- ETF Enthusiast
Educating by mistaking: how our experiences build our financial education
Mistakes, we all make them. We get that little bit too impulsive and somehow end up with something we really don’t need. We get enticed by that cool looking car and convince ourselves that we can afford to pay that repayment back every month. We are all human. Some mistakes are more costly than others (especially those that involve borrowing money) but the most important thing about making a mistake is that we try and teach ourselves something from it.
Mistakes are tough, they drive feelings of regret and tend to lead towards avoidance rather than dealing with the mistake. Lessons may not show themselves immediately, especially when we are having strong feelings of regret, but if we can put away these feelings for a moment and practise some self-reflection these experiences will tally up into our finical education.
So in the spirit of learning, I decided to ask a few people about financial mistakes they made in the past, I asked them how these mistakes affected them and most importantly, what they learnt from it.
Brendan Dale @your_money_blog
I’m not so proud to admit it, but I’ve made many money mistakes! Luckily though, I’ve learnt from them and won’t be repeating any. One of my really silly mistakes was cancelling my car insurance when I changed jobs. My insurance had been handled through my employer at a discounted rate and I actually couldn’t afford any of the new insurance quotes I’d received. I was young and naïve and decided to just “wing it” and drive without insurance for a while.
All was fine for a couple of weeks but I’ll never forget the feeling when I discovered that my car had been stolen. My heart sunk and I was numb. It was my first car and one which I’d bought brand new. It was my pride and joy, even though it was just a little VW Chico. The worst part of this story though is that it wasn’t yet paid off and I ended up paying for it for the next 2 years; being reminded of my mistake with each months instalment!
The lesson learnt is obviously that one needs insurance. But more than that, it’s planning for unpredictable events in life. It’s weighing up the monthly cost of insurance versus the crippling effect of not having it. And it’s about understanding how much risk you’re willing to take.
Having said that, I don’t have pet insurance. I put aside a set amount each month for my cat and “self-insure”. It’s a strategy that I have put a lot of thought into and which I reassess each year. So far I’ve had one cat emergency and was able to cover the expenses from my fund, but a R4000 visit to the vet will never compare to a R250,000 new car!
Carly Barnes @ShareGalCarly
I wouldn’t say I’ve ever made a monumental financial mistake, luckily. But what I think can be equally damaging are those small little financial missteps which can stray you from your long term goals. I’ve made many of these, and continue to learn and adapt my behaviour every day – I’m only human after all! Some of these include using my credit card for stuff I really don’t need, not having enough money (or any) in an emergency fund so when things have gone sideways I’ve had to borrow or use my credit card which isn’t ideal. I once purchased a gym service for R5000 that I ultimately couldn’t use for health reasons and couldn’t get a refund – what a waste! I also withdrew from my TFSA in the first year I used it – it was a small amount, but knowing what I know now I would never do that again!
These seemingly ‘small’ mistakes add up and compound. The next thing you know your credit card is maxed, you’ve got more debit orders than what you want to think about and your car suddenly needs a service. It’s the stuff that wakes me up at 3am and sends me reeling into anxiety. And it’s those times when you're even less able to think logically and strategically resulting in another non-essential Uber Eats order, another ‘treat myself’ manicure and a ’I’ll-be-better-next-month’ grocery splurge.
It’s hard, sometimes really hard (especially when Zara is having a sale), but I’ve learnt to not be so impulsive in how I spend my money. I have to have challenging conversations with myself and ask: Do I really need this? And remember that what I have doesn’t define who I am. It’s just stuff. And peace of mind is priceless – there’s enough to worry about in this world that is out of our control; how I spend my money is something that I do have a say in. I’ve also learnt to not get cocky. When you get an increase or an unexpected payout from the tax man, you know where it should go – even when you’ve convinced yourself you can totally afford a new app subscription now, or you can start dining out every night. Stop, collaborate and listen – to the voice of logic. Pay down debt, invest as much as you can, put some away for emergencies and – maybe just a little for a rainy day too :)
Trevor Muchedzi @trevmuchedzi
EXCHANGE RATE – A SILENT ASSASSIN
Most references to financial mistakes centre around having excess debt. I unfortunately had the worst of both worlds: Excessive debt denominated in a hard currency!
Back in 2011, for some reason, I decided it was a good idea to take a year off and pursue an international MBA. The key driver was to earn an international recognizable qualification, to cover up for my undergrad which I had earned from a university no one had ever heard of.
I got admitted to INSEAD Business School and was awarded a €40,000 scholarship. The total cost for the MBA was ~€85,000 so I took a student loan of €35 000 (~R330 750 at a R9.45/€ at the time) to fund the shortfall. I left for Europe for the MBA and after graduation, landed a nice paying job with McKinsey & Company.
