Top 3 Investing Mistakes

The Dividend Guy started the whole top 3 investing mistakes thing. I am finally getting around to throwing my 3 mistakes into the mix. Luckily I haven't made too many mistakes as i was lucky to read about some of the common mistakes others have made and learn from them. So without further ado, here they are:

1. Investing in my RRSP - You're probably thinking what the?? I'm sure there will be some people that totally disagree with me here. Let me explain. My strategy is to invest in dividend paying companies and then live off those dividends. If I am investing in an RRSP, it has to be converted by the age of 71. If I convert it to an RRIF then I have to draw down on my capital every year. I forget the formula and percentages, but it is significant. I want to have control in how my money is spent and managed, and investing outside of an RRSP provides that best. Like I said, i just want to live off the dividends, not draw down on my capital.

2. Not Starting Sooner - If only I had started sooner! If i had started investing at the age of 20 instead of almost age 30 i would be in much better shape. Granted, I didn't have much money to invest at age 20. If only i had understood the powerful concept of compounding over time. It is a crime that this stuff is not taught in schools!

3. Investing in Bonds - Bonds barely stay ahead of inflation. If you want to hamper your wealth creation, then buy bonds. Now, when I am close to retirement i might shift some of my portfolio into bonds (within my RRSP at least). I am young and my risk tolerance is such that i have no business owning bonds. I own a bond ETF and i will be selling out of it soon. See this article as to why bonds are a bad deal.

What are your top 3 investing mistakes?

My Financial Goals

As you have probably noticed I have some financial goals listed to the right in bar graph form. I thought i should explain what these goals are and why i have chosen these.

Emergency Fund

The first goal is an emergency fund. Due to a recent layoff (temporary) I have come to realize the importance of having an emergency fund. I have set a goal of $5,000, as this should provide for about 3 months of expenses should i ever lose my job. I hope to achieve this goal over the next 2-3 yrs. You can check out an earlier post about why you should set up and emergency fund.

Dividend Income

I have set a goal of $40,000 of dividend income. This is the amount of income i would like to be collecting from dividends when i retire. As you can see it is currently at $0, as i have been investing inside of an RRSP until just recently. I am changing my strategy to invest outside of an RRSP in companies that grow their dividend year after year. I hope to retire in about 20-25 yrs if all goes well.

Down Payment

The third goal is to have $10,000 for a down payment on a home. I am currently renting and want to get out of that rut so i am building my own net worth and not someone else's. I am well on my way to this goal and have about 75% saved thus far. I am trying to decide what to do with my tax refund and I may put it toward my down payment. We will see. I hope to achieve this goal in the next 6 months.

Bike Loan

I have a bike loan for a motorcycle I bought a couple of years ago. At this time i have no plans to pay off the loan early, as i want to concentrate on some of the other goals. For now i will be paying the monthly amount until the loan expires. As you can see i have about $8,000 left in the loan and it will be paid off in May 2011.

Net Worth

The final goal is a net worth of $1,000,000. I pretty much just pulled this number out of the sky. It is not nearly important to me as the dividend income of $40,000/yr. However, I would still like to achieve this goal even though it will take quite a long time. I obviously have a long way to go on this one but hope to achieve it by the time i retire. You can learn how to calculate your net worth here.

These are my current financial goals. Hopefully they will inspire you to set your own!

What are your finacial goals?

Income Tax Refund

I just got my income tax refund back the other day. Certainly when one receives money back, there is always the temptation to spend it on something we want. I am no exception and my first thought was, new computer or a plasma tv! I am going to resist temptation though and put the money towards one of my financial goals. I haven't decided yet, but it will probably be the home down payment or the emergency fund. If you are tempted to spend your refund, stop and ask yourself if you really need that item. More than likely you don't! Instead, spend it on a good dividend paying company that constantly increases the dividend. You will thank yourself later!

Why Set Up An Emergency Fund?

Why have an emergency fund? One word, emergencies. When i say emergency, I mean a true financial emergency. Not having enough money to pay for the vacation you have been planning for the last 6 months is not an emergency. An emergency would be if you have lost your job and you don't have the money to pay the monthly mortgage payment. You should only use your emergency fund if really necessary.

I have known for a long time that everyone should have an emergency fund, but just recently came to realize that they are a very important part of financial planning. About one month ago I was laid off from work because my employer was affected by the American Axle strike. This jolted me into the realization that I don't have an emergency fund and I might be needing one.

Thus far I have not needed to dip into an emergency fund because I had a lot of bank time built up at work and i will be able to collect unemployment. The unemployment cheque should hopefully be able to cover my monthly expenses such as food, rent, insurance, etc. However, if I was a home owner with a mortgage to pay for, i would probably be having to use some emergency fund money.

When you set up an emergency fund it is important that you can easily get at the money. You do not want it locked up in some financial vehicle where you can't get your money out easily or not at all. I would recommend a high interest savings account. There are many online and they are insured by the Canadian Deposit Insurance Corporation (I believe FDIC in the US).

The Lesson

We can all learn something from my mistake. We should be saving for a rainy day, because invariably that rainy day is going to come sooner or later. Even if you can only set aside $20/mth into an emergency fund, you should start yesterday. That $20 may seem like a small amount but over time will grow. After one year you would have $240. As for me, I have set a goal of a $5000 emergency fund. I have some saving to do!