I was 19 or 20 years old when I first started investing.  I diligently put money aside every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month.

Sounds like I was off to a great start, right?  Wrong!

Related: How Young Investors Can Get Started

Even though my intentions were good, my first attempt at investing for the future was a complete disaster.  Here’s why:

No Plan

It’s good practice to save a portion of your income for the future, even at a young age.  The problem for me was that I was still in school and didn’t have a plan – I didn’t really know what I was saving for.

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Related: The Best Time To Start Saving Is Now

Unfortunately I was saving for retirement at the expense of any other short term goals, like paying off my student loans, buying a used car or saving for a down payment on a house.

No Budget

I worked part-time while I was going to school, but the hours were irregular.  I never developed a proper budget to make sure that my school expenses, living expenses and partying expenses were under control.

The results were predictable; I spent more than I earned and then resorted to using a credit card to get me through most months.  It didn’t take long to build up $5,000 in credit card debt, when all the while I was still putting a couple hundred bucks per month into my RRSP.

Related: The Best Balance Transfer Credit Cards

No Savings Account

Speaking of RRSPs, what was a 20-year old kid doing opening up an RRSP when he’s making $15,000 per year?

There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket.  I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been invented yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

And carrying credit card debt (at 18% interest) alongside of my investments was a bad idea.

No Clue about Fees and Tracking Performance

Like a typical young investor I used mutual funds to build my investment portfolio.  I was encouraged to select all-equity growth funds because, I was told, they would deliver the highest returns over the long term.

What the bank advisors don’t tell you is the management expense ratio (MER) on some of these funds are over 2.5% and those fees will have a negative impact on your investment returns.

Related: How Index Funds Compare To Equity Mutual Funds

Bank advisors also don’t tell you what benchmark these funds are tracking (and trying to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.

No Choice but to Sell

My credit cards were maxed out and I was living paycheque to paycheque with no way to break the cycle.  I had no choice but to raid my RRSPs to pay off my credit card debt and get my finances back on track.

Taking money out of your RRSP early means you’ll owe taxes up front.  Withdrawals up to $5,000 are subject to 10% withholding tax, between $5,000 and $15,000 will cost you 20%, and withdrawals over $15,000 will cost you $30%.

Your financial institution withholds tax on the money you take out and pays it directly to the government.  So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000.

Related: Selling Your RRSPs Early Will Cost You

In addition to the withholding tax I also had to report the $8,000 as taxable income that year.

While I can’t really argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and caused me to start over from scratch.

Final thoughts

If I had to do things over again today I would have done the following:

  1. Create a budget – This is the foundation for responsible money management.  Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
  2. Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save within your TFSA instead of your RRSP like I did.  You can put $5,500 per year inside your TFSA and withdraw the money tax free.  You’ll contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
  3. Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward.  I’d take a three-pronged approach where I used a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement.  No doubt I’d be much further ahead today if I took this approach earlier in life.
  4. Use index funds or ETFs – Now that I know how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds (like TD e-series) or ETFs.  The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management fee (the MER on TD’s Canadian index e-series fund is just 0.33%).  Some brokers, like Questrade, also offer free commissions when you purchase ETFs.

Related: 4 Investing Mistakes To Avoid

Did you make similar mistakes when you first started investing?  How did you overcome them?

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13 Comments

  1. Gary on May 13, 2013 at 7:23 am

    Boy does that sum up at lot of my mistakes but I was 35 before I smarten up. I too carried credit card debt while putting money into RRSP’s. I cashed them all in to buy a cottage in 1981 with a 19-3/4% mortgage — later sold the cottage and put in a pool with the profit. When you are young you are invincible — time is on your side and then suddenly its not. I think schools should take a little more responsibility for educating our young people in these and other life skills. Great post Robb! I’m definitely passing this one on to my siblings. ( Now they will know how foolish their father was -lol)

    • Bryan@Fatwallet on May 13, 2013 at 7:46 am

      Agreed! I had a general finance class is school that went over things, and that helped a lot. However, it was an elective class. I personally thing a “personal finance” class should be a mandatory class!

      Show kids how credit card debt works, how much those student loans will cost them,etc.

    • Echo on May 14, 2013 at 4:22 pm

      @Gary – thanks for sharing your story, Gary. It’s nice to hear I wasn’t the only one making foolish mistakes when I was younger. The good thing (for both of us) is that we learned from our mistakes.

  2. Anne @ Unique Gifter on May 13, 2013 at 8:07 am

    Thanks for pointing out the importance of not saving at the expense of other goals. If you’re paying 7% on a vehicle loan, you probably shouldn’t be saving for retirement! Pay off the loan and then redirect all of those funds to savings!

    • Echo on May 14, 2013 at 4:35 pm

      @Anne – I agree, you need to prioritize your savings and debt payments. I should have put together a 5-year road map with short term savings goals and put my retirement savings on hold for a while.

  3. Chris on May 13, 2013 at 3:49 pm

    Thanks for the great article.

    Interestingly enough, my story almost exactly mirrors yours! I made the exact same mistakes in my early 20’s.

    Live and learn…

  4. LoonieLover on May 14, 2013 at 12:01 pm

    I have to say, I have mixed feelings about this post. Yes, you made some mistakes that cost you some money, but much more importantly, you learned from those mistakes. I’m sure we can all think of people who have made far worse financial mistakes who did NOT learn from them, either until they were much older, or at all.

    Also, it must be said that even though you needed to use your RRSP to dig yourself out of your problems, the fact is that you had that money available. Again, I’m sure we all know people who have run up credit card debt, and then have had no way to pay it off at all.

    So, yeah, you made some mistakes, but you’re the better for it, and, you could have left yourself in much worse circumstances if not for your (slightly misguided) attempts to do the right thing as you understood it at the time.

    As far as financial mistakes go, this is a pretty reasonable scenario overall, I think.

    (But I’m glad you won’t do it again!)

    Here’s a question: If somebody had explained your mistake to you before you realized it for yourself, would you have listened?

    • Echo on May 14, 2013 at 4:42 pm

      @LoonieLover – Good question. I think if financial blogs were around back then I would have enjoyed reading them and would have put some of the advice into practice.

      I felt like I had to be investing and, in the absence of a TFSA, I thought my RRSP was the right vehicle. I’m not sure someone would’ve been able to convince me to just use a savings account instead of investing.

  5. Joe on May 14, 2013 at 4:21 pm

    Awesome mea culpa and exactly what young people need to hear: the facts of life.

    • Echo on May 14, 2013 at 4:43 pm

      @Joe – Thanks! If I were as smart with my money at your age I might be able to “retire” by now 🙂

  6. Shafi on May 14, 2013 at 7:54 pm

    I find dollar cost averaging the best method for me to invest. The second is to diversify. The third is if you can’t stand the heat, get out of investing.

  7. Potato on May 18, 2013 at 2:24 pm

    Just a quick correction:

    “when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax I also had to report the $8,000 as taxable income that year.”

    The whole $10,000 should have been reported as taxable income.

  8. Anton Ivanov on June 4, 2013 at 9:27 pm

    Great advice! I’ve met so many people that think you can make thousands of dollars on the stock market a week. Most of them get very disappointed after a while and end up loosing a lot of money. Planning and knowledge are essential!

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