There's an old adage that gets trotted out at every elementary school fundraiser: If you think education is expensive, try ignorance.
Today I'd like to explore some of the consequences, both financial and non-monetary, of ignorance in my life through some illustrative case studies.
Case #1: Failing To Contribute To A Roth IRA During Internship
The Roth IRA was established in 1997. My transitional internship year began in 1999. During four years of residency, I missed out on the opportunity to invest $10,000 into a Roth IRA (limits were lower in those days).
If we simplify the math and assume I'd invested $2500 per year during residency in a Roth IRA compounded at 7% annually, I would have had $11,876.85 at the end of residency.
If I made no further contributions, again assuming a modest 7% rate of annual return (it would have been much higher in the past decade), that amount would be worth $35,062.41.
Some would say my far bigger financial mistake was to do a four year residency when I could have been out in three, which is a fair critique. I enjoyed residency in part because my schedule was less compressed, and this was a deliberate consideration in ordering my match list.
My lifestyle was better as a result, but I am fully aware that this is a luxury I enjoyed thanks to a debt-free education from my parents. I might have chosen differently if I'd had significant debt hovering over me.
Case #2: Continuing To Pay 1% Assets Under Management Fee To An Advisor As My Savings Grew
The assets under management (AUM) fee model can either be a great deal or a terrible deal for the consumer.
When you have few assets but the advisor has to do the work of creating and executing your investment strategy, the advisor invests many hours and reaps a low hourly rate.
In contrast, once you have accumulated substantial assets, after the initial work has been done to create your portfolio and the maintenance takes a few hours a year to perform, that same advisor is now making a high hourly rate based on your increased assets.
To adapt a term from medicine, the advisor is being paid out of proportion to the work he or she is doing.
After buying a home in 2009, we rapidly built up our invested assets. We should have negotiated a lower percentage, but I didn't know that was an option. That was before I knew to order off the menu.
My ignorance cost me a pretty penny over the ensuing years until I ultimately broke up with my financial advisor and assumed responsibility for managing my own portfolio.
Case #3: Replacing Bicycle Inner Tube Because I Did Not Understand How A Presta Valve Worked
In February I fell in love with cycling, and I've been riding on average two or three times a week since then. A friend gifted me a bicycle I would never have purchased for myself, and I've gradually been learning to maintain it under the guidance of a local bike shop I've grown to trust.
The fancy new-to-me bike had a different type of valve on the inner tube, and I noticed the rear tire was repeatedly requiring inflation prior to each ride. I assumed there was an air leak, and when I described what was happening to the bike shop proprietor we agreed the inner tube needed to be replaced.
The bike was in the shop for a couple of weeks while I was traveling, and on my return all appeared well. Then the front tire began to leak. An experienced cyclist friend, who spent several years working at the bicycle tour travel company Backroads in the south of France, happened to be visiting before I planned to take it in to the shop.
On inspection, he noted I'd failed to tighten a single nut on the presta valve that was causing the slow leak. He inflated both tires, tightened the valve, and I was good to go. Ignorance caused me to replace a perfectly good inner tube. More importantly, ignorance cost me the pleasure of riding my bike for a couple of weeks.
If you think education is expensive, try ignorance.
Errors of omission. Errors of commission. Errors that cost me money. Errors that lost me opportunities for enjoyment.
All these fall under a category I've nicknamed the moron tax.
I pay this tax in new and unexpected ways every year, and consider it among the most expensive continuing education costs I incur.
The hope is that every year it teaches me something in a new and unforgettable lesson, and that if I am truly learning from it, the amount I pay will continue to be a smaller proportion relative to the whole.
What financial screw-ups have led you to unnecessarily pay the moron tax?