What makes good personal-finance advice? This should be an easy question. As University of Chicago professor Harold Pollack once demonstrated, the basics are so basic, they could fit on an index card — a concept we ultimately turned into a book.
Choi’s conclusion: Economists can be like Mr. Spock, rational to an extreme, while gurus are more attuned to the psychology and low financial literacy of readers — in other words, offering advice they will comprehend and follow instead of better, more complicated and less emotionally appealing guidance.
Is he right? Absolutely. But as someone who has worked in the personal finance trenches, I suspect the problem of suboptimal advice also reflects both a society that confuses money-management strategies with morality, and the financial incentives of advice-giving.
With sales at a 10-year high, the personal-finance book business is booming, driven by readers seeking financial knowledge and independence. Many, it is said in book publishing, are repeat customers. And apparently, many want to hear the same thing over and over.
Take the issues of spending, saving and getting out of debt — all areas where Choi finds disconnects between the gurus and the PhD-certified economic theorists.
Choi, who surveyed the 50 most popular personal-finance books on the Goodreads website, said the popular financial advice givers 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 onward. Maintain an adequate emergency fund. When you pay down debt, put the majority of your resources not toward the highest-interest bill first, but rather the smallest bill, no matter the interest rate, even if it’s a significantly lower amount — because the “snowball method,” as it is called, will give you a motivational boost. Don’t gamble on adjustable mortgages; a fixed rate is best.
Choi points out that this often contradicts what economic theory advises. Many people will earn larger salaries as they age, allowing them to turbocharge savings. Keeping large sums of rainy-day cash in safe, low-interest accounts isn’t always ideal. And, yes, please do take interest rates into consideration when it comes to debt: You’ll pay it down faster if you pay the highest-interest bill first, while the snowball method can cost a lot of money in accumulated interest. And, uh, sometimes an adjustable rate mortgage is best. (A disclosure: Choi specifically singles out the book I co-wrote with Pollack as giving less than “optimal” mortgage advice.)
Count me mostly on the side of the popular gurus. (I have also been arguing against the “snowball method” for years.) Bad things can happen to good people (even Ivy League graduates!), and many don’t make up for lost time, instead supercharging their spending with every raise. Misfortunes ranging from ill health to a lost job can be financially catastrophic.
But it’s also true that American society — and many a financial guru — conflates savings habits with moral virtue. Debt is viewed as a personal failing: It’s “stupid” in the words of leading financial guru Dave Ramsey, who also tells people that needing to rely on government aid — say, a federal stimulus check during a pandemic — is a sign they messed up. We should eat “rice and beans” until we can pay off our bills.
There are no objective standards for financial guru status, other than a willingness to opine and the ability to get eyeballs, be it via a book or TikTok post. And there is money to be made here. Ramsey’s empire, for example, encompasses everything from a national radio show to in-person get-out-of-debt seminars.
Still, Choi says, in most cases, taking the popular advice is better than not taking action, and their guidance might even be “more practically useful to the ordinary individual” than the expert advice of economists. “Even where I thought, ‘This is wrong,’ it wouldn’t get people to a horrible place,” he told me.
Choi makes an exception for Robert T. Kiyosaki of “Rich Dad, Poor Dad” fame, who urges people to leverage up and get rich quick in real estate, something Choi described to me as “horrifying.” It’s worth noting that Kiyosaki’s advice is enormously popular — his most famous book was on the New York Times bestseller list for the better part of a decade — and people have paid tens of thousands of dollars to attend seminars bearing his name.
Choi himself teaches a personal finance class. When I asked whether he advises students to follow the economists or the gurus, he demurred. “I tell my students all I want them to do is have a plan,” he told me. “Ask yourself, ‘Am I going to end up somewhere that’s reasonable?’ ”
In other words, we all need our own individual index cards — informed by best practices, but also by our own personality, priorities and luck.