Our Personal Finance Problem

This is the 100th post to Bad Money Advice.  In honor of that milestone I thought I would get a little more philosophical and reflective than usual.

I am generally very suspicious of arguments founded on the assertion that never in history has some aspect of our lives been more difficult or challenging than it is today. Some parts of life in the good old days may have been less Train_wreck_at_Montparnasse_1895 complicated then they are now, but it was a brutal simplicity.   I remember years ago when somebody remarked to my grandfather how dirty the streets in New York had become.  He rolled his eyes and pointed out that when he was a child those streets where covered in horse manure. And you may think it is stressful to raise kids today, but consider what it was like a few hundred years ago when half of them died before reaching adulthood.

But there is at least one part of our lives that really is much more difficult and harder than it was hundreds of years ago.  That is the somewhat amorphous subject that we call personal finance.  Don’t get me wrong, I am in no way pining for the old days.  In the past there was no such thing as an activity called personal finance for most people because, by our standards, in the past most people spent their lives broke.  A person might save food for the coming winter, but not money for retirement.  Until recently, there was no such thing as retirement for ordinary folks, and, if you go back far enough, hardly such a thing as money.

Most people throughout most of history lived only barely above subsistence.  You worked, rather literally, to keep food on the table and a roof over your head.  If there were coins left over, your choices of what to do with them were limited.  There were no malls to go to, no credit cards to max out, no cars to lease or buy, and no vacations to go on. Medical expenses were also not a big worry.

Even as recently as a hundred years ago, knowledge of the ways of money, of what we now call personal finance, was a non-issue for all but a small elite. There was just so little leeway for a person to do it either well or badly.  But as the 20th Century progressed, and the wealth of the average American grew geometrically, so did the importance and difficulty of personal finance.   Indeed, it probably grew faster.  Today, the impact on a person’s material life of doing personal finance well or badly can be profound.

We are now so accustomed to this rapid growth in the number of choices that we have that we tend to lose sight of the fact that this is all so new and so much more bewildering than it was even a few decades ago.  Lost in the discussion of defined contribution plans occasioned by recent events is the fact that these schemes are themselves only a few decades old.  Current retirees are the first generation to have used them to fund a significant part of their retirement. Today’s 60 year-olds are the first ones to experience a widespread collapse in their self-directed retirement savings just before they planned to retire.

Again, this is all a side effect of the massive increase in the wealth of the average American over the past few generations, which has meant a similar increase in the number of available financial choices.  A person would have to have a very grim view of human nature to think that having more choices was a bad thing.

But by the same token, the consequences of making poor choices have also grown and somehow, as a society, our understanding and knowledge of personal finance has not kept up.  It is as if we all had cars but did not know how to drive them.  There is an entire area of common knowledge missing from our heads.

I spend a lot of time pointing out the faults of the big personal finance gurus such as Suze Orman and Dave Ramsey.   In a way, this is a bit unfair to them.  They are media personalities.  In a more perfect world, they would be the equivalent of, for example, CNN’s healthcare correspondent or a host of a radio talk show on healthy living.  Those roles have their place, but nobody would consider them to be a viable substitute for doctors and hospitals.  The problem is that with regard to personal finance, we have no doctors or hospitals.  We have only Suze and Dave and their ilk.  And in the land of the blind the one eyed man is king.

My self-appointed role is as the guy who points out what is wrong with what little personal finance advice and education we now have. A person could argue that this was counter-productive, that what we have got now should be embraced as a good start and built on. I do not think so. Pretending that mainstream personal finance advice is wise and thoughtful encourages a complacency that the problem is not as bad as it is.  For example, it has been suggested that all we need to do is require high schoolers to take a course in personal finance, a plan which assumes the miraculous appearance of teachers able to teach the course and textbooks for them to use.

Moreover, a lot of the personal finance advice out there is just plain bad.  If I can stop one person from doing something really stupid based on the advice of “experts” then this will have been all worthwhile.

My hope is that by starting a dialog on the merits of personal finance advice, and the state of personal finance in America, we can begin what will undoubtedly be a long process of building that missing bit of common knowledge.

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