All the Personal-Finance Books Are Wrong

James Choi, a professor at Yale University, was interested in teaching a different kind of personal-finance course. He wanted his curriculum to mix the conclusions of technical economics papers with the takeaways from glitzy best-selling books.

Several years ago, he started poring over dozens of popular personal-finance titles, which had sold tens of millions of copies, in order to get a sense of the counsel they were dispensing. “I got really interested in this universe of advice and how was it different from the advice that we academics were giving about savings and investment,” he told me. He realized that the most popular books tended to offer finance tips that were either significantly different from academic research or, in his words, “just dead wrong.”

Choi distilled 50 best sellers’ lessons in saving, spending, and investing and lined them up against the takeaways of mainstream economics research. This month, he published the results in a new paper: “Popular Personal Financial Advice Versus the Professors.” His conclusion: Economists tend to offer more rational advice, because they are dealing with numbers; best sellers tend to offer more practical advice, because they are grappling with human behavior—with all of its mess and irrationality.

Perhaps the starkest example of the difference between economists and popular authors was the advice for paying down debt. In economic theory, Choi said, households should always focus on prioritizing the payment of their highest-interest debt. Every other strategy is more expensive, since you’re just letting higher-interest charges linger on your monthly bill.

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But popular authors such as Dave Ramsey have suggested a nearly opposite approach. According to Ramsey’s “debt-snowball” method, you should pay off debt from smallest to largest, gaining motivation and momentum as you zero out your accounts. This is far from the cheapest strategy for eliminating debt—Ramsey admits as much. But his debt-snowball method isn’t about technical efficiency. It’s about building willpower. When people overwhelmed by their debt see a smaller account hit zero, it’s so rewarding that they’re motivated to continue paying down their larger balances.

Choi emphasized that he doesn’t necessarily think Ramsey’s approach is strategically wrong, even though it is technically fallacious: “I think of it like diet and exercise. You can tell people to eat broccoli and steamed chicken for their whole life. Or you can tell people about cheat meals to get their buy-in so that they’re motivated to stay on the diet.”

The best sellers’ emphasis on building momentum and motivation sometimes tips into less reasonable suggestions. For example, popular books frequently insist that people should save at least 10 percent of their income no matter what. You can think of this strategy as “smoothing” your savings rate: Rain or shine, you’re advised to stock away a consistent share of income to build a savings habit over time.

But life isn’t smooth. It’s spiky. Many people who barely earn enough to afford rent at 25 become rich enough to easily afford a suburban home at 40. Some parents deluged with day-care expenses find a huge chunk of cash freed up when their kids move on to public school. For this reason, Choi said, academics are more likely to defend low or even negative savings rates for young people in anticipation of higher savings rates in midlife. This is the opposite of smoothing your savings rate; it’s consumption smoothing.

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These methods are more than competing personal-finance strategies; they’re almost like competing life philosophies. Smoothing your savings pays homage to a psychological reality: Habits require discipline and practice. If most people are bad at suddenly changing their savings behavior in middle age, then advising them to sacrifice while they’re young is reasonable.

But consumption smoothing pays homage to an existential reality: Life itself is the ultimate scarce asset. The future is unknowable, and religiously maintaining a double-digit savings rate through the worst squalls of life is not of the utmost importance. Having that special dinner with friends at 23 is, for instance, more valuable than having a couple hundred extra dollars in your retirement fund at 73. By this logic, building a budget that makes you comfortable and happy in the short term, even if that means varying your savings rate from decade to decade (or year to year), is the better approach.

This might be the deepest takeaway of Choi’s paper. Personal-finance best sellers succeed by blending theory and psychology in a way that takes human nature seriously and thus deserves the respect of economics professors. But those who spend a lifetime delaying gratification may one day find themselves rich in savings but poor in memories, having sacrificed too much joy at the altar of compounding interest.

Perhaps many of the most popular personal-finance books could take a page from economic theory: There is more to life than optimized savings habits.