My job as critic of personal finance advice is made a lot easier if other writers concisely summarize their points of view in easy to digest and refute bullet points. It gets even better if the other writer is argumentative, taking a neatly delineated position on a question which I can contradict.
So when I saw that Free Money Finance yesterday posted a list of Money Myths, my heart leapt. And I was not disappointed. There were eight myths listed, with bullet point explanations and links to fuller arguments from previous posts. What could be easier?
By my scoring, one of the myths really is untrue, two are so subjective that it could go either way based on interpretation, and five are not myths.
The one actual myth is that “you can beat the market’s return consistently without taking any additional risk.” Assuming that by “you” is meant the typical person, then this is indeed false because consistently beating the market is something that can be done by only a tiny minority of people, almost all of them professionals.
The two subjective ones are “getting a higher return on investments is the best way to grow your portfolio” and “most people become wealthy through inheritance, a special talent, or some good fortune.” I am not comfortable with the general direction FMF is going with these two, but the definitions of “best way” and “special talent” are vague enough that I can’t really make the non-myth case.
Which brings me to the five true statements unfairly slandered as false.
Smart people are wealthier. As long as you are willing to interpret this to mean that they are on average wealthier, then this is certainly true. That does not mean that all smart people, or even most smart people, are rich, nor does it mean that all rich people are smart. But a randomly selected group of smart (or rich) people will be on average richer (or smarter) than the general population.
Free Money Finance supports the pro-myth argument on this by citing a particularly weak bit of junk science I discussed in July. (Since writing that post somebody sent me a working link to the paper discussed. It is worse than I supposed when I wrote the post.)
People who make higher incomes have a greater net worth. Of course they do. On average. Even The Millionaire Next Door takes as its base assumption that wealth is substantially driven by income and purports to discuss the determinants of wealth after it is taken into account.
This is really the same non-myth as above, since FMF supports the non-relationship between intelligence and wealth by conceding that yes, smarter people have higher incomes, but there is no relationship between income and wealth. That is the position taken by the author of the paper I just mentioned, but it is at odds with the actual data as provided in the same paper. (Income and wealth were found to have a correlation of 0.39. IQ and wealth came in at 0.16.)
Wealthy people drive expensive cars and live in expensive homes. Again, if taken as a literal absolute, that all wealthy people drive expensive cars, this is false. But I do not think that any reasonable person would understand the statement that way. Most people would take it to mean that there is a correlation between expensive car and house ownership and wealth, just as there is a correlation between smarts and wealth and income and wealth.
And does anybody really doubt that the average Mercedes or million dollar house owner is wealthier than the average American? There are more than enough rich Ford drivers and broke Porsche drivers to disqualify this as a hard if-then rule, but the relationship that a reasonable person would expect is certainly there.
When you give, you are hindering yourself financially. I suppose that the term “hindering” opens up some wiggle room, but the unalterable fact is that if you give away a dollar your are a dollar poorer. That does not mean that you should not do it, nor that giving away money does not bring non-monetary rewards.
Calling this a myth is really a religious belief. I have no problem with the idea that charity is doing God’s work, but the bastardization of that into a personal finance tip, that giving money away will make you materially richer, is bad money advice and likely poor theology as well.
A high income leads to happiness. FMF counters this saying that “a high income relative to those you know leads to happiness.” That is true, but hardly contradictory to the candidate myth. It is more of a clarification. Making more money may not make us as happy has we expect it will, but on the margin it does make us a little happier. If it didn’t we would all still be living in caves.
What all eight of FMF’s myths have in common is that they are intuitively appealing. Each is something that most would assume to be true if not told otherwise. And yet each is something that many of us would like to believe is false. Labeled as myths they reassure us that becoming rich is an attainable goal for all and something achieved by the wholesome and diligent rather than the especially talented.
FMF takes as motivation for the list that he is working on a speech to a group and is soliciting reader input. He ends by asking which of his myths are “something an audience would want to hear.” I think the answer to that is all of them, although the one about beating the market, the only unequivocally false one, is a bit of a bummer.