A new research paper by economists at Yale University takes a deep dive into the 50 most popular personal finance books of all time.
If you’re a personal finance geek like me, you should be familiar with the authors — Dave Ramsey, Suze Orman, Robert Kiyosaki, Ramit Sethi, David Bach, and others.
The gist of this paper was to show how common personal finance advice differs from academic economic models.
For example, most personal finance books say that you should start saving at a young age to develop good habits and take advantage of compound interest.
The paper’s author, James Choi, disputes that:
Earnings tend to hump with age, so the savings rate should, on average, be low or negative in youth, high in middle age, and negative in retirement. From this perspective, the general policy of making default retirement savings plan contribution rates age-independent is suboptimal.
The idea here is that most young people aren’t making much money, so they should have fun and postpone retirement savings until middle age when most people enjoy higher incomes. .
So who are you here? An economist or a personal finance expert?
Both are correct and both are wrong.
Some people need to start saving at a young age to develop good financial habits, even if it’s just a small amount. Middle age usually brings more income, but also more responsibilities.
For some people, there’s always a good reason to put savings on the back burner, so you should start early.
For others, things can be better planned. They understand the typical life cycle of income trends and have no problem saving money when they are older so they can enjoy their youth as much as possible.
It depends a lot on the personality, situation, and emotional make-up of the person in question.
These days, so many “experts” profess to have the one and only advice that will solve all your problems.
Read this book and it will change your life!
Just follow these 10 steps and you’ll be on your way to success.
Just read these words of someone who died 2,400 years ago and you too can become enlightened!
Just follow the exact same path that I took and you will surely get rich!
The problem with this kind of advice is the failure to recognize the hard work, personal circumstances, temperament, timing, and luck involved.
I have a hard time giving people career advice for this very reason. I feel like my career was random. A good or bad break in either direction could lead to dramatically different results in terms of where you ended up.
A job I wanted to do but couldn’t get. The chances I took paid off. others who did not. Good luck, bad luck and everything in between.
I feel like a lot of what worked for me came out of a combination of luck, timing, and hard work.
Everyone is different, so there’s very little universal advice.
There are personal finance books that have sold millions that tell you not to buy a latte every day.
Then came a personal finance book that sold millions of copies and said you could buy a latte.
Both books are somewhat right and somewhat wrong depending on the reader.
Some personal finance experts say you should have six to 12 months of cash in reserve for emergencies.
While this seems like good advice on a spreadsheet, it’s unrealistic for most of the population. When I first started working, my income was so low that I couldn’t afford to save that much money. It would have taken years to amass that much cash.
Even though I have more money, I don’t have much emergency savings. Because they think it’s useless.1
Others disagree with me and need that cushion so they can sleep at night.
We are both right and both wrong.
When I was in college, I knew a guy who graduated freshman year and went to film school. When he came back, he had 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 buff than a movie buff, so I didn’t really like it.
I loved it when I saw it again a few years ago, so maybe I was too young and stupid while going to college.
My point is, it’s okay if you change your mind.
For our first home, my wife and I were making double payments trying to pay off the mortgage as quickly as possible. Then we moved, interest rates kept dropping, and I realized there was no point in paying off the mortgage debt on such favorable terms.
I think paying off a 3% mortgage is silly, but others will disagree. I’ve spoken to many people who have paid off their mortgages over the last few years and none of them regret it.
We are both right and both wrong.
I know someone who became a millionaire by investing in real estate. Others think that buying a house is a waste of money and rent it out.
I know someone who worked 80 hours a week at a startup, hit the jackpot, and became a millionaire very quickly. Then there are those who managed to become the millionaire next door by getting a more stable job and slowly saving money over time.
Some have savings rates of 70% and can retire by age 40. Others are willing to work until they are 60 because they want to have fun while they are young.
They are all right and all wrong, depending on the situation.
Useful personal financial advice should never:
- Don’t let yourself feel bad about yourself.
- Make it sound easy.
- Let me believe you can get rich overnight.
And it should always take your personal situation into account.
it is called Personal financing for some reason.
When I was young and overconfident, I believed there was a right way and a wrong way to manage my finances.
But after interacting with thousands of savers and investors over the years, I’ve learned that no two people are the same. Different strategies work for different individuals.
You have to figure out what works for you.
Michael and I talked about different types of personal finance advice in this week’s Animal Spirits video.
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References:
all the jobs i didn’t get
Well, here’s what I read recently.
1I don’t think it’s necessary to have such a large emergency fund because a high savings rate provides a good buffer. Additionally, if the push comes in, I have other sources of liquidity.
