Learning From the Financial Mistakes of Others

“Learn from the mistakes of others. You can’t live long enough to make them all yourself.” – Eleanor Roosevelt

A few years ago, I embarked on a business venture with a friend. As part of our due diligence we made it a point to talk with as many people as possible who had found success in the area we were focussing on in the hopes of learning strategies that we could duplicate but we also sought out people who had created a similar product and been highly unsuccessful. Our thought was that, in learning about their mistakes and consequent challenges we might be able to avoid making those same mistakes ourselves. As it turned out, we received some great mentorship from those who had been successful but we learned some of the most valuable lessons from hearing the stories of the less fortunate entrepreneurs. When it comes to finances, the most powerful lessons often come from the financial mistakes we make and we can learn a lot from these negative experiences.

Related article: Do you have a money mentor?

A few weeks ago there was an article in the family finance section of the Financial Post which detailed the sorry story of “Rebecca”, a 68 year old civil servant who found herself deep in debt with no savings after making two disastrous investment decisions. There are a lot of lessons to be learned from Rebecca’s experiences. Here are the three financial mistakes that resonated most with me:

Beware of Taking Risk to Catch Up on Retirement Savings:

The driving force behind Rebecca’s decision to invest in two high risk business opportunities (a real estate development that failed and a mining venture which turned out to be fraudulent) was realizing that she hadn’t saved enough money to maintain her preferred lifestyle in retirement. This is not a rare thing; one of the most common regrets I hear expressed by people in their 50s and 60s is the wish that they had saved more and spent less in their younger years. Realizing that their savings aren’t enough often prompts people to take far too much risk with their money at a time when they should be investing more conservatively. Some, like Rebecca, gamble on speculative ventures that promise huge returns, others leave their money invested in portfolios that are far too exposed to market risk in a bid to net an extra couple of years of good returns.

Related article:  6 reasons why retirees need to be more conservative with their portfolios

Investors in their 20s, 30s and 40s can learn great lessons from these investors’ mistakes. The best way to build wealth is to do it steadily, over time. Commit to saving early and saving hard; your 65 year old self will thank you for it!

Don’t Assume that CPP and OAS will be Enough:

CPP and OAS were never intended to be anyone’s sole source of income in retirement but far too many people assume that the contributions they make to CPP over the course of their working life will generate enough income in retirement to support their chosen lifestyle. The reality is though, that unless your retirement lifestyle can be maintained on an average of $1116/month before taxes, CPP and OAS will not be enough. These programs were always intended to supplement our own retirement savings not replace the need to save but all too often, just like Rebecca, people have no idea how much they will actually receive from CPP until they get a letter just before they turn 60 outlining the details. By then, it’s often too late to do anything significant when it comes to boosting their own savings.

Related article:  How much will government benefits pay you in retirement?

Ignorance is only bliss up to a point; it’s worth contacting Service Canada to ask for your Statement of Contributions so that you know exactly where you stand and how much you need to save to supplement what you’ll receive from government programs.

Borrowing to Invest Can Be Risky

At the point where Rebecca was confronted with the fact that the amount she would receive from her company pension combined with CPP and OAS would not be enough to support her pre-retirement lifestyle, the only assets she had were the $20,000 in her RRSP and the equity in her home. This is a precarious situation to be in because her only options for financing those investment opportunities involved cashing out her retirement savings and/or borrowing against the value of her home.

Fear and desperation often go hand in hand with poor decision making and this is especially true when it comes to making decisions related to finances. When an investment opportunity seems too good to be true, there’s a good chance that it is. Leveraging can be a great way to boost your net worth but it’s a strategy that should only be used after doing your due diligence, taking advice from qualified professionals and making sure that you fully understand and weigh up the risks involved. Rebecca did none of those things and she paid a heavy price for it.

Related article:  The risks of leveraging

One of my mentors credits some of his smartest financial decisions to conversations he had in his late teens with co-workers who were approaching retirement. Listening to these men talk about what they wished they had done differently and hearing their stories of friends who had built wealth in a number of ways inspired him to make choices over the past 40 years which have allowed him to build a solid financial foundation for himself and his family. Like him, I believe there is a lot to be learned from cautionary tales of financial misadventure; perhaps more than from tales of great success. What do you think?

Written by Sarah Milton

Sarah Milton is currently stretching her professional wings in Edmonton, Alberta in a role that allows her to combine her talent for writing and speaking with her training in the financial services industry. She is passionate about inspiring people to get excited about their money and empowering them to take control of their financial future. You can follow Sarah on Twitter @5arahMilton

5 Responses to Learning From the Financial Mistakes of Others

  1. This was a great article! Although too young for retirement issues to be bothering me, I am fully aware that my decisions now will affect my ability to enjoy life in the future. And the crazy thing is, it’s amazing how fast your paycheck can disappear! Thanks for the advice that you share here, and I certainly hope that I can learn from others to be best prepared for my own retirement.

  2. Borrowing for investment is very risky, it is best not to borrow if you want to borrow please borrow only 10% of your net worth.

  3. While I agree that most people shouldn’t rely on just the OAS and CPP programs, I think you’ve undersold their value a bit by using a monthly figure of $1,116.

    Including the Guaranteed Income Supplement (GIS), the minimum that any single longtime resident of Canada should expect from the OAS program itself is $1,316.

    If they have any CPP at all, although their GIS will decrease somewhat, they’ll still be ahead of the $1,316 amount.

    For example, if their CPP is $600 monthly, their total OAS/GIS/CPP would be about $1,563. That may still not be enough for most people to live on, but it’s certainly better than $1,116.

  4. Thank you for the comments!

    Rob, I’m really glad that the article resonated with you and I absolutely understand what you mean about the disappearing paycheque! Developing a solid savings habit and giving a purpose to your money are two key habits that have really helped me but I wish I’d learned them at 16 instead of 35!

    Kiat, borrowing money to invest can be very risky and should be done only after weighing up the pros and cons and seeking advice from more than one professional. I like your idea of a 10% “safety net”.

    Doug, Thank you for the extra information about GIS – that’s something I will definitely factor into my calculations in the future : )

  5. Great article. I find that most people underestimate the importance of saving and having a solid cash position that isn’t exposed to any market risks whatsoever.
    It seems to me that our system is geared toward the need to “invest” and it’s usually driven by our banking system. Example: I sold some real estate last year and therefore I had a generous amount of cash show up in my bank account. The very next day I was contacted by a financial adviser from my bank wanting to meet and go over some “investment” options etc…

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