Don’t Commit these 7 Deadly Financial Sins like I did

Or- More Importantly – If you are a Seinfeld fan like I am, you are well familiar with the ‘Opposite George’ episode- Where George Costanza decides that everything he has done in his life up to that point was wrong… therefore the correct thing to do going forward is the OPPOSITE of his normal instincts.

 

 

Sin #1- I bought a sports car in college.

    At the end of my College Junior Year I bought a 2-seater sporty car- brand new, off the Lot.  This was enabled by the easy money of the  ‘Career Starter Loan’ aka the ‘2nd Class Car Loan’ offered to Service Academy students.   

    It was a fun car, ladies loved it, but I ended up selling it 18 months later to purchase something more practical for hauling friends and gear to the Beach and/or Mountains.   In the end, I paid new car taxes plus the steepest part of the depreciation curve on this sports car.  Probably set me back about $5k before my 23rd birthday.

 

 

    My first Permanent Duty Station was San Diego in the early 1990s.  Housing prices were expensive by national standards but not ludicrous like they are now 30 years later.  San Diego was barely starting its “Qualcomm Recovery” from the military and defense contractor slowdown of the early 1990’s.  I could have had my parents co-sign on a $162k loan for a NICE 2 br Condo in a very desirable area of Point Loma.  Instead of pressing on with purchasing the house, I let my parents buy it and I rented it out from them at my full VHA housing allowance- They made out pretty good on the deal.    

30 years later… I could have owned this house free and clear, and it would easily cash flow $1300/month after expenses.

 

    The word “Annuity” is frequently and half-jokingly referred to as a curse-word on the Clark Howard Show. 

 

 In my case, I purchased the dirtiest of the Seven Dirty Words- A Variable Annuity- before my 27th birthday.   

 

In my defense, it was the late 1990’s which was

I was looking for a method to set aside additional cash for long-term retirement planning, and boy was my ‘guy’ at the Brokerage House happy to make this suggestion.  

 

In the end, the Variable Annuity went way up, then back down to about $5k more than my original investment at the end of the 5-year surrender period.   There were more attractive options for retirement savings at this point, so I cashed in the VA, paid the taxes on the gain (all INCOME) and started to shunt money over to Roth IRAs and workplace 401k’s.   Total cost to me was about $2k in taxes around my 32nd birthday.

 

Sin #4- I Sold Qualcomm And Amazon stock-  Before the Y2K stock market frenzy/Dot-Com Bubble.

    In the mid-1990’s I bought some shares of this online book seller called Amazon and bought some shares of the local Telecomm innovator Qualcomm.  In 1999 I sold these shares at a good profit- Enough to make a down payment on a house in San Diego in Y2K.   

 

I COULD have held on to these shares longer as they continued to run-up until about Y2K…. but I might have held on to them too long and experienced the Dot-Com bubble crash.  

 

In the end, I got sick of waking up at 3AM (I was stationed in Hawaii) to watch the ticker scroll on CNBC.  I already had enough saved in these 2 stocks for a  house down payment and decided to take my chips off the table.   In hindsight I still  think this was the best choice as it let me sleep at night and I would eventually convert this to something tangible and enjoyable (a nice house for my new family to grow up in). 

 

    Also back in Y2K, I was separating from the Navy and affilating with the Navy Reserve.  Not knowing any better (since this topic was NOT briefed in my TAP career transition class)  I told the Physician’s Assistant there was nothing wrong with me.   I did this because I did not want to adversely impact my ability to do Navy Reserves and Drill for pay.  As I have written here, this could cost me the full price of college tuition for at least 1 of my children ($122k).  

 

    After reading Bob Rice’s Book ‘The Alternative Answer’,  I decided it would be wise to branch out with my IRA monies and try some Alternative Assets.  

 

    Back in 2012, there was this hot new ‘FinTech’ company called Lending Club, which had this cool business model – [sarcasm] They provided More Debt to customers who demonstrated that they could not handle debt, and re-sold this debt to investors (me). [/ sarcasm] After 7 years in, I made a rate of return of about 2 percent, while assuming huge liquidity and default risks.  I could have made more money backed by FDIC guarantees in Bank CD’s.  

 

 The only ‘real’ money I made on Lending Club was the opportunity to get a few hundred bucks’ worth of shares on their IPO.    This taught me a valuable lesson- That companies can be founded (and funded) on a completely looney business model, yet investment banks flock to back them because they are compensated handsomely on the IPO.

 

8 years later (2020) Lending Club announced they were giving up on the Consumer Debt product…. but it will take me at least another year to let the loans I have in the Portfolio to mature and ultimately cash out. 

 

In the end, If I had just put this money in a Target Date or Balanced fund (no tax implications since it was in an IRA) and easily earned 5% per year.   I could have made an extra 9.5k over what is sitting hostage in my Lending Club accounts now.

 

 

Yikes.  I did not plunk down a huge amount of cash here, and did it inside of Retirement Accounts, but what a doozy of an error this was.  I had no idea that Rooftop Solar and Electric Cars would become such a big deal. The royalty trusts ended up paying next to nothing in income as oil prices tanked, and also dropped in value as there was less oil left in the ground to drill for.  I probably blew about $10k in gains versus a Balanced or Target Date fund here.

 

 

1: New Car Tax (twice): 5k as Present Value [PV], 30 years as Term, 5% as Interest Rate [i] :  Future Value [FV] = $21k

 

2: ‘Lost’ Rental Income on a free-and-clear rental property:  $1300/month is $15.6k per year.   Using the 4% rule the Lump-Sum equivalent value of this income stream is $1300 x 12 x 25 = $390k  (that is, it would take $390k in savings to generate $15.6k per year for life).

 

3: Variable Annuity Cash-out taxed:  2k mistake [PV] over 25 years [n] at 5% [i]: [FV] = $6.8k

 

4: The stock sales are probably a wash – I essentially converted them to a Primary Residence.

 

5: My failure to request a VA Disability Rating COULD cost me $122k if my second child goes to college and does not max out on Scholarships

 

6: $9.5k lost value for Lending Club versus other opportunities.

 

7: $10k lost value for Royalty Trusts versus other opportunities.

 

 

 

Because all along this path I saved regularly in my employers’ 401k/TSP and maximized the employer match each and every year.  I invested mostly in ‘vanilla’ Balanced or Target Date funds (the only options available in TSP) and have plenty set aside for retirement today.  

 

Here’s a benchmark study from a recent TSP data pull (about TSP Millionaires), as published by FedSmith.  For me- In spite of the mistakes detailed above- I’m graded ‘above average’ on asset value for someone in my age group who has been saving in a Qualified Retirement Plan for 25+ years:

 

 

The takeaway is that even if you commit some of the Deadly Financial Sins above like I did, you will be ok as long as you make the most of your employer’s Qualified Retirement Plan.  The combination of investments, time, compounding, and low expenses will put you in good shape on your road to retirement and financial independence.