This post highlights two early money mistakes that felt tragic in the moment before turning into catalysts for massive personal and financial growth. The key? A willingness to trade hundred-dollar mistakes for million-dollar lessons.

Introduction

I would love to tell you that I walked a straight path to personal finance nirvana. That I emerged from the womb maxing my Roth IRA. Never spent a dime on something stupid. Never gambled at a casino or on a stock. That I never made a money mistake.

This is not the truth. Fortunately, my financial setbacks never discouraged me; they fueled me. In my financial life, pain has proven to be the best teacher.

This post highlights two of my personal money mistakes, and why I don’t regret them. In each case, I consider the lessons that I learned far more valuable than the dollars that I sacrificed.

To be clear, these are two of many examples from my own life. Money mistakes are inevitable, but your response is crucial.

Money Mistake #1

I aggressively paid down student loans the moment I had extra cash in my pocket. Alternatively, I could have used this cheap debt as a tool to build early wealth more efficiently. I should have “leveraged” my leverage. I’ll show you why.

Money Mistake #2

I picked individual stocks in high school. Worse still, I enjoyed some early success in this endeavor. It took me years to realize the risks associated with individual stock picking. And it took even longer for me to accept the superiority of low-cost index funds. I wish I had embraced index funds from the outset.

Post Objective

My goal is not to help you avoid these, or other, money mistakes. It’s really the opposite. My intent is twofold:

  • To demonstrate that constant perfection is not a requirement for strong financial results. If you make more good decisions than bad, over an extended time horizon, you’ll prosper. It’s math
  • To help you embrace financial failures. This will foster growth and provide you with invaluable perspective. The lifetime value of the lessons learned will more than offset the money lost at a young age. Fail now

Money Mistake #1 – Overly Aggressive Student Loan Paydown

Fresh out of undergrad, I arrived on Wall Street feeling like I “made it.” In my Midtown skyscraper office, the egos grew larger by the floor. I felt comfortable in my team’s designated area: floor 25 of 30.

After relying on assistance from my parents growing up, I was ready to take control of my life, finances, and career. Lacking concrete financial direction or objectives, my student loans became an easy target. Paying them off ASAP felt like a proper first step.

For context, I graduated with ~$30K in total loans. Luckily, most of the debt fell under the “Federal Subsidized Loan” umbrella. This meant interest wouldn’t begin accruing until 6 months after graduation, and the interest rates were low. I also owed $5K on a private loan provided directly by a school alum. Although private, this one offered similarly advantageous terms with interest deferred through graduation.

Student Loan Snapshot

Here’s the precise breakdown of my student loans at graduation:

  • $10,200 in Federal Subsidized Perkins Loans @ 5.0%
  • $4,500 in Federal Subsidized Stafford Loans @ 4.4%
  • $5,000 in Private Subsidized Loans @ 4.0%
  • $9,000 in Federal Subsidized Stafford Loans @ 3.6%

I didn’t realize it at the time, but I should’ve embraced my student loans. The attractive rates and flexibility provided to Federal borrowers are unmatched in the financial world. If I could do it again, I’d extend the payments on these Federal loans for as long as possible.

Before continuing, I want to acknowledge the fortunate nature of my situation. I had the luxury of choosing between paying the loans off or saving extra money. I recognize that many graduates struggle to keep pace with even the minimum payment requirements.

The bright side? I believe the optimal choice is the same regardless of your financial situation. If you carry low-interest Federal loans, pay only the minimum.

*A Word of Caution*

This framework applies only if you commit to investing the money you would’ve spent on debt paydown. If you suspect that you’d use this extra money to fund an inflated lifestyle, pay the debt down to avoid the temptation.

3 Reasons to Pay Student Loan Minimums

Reason #1 – Opportunity Cost

There’s an opportunity cost for every financial choice that you make. Every dollar that you allocate towards one objective cannot be used for its next-best purpose.

In this case, I could’ve put the extra dollars I spent on student loans into more tax-efficient assets. For instance, while I did contribute some money to my 401K, I failed to reach the maximum.

An additional 401K contribution would’ve provided a dual benefit, reducing my taxable income in the present and growing at 7-8% annually over the long term. The tax-deferred returns in my 401K could’ve handily outpaced the interest rates charged on most of my student loans.

Reason #2 – Flexibility

Building a cash surplus at a young age provides optionality and flexibility. A large cash cushion allows you to take risks and operate from a position of strength at a time when many peers live paycheck to paycheck. This creates incredible opportunity.

