13 Oct 2022 “All The Personal Finance Books Are Wrong”
That’s the title of a September article by Derek Thompson at The Atlantic. It’s provocative enough on its own, but wait until you read the subtitle: “They tend to treat their readers like fools without willpower. So you could argue that they’re wrong for the right reasons.” Yeesh!
The article examines a recent paper by a Yale economist named James Choi who compared the advice found in 50 popular personal finance books with that typically offered by modern economists. It’s all quite interesting, at least to me, but by far the most interesting piece examines advice around saving and consumption.
In most popular personal finance books, the advice on saving revolves around smoothing savings rates, meaning that typically a savings rate of anywhere from 10%-15% (or in some cases 20%+) is recommended for the working life of a person. This advice is often accompanied by admonishments on the importance of starting early (for compounding) and never stopping.
Meanwhile, economists think about this problem from the perspective of smoothing consumption, meaning that rather than saving some percentage of your income forever regardless of the “hump shaped” distribution of your lifetime earnings, you should instead be fine with a very low or even negative savings rate early in your career when your income is lower and you might have expensive things like kids around. But then the lifestyle that you live would be relatively stable as your income increases, such that your savings rate would then increase at a much higher rate during your peak earning years.
Neither the Dave Ramseys nor the PhD economists are flat out wrong here; people can and do make it work by smoothing savings rates or smoothing consumption. But I will note that when you assume on the one hand that your target audience are “fools without willpower” and on the other that they are robots with unlimited reserves of willpower, you are likely giving suboptimal real world advice.
In short, the two basic financial desires we have to deal with are:
- Life is short and I want to take that expensive vacation with family this year.
- Life is long and I don’t want to worry when I retire.
I guess in a perfect world and perhaps even in some people these desires do not come into conflict with each other, but for most of us the conflict is raging inside us and between us. Discipline is important and walking around saying “life is short” is generally a good way to make it shorter. But at the same time life is short and living obsessively in the future is generally a good way to never get there.
Part of the reason Beacon exists is because the only way to deal with this tension of now vs. later is through conversation and process and dynamic decision making. If rules of thumb could do the trick we’d just sell PDF files. How much to save, how much to give, how to invest well—these are questions a personal finance book can help with but probably never answer, because you can’t talk to a book. Talk to us instead.
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