I first started investing when I was 19 years old. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!

Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why:

I didn’t have a 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 had no clue 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.

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.

I didn’t have any short-term savings

Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only 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 introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

I didn’t have a clue about fees and tracking performance

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

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 percent or more, and high fees will have a negative impact on your investment returns over the long run.

Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt 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.

I drained my RRSP early

I didn’t have a good handle on my finances in my 20’s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs in order to pay off my credit card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 percent withholding tax, while taking between $5,000 and $15,000 will cost you 20 percent, and withdrawals over $15,000 will cost you 30 percent.

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. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting 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 up to $10,000 per year inside your TFSA and withdraw the money tax free. You 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’d use 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 understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds 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. Some brokers also offer free commissions when you purchase ETFs.

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

Robb Engen is a fee-only financial planner and co-founder of Boomer & Echo, a Canadian personal finance blog.