You might invest in a friend’s business venture, real estate, a transformational course, networking communities, or tools to develop a new skill. These options could generate 500%, 5000%…even 50,000% returns. In contrast, paying off my student loans provided a 3-5% return.

Reason #3 – Tax Advantages

One final cherry on top. Student loan interest can reduce your tax bill. Interest payments of up to $2,500 can be applied as a tax deduction. Note that this deduction begins to phase out above certain income thresholds ($70,000 for single-filers at the time of this writing).

Lack of Regret

This early money mistake enhanced my desire to learn about investing and tax optimization. I felt like I had cheated myself out of my first year of full 401K benefits. It compelled me to dive deeper into the nuances around Roth 401Ks, HSAs, Roth IRAs, and other tax-advantaged opportunities.

While the decision to prioritize the loans over the 401K may have cost me a couple bucks, the increased determination to learn about tax strategy will more than offset any of these losses. And better yet, I grew obsessed enough to share my passion for this nerdy topic with all of you.

Financial Mistake #2 – Picking Individual Stocks

In high school, I read a Motley Fool investment guidebook that sparked my interest in the stock market. It espoused the potential for everyday investors to gain an advantage over “smart money” on Wall Street. The authors held that the Average Joe could see unique opportunities that a Wall Street trader might miss.

Armed with some basic business knowledge, and a semester of high school economics, I decided to put this strategy to the test. I invested in a single share of the emergent fast-casual restaurant chain Chipotle (CMG).

I wish I could claim that I crafted a sophisticated investment thesis. In reality, I liked two basic things about the company:

  • Quantitatively, it carried limited long-term debt. I knew that financial leverage could increase the riskiness of a stock since creditors receive priority payments over equity investors
  • Qualitatively, the restaurant was new to my area, but I observed out-the-door lines almost every time I drove past. I liked the bowls too

Good enough for me! After saving a couple hundred bucks from my tutoring gig, I was a proud Chipotle shareholder.

The problem? The stock almost tripled in the course of a few years. Suddenly, I fancied myself the next Warren Buffet.

I felt emboldened to take greater risks. I made speculative investments in 3D printing companies, bioscience startups, and other mid-size restaurant concepts.

The majority of my Chipotle gains evaporated.

Lack of Regret

This early exposure to the dangers of stock-picking turned into a blessing. I lost a few hundred dollars buying these underperformers since I had limited savings to invest at the time. And while it seems minor now, it was painful in the moment. As a high school student hoping to to cobble together pocket change for weekend parties and trips with friends, this money mattered.

The pain of these losses suppressed my temptation to pick individual stocks in the future. If I continued to make poor investment decisions once I started to earn a decent salary, it could’ve cost me hundreds of thousands, or even millions, of dollars when compounded over a lifetime.

The way I look at it, I learned a million-dollar lesson for the price of an NFL game ticket (in lousy seats at that)!

The experience pushed me to research alternative strategies that could yield consistent growth over a long-term horizon. I stumbled upon the passive index investing preached by many of the prominent financial bloggers at the time.

While the historical performance of these indexes was undeniable, it was equally uninspiring. My teenage mind couldn’t comprehend the power of stable single-digit returns compounded over a lifetime. I wanted to triple my money in a year again!

I finally accepted that this sort of return wouldn’t be achievable without exposing myself to an unbearable level of volatility and risk. After enough research, I decided that I’d rather be bored and rich than excited and broke.

My attention turned to low-cost ETFs. I never looked back. Most of my investments sit in passive Vanguard indexes to this day. As Buffet says, my “favorite holding period is forever.”

Thanks Chipotle.

Learning from Money Mistakes

Although we’ll all make countless money mistakes early in our lives, it’s imperative that we don’t let these missteps control our financial narratives. But how?

Make money mistakes now. Embrace them. Take ownership. The earlier you falter, the smaller the relative financial consequences, and the more quickly you’ll learn. Err with time to course-correct before making a decision that could materially impact your net worth.

Putting real money on the line is also crucial. Many advocate the use of stock simulations, board games, or other fictional scenarios to inform real-world financial decisions. While this advice has merit, there’s no substitute for the experience of a tangible loss.

I’m not suggesting that you take reckless financial action for the sole purpose of teaching yourself a lesson. However, taking calculated chances that could result in early failures will build an unparalleled level of self-awareness and personal growth.

Trade the hundred-dollar mistake for the million-dollar lesson. Every time.