The Worst Kind of Financial Advice

A new research paper from an economist at Yale did a deep dive into 50 of the most popular personal finance books of all-time.

If you’re a personal finance nerd like me you should be familiar with the authors — Dave Ramsey, Suze Orman, Robert Kiyosaki, Ramit Sethi, David Bach and the like.

The point of the paper was to show how typical personal finance advice differs from academic economic models.

For example, most personal finance books say you should start saving from an early age to develop good habits and take advantage of compound interest.

The author of the paper, James Choi, disagrees:

Because income tends to be hump-shaped with respect to age, savings rates should on average be low or negative early in life, high in midlife, and negative during retirement. From this perspective, the common policy of making the default retirement savings plan contribution rate not depend on age is suboptimal.

The idea here is most young people don’t make a lot of money so they should enjoy themselves and put off saving for retirement until middle age when most people enjoy higher incomes.

So who is right here — the economist or the personal finance experts?

They’re both right and they’re both wrong.

Certain people do need to start saving when they’re young to develop good financial habits, even if it’s a small amount of money. Middle age usually does bring more income but also more responsibilities.

For some, there will always be a good reason to put off saving until later so they need to start early.

For others, they can plan things out better. They understand the typical lifecycle of income trends and will have no problem putting money aside when they’re older so they can enjoy their youth while they can.

It really depends on the personality, circumstances and emotional make-up of the person in question.

Far too many “experts” these days profess to have the singular piece of advice that will solve all of your problems.

Just read this one book — it will change your life!

Just follow these 10 steps and you’ll find success!

Just read this quote by some guy who died 2,400 years ago and you too can gain enlightenment!

Just follow the exact same path I followed and you are sure to end up rich!

The problem with this kind of advice is it fails to recognize the hard work, personal circumstances, temperament, timing and luck involved.

I have a hard time giving career advice to people for this very reason. My career feels like it has been random. One good or bad break in either direction could have led to drastically different outcomes in terms of where I ended up.

Jobs I thought I wanted but didn’t get. Chances I took that paid off. Others that didn’t. Good luck, bad luck and everything in between.

It feels like a lot of the stuff that’s worked out for me has come from some combination of luck, timing and hard work. I just don’t know which variables have carried the most weight because it’s impossible to know.

Everyone is different so there are very few pieces of advice that are universal.

There are personal finance books that sold millions of copies telling you not to buy a latte every single day.

Then came personal finance books that sold millions of copies telling you it’s OK to buy a latte.

Both books are somewhat right and somewhat wrong depending on the audience.

Some personal finance experts say you must have 6-12 months’ worth of cash saved up for emergencies.

This sounds like good advice on a spreadsheet but it’s unrealistic for a large portion of the population. When I first started working there is no way I could have afforded to save that much money because my income was so low. It would have taken me years to build up that much cash.

Now that I make more money I still don’t have that much in emergency savings because I think it’s a waste.1

Others would disagree with me and need to have that cushion to be able to sleep at night.

We’re both right and we’re both wrong.

When I was in college I knew a guy who left after his freshman year to go away to film school. When he came back to visit he made us all watch the Bill Murray movie Lost in Translation. He described it as a transcendent film.

I’ve always been more of a movie guy than a film guy so I didn’t really like it.

Maybe I was too young and dumb to get it while I was in college because when I re-watched it a few years ago I loved it.

My point is, it’s OK to change your mind.

For our first house, my wife and I were making double payments to try and pay off our mortgage as quickly as possible. Then we moved and rates kept going lower and I realized it made no sense to pay off mortgage debt with such favorable terms.

I think it’s nuts to pay off a 3% mortgage but others would disagree. I’ve talked to a number of people who have fully paid off their mortgage in recent years and not one of them regrets it.

We’re both right and we’re both wrong.

I know people who have gotten wealthy from investing in real estate. Then there are those who swear off ever buying a house because they feel it’s a waste of money so they rent.

I know people who work 80 hours a week at a start-up who hit the jackpot and became uber-rich in a very short period of time. Then there are those who work in a more stable job and manage to become the millionaires next door by slowly saving their money over time.

I know people who have 70% savings rates so they can retire by age 40. Then there are those who prefer to enjoy themselves while they’re young and don’t mind working until their 60s.

They’re all right and they’re all wrong depending on the situation.

Useful personal finance advice should never:

  • Make you feel bad about yourself.
  • Make it sound like it’s easy.
  • Make you believe you can become rich overnight.

And it should always take into account your personal circumstances.

It’s called personal finance for a reason.

When I was young and overconfident I used to assume there was a right way and a wrong way to manage your finances.

But after interacting with thousands of savers and investors over the years I know no two people are the same. Different strategies can work for different individuals.

You just have to figure out what works for you.

Michael and I talked about the different kinds of personal finance advice on this week’s Animal Spirits video:

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Further Reading:
All the Jobs I Didn’t Get

Now here’s what I’ve been reading lately:

1I believe a high savings rate gives you a big enough buffer so you don’t have to have an emergency fund that large. Plus I have other sources of liquidity if push comes to shove. To each their own.

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