The worst kind of financial advice

A new research paper from a Yale economist took 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 purpose of the article was to show how typical personal finance advice differs from academic economic models.

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

The article’s author, James Choi, disagrees:

Because income tends to hump with age, average savings rates should be low or negative early in life, high in midlife, and negative in retirement. From this perspective, the common policy of making the default retirement savings plan contribution rate age-independent is suboptimal.

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

So who is here, the economist or the personal finance experts?

Both are right and both are wrong.

Some people need to start saving when they are young to develop good financial habits, even if it is for a small amount of money. Middle age often brings more income, but also more responsibilities.

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

For others, they can plan things better. They understand the typical life cycle of income trends and will have no problem saving money when they are older so they can enjoy their youth while they can.

It really depends on the personality, circumstances, and emotional makeup of the person in question.

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

Just read this book, it will change your life!

Just follow these 10 steps and you will find success!

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

Just follow the exact same path that I followed and you will surely end up rich!

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

I have a hard time giving professional advice to people for this very reason. My run feels like it was random. A good or bad breakout 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. Opportunities I took that were worth it. Others that don’t. Good luck, bad luck and everything in between.

I feel like a lot of the things that have worked for me have come from a combination of luck, opportunity, and hard work. I just don’t know which variables have had more weight because it’s impossible to know.

We are all different, so there is very little advice that is universal.

There are personal finance books that have sold millions of copies and tell you not to buy a latte every day.

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

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

Some personal finance experts say you should have 6 to 12 months of cash saved for emergencies.

This sounds like good advice on a spreadsheet, but it’s not realistic for a large part of the population. When I started working, there was no way I could afford to save that much money because my income was so low. It would have taken me years to accumulate that much money.

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

Others would disagree with me and would need to have that cushion in order to sleep at night.

We are both right and we are both wrong.

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

I’ve always been more of a movie buff than a movie buff, 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 saw it again a few years ago I loved it.

My point is that it’s okay to change your mind.

For our first home, my wife and I were making double payments to try to pay off our mortgage as quickly as possible. Then we moved and the rates kept going down and I realized there was no point in paying the mortgage debt on such favorable terms.

I think it’s crazy to pay a 3% mortgage, but others would disagree. I’ve talked to several people who have paid off their mortgage in full over the years and none of them have any regrets.

We are both right and we are both wrong.

I know people who have gotten rich by investing in real estate. Then there are those who swear never to buy 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 startup that hit the jackpot and became super rich in no time. Then there are those who work a more stable job and manage to become the millionaire next door by slowly saving their money over time.

I know people who have savings rates of 70% so they can retire at age 40. Then there are those who prefer to enjoy themselves while they are young and do not mind working until they are 60 years old.

They are right and they are all wrong depending on the situation.

Helpful personal finance advice should never:

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

And you should always take into account your personal circumstances.

Is named staff finance for a reason.

When you were young and overconfident, you 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 that no two people are the same. Different strategies may work for different individuals.

You just have to find out what works for you.

Michael and I talk about the different types of personal finance advice in this week’s Animal Spirits video:



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Other readings:
All the jobs I didn’t get

Now this is what I’ve been reading lately:

1I think a high savings rate gives you a large enough reserve so you don’t have to have as big an emergency fund. In addition, I have other sources of liquidity in case of need. To each his own.


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