When I started paying off my MBA loan, the €/R exchange rate had weakened slightly to R10.50 and after two years of aggressively paying it off, the outstanding loan was down to €26,000. Then something happened I hadn’t envisaged: the blowout of Zuma’s maladministration. From the end of 2013, the Rand started to depreciate and when Zuma pulled his famous weekend move with the Ministry of Finance, it hit R18 against the Euro. On that day, my outstanding student loan balance shot up to ~R450 000. I owed more after two years of paying off the loan than what borrowed.
Key lessons
Avoid currency mismatch: Having a hard currency denominated debt when the bulk of your income is in a weaker currency is usually a recipe for disaster!
Currency devaluation has a devastating impact on personal finances than what most people recognize. My unfortunate situation got me thinking about the wider implications of holding assets that denominated in a weaker currency;
I came across an article which showed that, over the past 20 years, currency depreciation within emerging economies wiped out almost all capital gains on assets denominated in local currencies. In other words, in US$ terms, emerging market assets have not increased in value at all.
Although different countries have different experiences, the key message is that investors should be mindful of the long term impact of currency devaluation, the same way they do inflation
In 2016, I undertook a process to evaluate all my personal investments, both property and listed equities and I realised they had lost value in US$ terms over the past 10 years;
However, in that same period, I had paid capital gains tax on the same assets because of how our tax system work;
Therefore, I sold everything I owned and moved the funds offshore. It was a radical move but I am happy with it
Other anecdotal considerations
I also saw another report which estimated that 50 - 60% of South Africa’s consumer price inflation is imported through currency weakness;
Given the slowdown in economic growth and widening current account deficit, the Rand is likely to face additional headwinds in the short to medium term;
In conclusion, I believe the process of building your personal wealth should include diversifying some of your investments offshore. How much that should be is your personal choice!
Dylan Ross-Watt @10DylanRW
MY BIGGEST FINANCIAL MISTAKE – THE BEST ONE I’VE EVER MADE
My story about a financial mistake is a little different. It’s different because it’s not about money. “Wait, what?”, you might say. Surely a financial mistake is ALL about money. Let me explain by taking you back to 2014. I was an academic achiever completing a BCom Honours degree in Investment Management at UP (Tuks). I had just completed a holiday internship with Allan Gray and had a job offer to join them starting in January 2015. This was all part of the 5-year plan: graduate; get a good job; move to Cape Town; get rich; buy a house with a white picket fence; marry and have kids. We all know this traditional formula for the “perfect life”. What I haven’t told you yet is that I was also an achiever on the cricket field. Little did I realise at the time that this “hobby” of mine was actually a priority, and in fact it was THE priority in my life. It took a road trip to Oppikoppi (a music festival, if you didn’t know) and a thought-provoking question from a friend to help me realise it. The question was: “If money didn’t exist, and you never had to worry about paying for food, shelter, or anything else, and you had to choose something to do every day for the rest of your life, what would you do?”. The words flew out of me before I could even think about them – “I’d play cricket”. I was taken aback by own answer, and it made me question my whole life. That’s when I knew that my 5-year plan was starting to change. I pulled up the hand-brake on my corporate career, turned around and took the road less travelled by pursuing a career as a professional cricketer. Since then the road has given me opportunities to play in the U.K., do what I love on live television, rub shoulders with elite sportspeople, all the while putting food on the table (just about) and finding my true calling along the way – cricket coaching.
Now it hasn’t been all sunshine and daisies along the way – in fact from a financial perspective it’s been the biggest “mistake” I’ve ever made. This road has had many bumps, potholes and inclement weather along the way. The lack of job security and the inconsistency of income I have endured has meant that I haven’t been able to save well.
When I have saved, I’ve had to keep my portfolio low-risk due to my short-term cash-flow needs. With limited long-term savings in place, it’s not exactly the ideal strategy for an individual with a high-risk tolerance and a 40+ year time horizon. At times it has also meant no insurance on my car and personal belongings, no medical aid, high rental rates due to short-term stays between SA and the U.K., and many more financial limitations. I still find myself on this road now, but what if I did take the job offer at Allan Gray 5 years ago? I’d probably have my own home, no debt, a well-diversified investment portfolio, high-paying career prospects, and who knows, maybe a wife and kids too.
There are many “what if?” moments we face in life. I just wasn’t able to bare the thought of asking myself one day, “what if I didn’t pursue my dreams?”. There is little doubt that my choice of career seems like a bad financial decision right now, but it was never a financial decision to begin with. Like I said, my story is not about money. So the question is – was it a mistake? I’ll leave it up to you to decide. “If money didn’t exist… what would you do?”
Thank you so much to Brendan, Carly, Trev and Dylan for their contributions to this post.