesn’t even factor in the dividend income that I would have received from investing the extra capital into the mutual funds my 401k and HSA offered.
Financial Mistake #4: Waiting Too Long to Become a Dividend Growth Investor
This one is a little harder to quantify, but I’m going for it here. There was a short chapter of my career, before Lanny showed me the ways of dividend growth investing, that I was just a regular old investor. My portfolio consisted of a technology company, retail company, and a few other random companies that did not pay a dividend. I didn’t do terribly with those holdings, but it wasn’t until 2013 that I truly became a dividend investor. To state it bluntly, my fourth financial mistake was not becoming a dividend growth investor earlier. In hindsight, man, do I wish I would have started dividend investing a year earlier to get the dividend snowball rolling sooner.
How Much Dividend Income Did Financial Mistake #4 Cost Me? I mentioned that this one is going to be difficult to predict because there are a lot of different assumptions that will need to be made. But, I am confident that I can put together an estimate. Knowing myself, that should do the trick. Currently, I report my dividend income as a family. My wife and I have over $6,000 in combined forward dividend income. However, for a while, before 2017 in fact, I reported dividend income on this website individually. The values that were reported were just for my regular trading account, 401k, and Roth IRA. I still track the individual values from just my account as well, so I will use my personal income figures in this calculation. This is because if I would have started investing earlier, it would have been using my individual money, not my wife’s. Heck, we were just dating in 2012 and 2013 when my dividend investing journey began.
In the chart below, I included my personal forward dividend income totals from 12/31/13 – 12/31/17 and the dividend growth rates for each year. I excluded the first year since I moved a lot of capital into my investment account and jump-started my dividend investing portfolio. The growth rate in the first year, over 150%, was not reflective of my annual growth rate that was the result of saving, side-hustling, and my current behaviors. So I will use my three-year average dividend growth rate to forecast what an additional year of dividend income would potentially look like. I am also comfortable projecting an additional year using this method because knowing myself, I would have invested every extra dollar that I could! Here are the results:
As you can see, my three-year average dividend growth rate was 27.65%. Using this growth rate and applying it to my 12/31/17 forward dividend income, I am projecting that my personal dividend income would be over $5,100 if I had another year of investing, dividend-reinvestment, and dividend growth under my belt. Because I did not start dividend investing earlier, I cost myself $1,112 in dividend income in my 20s. Again, there were a lot of assumptions built into this model, but I think that number is a reasonable estimate!
Financial Mistake #5: Not Helping Others As Much as I Could Have – This financial mistake hasn’t personally cost me any dividend income, so the impact for this financial mistake is $0. But this year, Lanny wrote a very inspiring story about how he worked with his brother to finally get his finances in great shape. Now, he has a lower interest rate on his student loans and over $300 in annual dividend income. To me, that’s such a cool story and it has helped change my mindset. The reality is, this is hardly the first time that Lanny has been vocal and helped out others with improving their finances. That’s just the kind of person he is and that’s what makes him so great.
Historically, while I have this blog, I typically have not been as vocal with others about finances. In person, I’m very reserved when it comes to the topic of personal finance. I’ve missed a lot of great teaching opportunities over the years to help family and friends with their finances because I haven’t asked them the right questions and offered advice where I probably should have. This hasn’t impacted me at all, however, I have cost others thousands of dollar in dividend income and future savings. That is all going to change going forward and I’ll be ready to have those conversations. In fact, I’ve already put in a few requests for conversations with others. Thanks again for the inspiration Lanny!
Overall Impact of my top 5 Financial Mistakes
Now that I’ve crunched the numbers, let’s see the final results. The impact of each individual financial mistake may not be that significant, but in total, the impact will surely be felt. Thank goodness I have been sitting down while typing this article so my knees didn’t buckle!
In total, these financial mistakes have cost me an estimated $2,035.42 in dividend income. Man oh man, I can only imagine what I would do with that kind of extra dividend income each year. It kills me because I know that a few easy changes have cost me a significant amount of money over the years. None of the changes would have impacted my lifestyle nor would they have changed my quality of life. They were just mistakes that I made because I didn’t focus, perform adequate research, or think through my decisions close enough. But hopefully all of you can learn from my financial mistakes and make the necessary choices/decisions that need to be made to avoid them. Part of why I love this community is because we can all learn from each other!
What do you think about my mistakes? Have you made similar financial mistakes in your career? What other decisions or events have provided great learning opportunities in hindsight? What financial mistakes would you recommend an individual in their 20s avoid? Do you think I am overreacting to all of this?
-Bert