Wednesday, April 28, 2010

Be Prepared To Make Financial Mistakes

Tip #253 - Be Prepared To Make Financial Mistakes. In our quest to save money, many of us are reading all that we can about finances. We hear of others successes and try to imitate them. We start to invest in products that months earlier we may not have heard of. We may even become bold with our newfound knowledge. And then our mutual fund takes a nosedive, our house loses some of its value, and we realize that we missed the deadline to invest in last year's IRA.

It's so easy to get discouraged when things like these happen. It often clouds our outlook on other aspects of our financial life or even other aspects of our non-financial life. But these failures are to be expected. Learning about finances takes a lot of time, energy, and devotion. But taking part in managing your finances is a whole new ballgame. No one can expect to get everything right the first time they do things. There will be failures along the way - some may even be big failures. But don't let that discourage you. Each failure is a learning opportunity for the next financial decision.

One way to deal with financial mistakes is to look at the overall picture. Sure you forgot to put in $5000 for 2009's IRA, but overall you may have saved much more than you ever have in the past. Learn from it; don't miss another IRA deadline, and move on. Or perhaps you locked into a CD for an okay rate, only to find out a month later the rates have climbed. Forget about it. That CD is only one part of your overall financial picture. Expect that you won't always get the best CD rate or that you will buy mutual funds that will drop in value. Or that your house's property taxes may go up more than predicted.

Crossing the threshold from learning all that you can about finances to actually taking an active role in your finances is a big jump. And like everything else, learning and doing are two differnt things. Each financial decision you make will not be the right one, but that is okay. As long as you are making better ones than you did in the past, and your good decisions outweigh some bad ones, you will only improve.

In Real Life (IRL) - I studied finance in college, worked for a life insurance company for 9 years, belonged to an investment club for 4 or 5 years, and have always been a saver of money. So I should have known better. After testing the waters of stock investing as a member of my investment club, I decided to dive in on my own and I bought a few stocks - most of them were ones that my club invested in that appealed to me. We researched them, discussed them, and invested in them. And then I watched them, so I felt comfortable making the leap into my own investing with stocks I was familiar with.

Then one day I heard my boss talking about a stock that he was investing in. My boss was a very smart mathematician - the kind who can calculate compound interest in his head. He was also older than I and more experienced in investing. So when he mentioned this stock tip, I decided to buy some myself - no research, no discussion, no analysis. You can guess what happened next. The stock when down and down and down. Until finally, I couldn't stand it any more and I sold it. What was I thinking? I had READ all of the financial advice that says not to buy stocks on tips, to only buy after you have thoroughly researched it, and to see if it fits in with your financial goals. I did none of this. I bought on a "hot" tip. I did no research on it. And I have no idea if the nature of this stock even fit into my financial plan. This was a definite financial mistake. I sold it and moved on.

That's not to say that I wouldn't have bought some bad stocks on my own. I would and I have. But at least they would have been mistakes based on my research. Regardless, I have made this and many other financial mistakes. People more financially savvy than I have made financial mistakes. Heck, even Peter Lynch and Warren Buffett have made financial mistakes, I'm sure. It should be expected that a novice to investing and saving will make mistakes, too. But just keep on going. The most important thing to know is that you will do more things right than wrong, in the financial world if you keep on reading and keep on saving and investing. And that's what matters - not the financial mistakes you make along the way.

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