Inexperienced, but Learning - Ten Years of Finances: Part 4

What’s wrong with Knight to Square C3?

This is Part 4 of an ongoing series reviewing the past ten years of our finances.

Soon after we bought our house, a friend suggested that we meet with an insurance rep who had helped them with some things. I had been wanting a life insurance policy and also to get some of the money sitting in our savings account into the market, so we agreed to meet. The only knowledge I had about life insurance was what Dave Ramsey’s Financial Peace University taught: get term life, but avoid whole/guaranteed life insurance at all costs. For being somewhat computer savvy, I was embarrassingly naive about the idea of online brokerages and I didn’t understand investing at all.

There were three outcomes from the meeting with the insurance rep:

Decision 1: Cost Analysis on Car and House Insurance

The rep took copies of our current car and house insurance bills and did a cost analysis with several different providers. He found savings of about 150 dollars a month for better coverage, both house and car included. This was nice!

Decision 2: Sign for Term Life Insurance

After some discussion, he proposed a term life insurance policy, which we eventually signed. In retrospect, the rates were not great, and the policy had an obnoxious automatic yearly increase in coverage and premium unless we were to opt out. Not paying any attention to it at first, it increased two years in a row before I stopped it. Plus, the policy’s cost was inflated by a supposed “feature:” the ability to buy more term life without a medical exam when the policy ended. I guess it was better than having nothing, but I’ve since canceled both of our policies and we’ve since signed for new ones that are cheaper with a much larger face value.

Decision 3: Make a Market Investment

We had a lump sum that we had wanted to invest but didn’t really know the best way to do so. After talking about our investing expectations–opting for aggressive growth, and open to risk–he took the cash and initiated the investment for us. He also set up a routine monthly Roth IRA contribution for each of us. (There’s more to this story. See below.)

In Retrospect, What Was Good: Doing a periodic cost analysis on car and house insurance is always a good idea, and the agent took care of everything for us. The rates we got were still very competitive for years after we signed the policies. 10/10, would recommend again.

In Retrospect, What I Would Have Changed: The lump sum Market Investment. A few details around my thought process at the time: First, we still had $40k in vehicle and student loans debt at around 6% interest, but I had a single minded focus on getting into the market. Second, if we had dumped the lump sum all at once into our loans, we wouldn’t have had anything liquid left except our cashflow account and a three month emergency fund in cash. This felt like too small a cushion to leave in the bank. Third, I felt like we could beat our loans’ 6% rates in the market while we kept making extra payments on the debt. And we did beat the market’s rate, fairly handily, except for this little detail:

That 5.73% sales charge, though. I did not understand the Class A fund load fees. I didn’t know what they were. All those load fees (including the lost investment opportunity) cost us well over $2,000 since then, plus we were put in actively managed funds with fairly hefty annual fees as well.

I was, unfortunately, years away from reading the Boglehead’s philosophy. Thankfully, the funds we were put into performed pretty well, so we still turned out ahead. If the funds hadn’t performed, this would have been much worse of an opportunity cost than it was. Especially since we decided to invest while paying down debt, a controversial decision on it own.

So, as advice to my former self who has some available funds to invest and wants to “get into the market”:

1. Read good books. Talk with someone knowledgeable.
2. Pick an online brokerage and invest in low or no-fee market index funds until (and possibly even after) you know what you’re doing. No need to work with a broker! Save lots of money in fees with similar returns.
3. Don’t neglect taking advantage of the Roth IRA. Enjoy tax free growth.
4. If you want to keep diving in…
5. Read more books.