opinion | Good personal finance gurus may offer less than great advice. So?

What makes good personal finance tips? This should be an easy question. As University of Chicago professor Harold Pollack once explained, the basics are very basic, and can fit in with record card A concept that we eventually turned to book.

But much of what popular finance gurus and the public consider common sense guidelines to be less than ideal, according to Yale economist James Choi, who has studied Some inconsistencies between this advice and what economic theory recommended in a recent working paper I published National Bureau of Economic Research.

Choi’s conclusion: Economists can be like Mr. SpockLogical to the extreme, while teachers are more attuned to psychology and readers’ lower financial literacy – in other words, they offer advice they will understand and follow rather than better, more complex, and less emotionally appealing guidance.

Is he right? definitely. But as someone who has worked in the trenches of personal finance, I believe the problem of suboptimal advice also reflects a society that confuses money management strategies with ethics, and financial incentives to give advice.

with Sales at the highest level in 10 yearsThe personal finance book business is booming, driven by readers seeking financial knowledge and independence. It is said in book publishing that many are repeat customers. And apparently, many want to hear the same thing over and over again.

Take, for example, the issues of spending, saving and getting rid of debt – all areas in which Choi finds a break between educators and economic theorists with a Ph.D.

Choi, who surveyed the 50 most popular personal finance books on the Goodreads website, said popular financial advisors tend to push the tortoise strategy: slow and steady wins the financial race. Save at least 10 percent of your income, from your first job onwards. Maintain a suitable emergency fund. When you pay off the debt, put the majority of your resources toward the highest interest bill first, but rather the smallest bill, regardless of the interest rate, even if it’s a much smaller amount—because the “snowball method,” as it’s called, will give you a stimulus boost. Don’t gamble on adjustable mortgages; Fixed price is the best.

choi pointing to This often contradicts what economic theory advises. Many people will earn larger salaries as they get older, allowing them to increase savings. Keeping large amounts of cash on rainy days in secure, low-interest accounts is not always ideal. And yes, please keep interest rates in mind when it comes to debt: you’ll pay it off faster if you pay the highest interest bill first, while the snowball method can cost a lot of money in accrued interest. And uh, sometimes the adjustable rate mortgage is the best. (Disclosure: Choi specifically singled out the book I co-wrote with Pollack as offering less than “perfect” mortgage advice.)

Count me mostly alongside famous teachers. (I have too also Argues Against the “snowball way” for years.) Bad things can happen to good people (even Ivy League alumni!), and many don’t make up for lost time, and instead increase their spending with each increase. Misfortunes ranging from ill health to job loss can be financially disastrous.

But it is also true that American society—and many financial educators—confuse saving habits with moral virtue. Religion is seen as a personal failure: it is “Stupid“In the words of leading financial guru Dave Ramsey, who has also told people that the need to rely on government assistance — for example, a federal stimulus check during a pandemic — is a sign that they got it wrong. We should eat.”rice and beans“So we can pay our bills.

There are no objective criteria for a guru’s financial status, other than a desire for opinion and the ability to get eyeballs, whether it be via a book or a TikTok post. There is money to be made here. Ramsey’s empire, for example, includes everything from national radio shows to personal seminars on getting out of debt.

However, Choi says, in most cases, it is better to take popular advice than take no action, and their guidance may be “more practically useful to the average individual” than the advice of economists. Even when I was thinking, ‘This is wrong,’ he told me, ‘it wouldn’t get people to a terrible place.

Choi excludes Robert T Kiyosaki from “Rich Dad Poor DadFame, from Urging people to take advantage and get rich quick in real estate, Li Choi described something as “terrifying.” It should be noted that Kiyosaki’s advice is very popular – his most famous book was in The New York Times Bestseller List During the greater part of a decade – people have paid Tens of thousands of dollars To attend seminars bearing his name.

Choi himself teaches a personal finance class. When I asked him if he would advise students to follow economists or teachers, he objected. “I tell my students that all I want them to do is have a plan,” he told me. Ask yourself, “Will I end up in a reasonable place?” “

In other words, we all need our own individual index cards – informed by best practices, but also by our personality, our priorities, and our luck.

Leave a Comment