The Problem With Most Financial Advice

Why Personal Finance is a Bit Too…Personal

Photo: Ales Krivec on Unsplash

Though you have probably never heard of Wally Jay, he is considered one of the greatest judo instructors of all time.  Despite never once competing in judo (only in jiujitsu), Jay consistently produced champions in judo and other martial arts.  One of Jay’s key insights was that not everyone learned like he did:

The biggest mistake is for an instructor to teach exactly the way he was taught.  Once a teacher said to me, “All of my boys fight like me.”  Then when we got on the mat, not one of his students could beat one of mine.  Not one.  So I told him that he had to individualize his instruction.

This lesson seems to be lost on many financial commentators/bloggers who provide personal finance advice based on their own experiences, which are typically outside the norm.  The exceptions become the rule and then personal finance becomes a bit too…personal.  I am reminded of the words of Richard Hamming:

Please remember that what made you great is not appropriate for the next generation.

One prime example of this comes from one of the finance bloggers that got me into this scene, The Financial Samurai (aka Sam).  Sam has done a lot of great work, but there are times when he applies his personal experience far too stringently when giving advice to others.  The best example of this is his post titled “The First Million Might Be the Easiest: How to Become a Millionaire by Age 30”.

In this post Sam breaks down his journey to $1 million by age 28.  If you don’t have time to read the whole thing, the summary comes down to:  have one incredible lucky trade in the Dot Com bubble (make 50x), earn a boat load of money in finance, and live a relatively frugal lifestyle.  And for his age, Sam was making a “boat load” of money.

Between the ages of 24 and 25, Sam increased his net worth from $260,000 to $400,000 by saving 70% of his after-tax income.  Even if we assume 10% of the gain in his net worth was asset appreciation (despite a falling stock market), this means that he earned something like $160,000 in after-tax income as a 25 year old.  It’s not an unbelievable sum, but easily puts him in the top 1% of income earners for his age.

So, how do you become a millionaire by age 30?  Make a ton of money and don’t spend most of it.  Shocking, right?  The issue is that this advice just isn’t an option for basically everyone.  And I am not talking about the 61% of Americans that couldn’t cover a $1,000 emergency expense directly from their savings.  Even for people like me, who were born with lots of advantages and also received a great education, it would have been anything but “easy” to earn this much so quickly.

The trouble with Sam’s advice is that it is based on his atypical/outlier experience, but he doesn’t present it that way.  It reminds me of this brilliant comic from XKCD:

Just like the news never interviews the people that didn’t win the lottery, we rarely hear from the people who followed a particular set of financial advice and never got rich.  This is known as survivorship bias and it has infected our industry like the plague.  They say that, “history is written by the victors,” well so is most of the financial advice.

Now, of course, it is probably better to listen to a self-made rich person than a self-made poor person when it comes to financial matters.  However, this doesn’t imply that the rich person understands how they got rich.  It’s easy to come up with a story for how you earned your wealth after you earned it.  It’s like shooting an arrow and then painting the bullseye.

What’s hard is finding a person who creates a system (and publicly documents it) while they are poor and then uses that system to get rich.  Of course, even this person could have gotten lucky, but we could at least try to test this.

This concept, known as the post hoc fallacy, explains how individuals come up with causal explanations for their success though these explanations may be inaccurate.  A passage from More Money Than God summarizes it well:

The lesson is that genius does not always understand itself—a lesson, incidentally, that is not confined to finance.  “Out of all the research that we’ve done with the top tennis players, we haven’t found a single player who is consistent in knowing and explaining exactly what he does,” the legendary tennis coach Vic Braden once complained.  “They give different answers at different times, or they have answers that simply are not meaningful.”

So the next time a finance guru claims that they got rich because of X or Y or Z, remember that the full story is usually more complex than that.

The Real Secret to Getting Rich

Last year an article triggered most of the internet by claiming that you should have 2x your annual salary saved by the age of 35.  I was fortunate enough to have saved 2x my salary by the age of 27.  Why haven’t I written about my “secret”?  Because the “secret” is the thing in personal finance that no one wants to talk about:  it’s easy to save money when you have a high income.

Genius revelation, right?  Call the Nobel committee for me.  Tell them its pronounced “Ma-Julie.”

In all seriousness, you can talk about cutting expenses all you want, but it’s income that builds wealth.  So when I hear a blogger say they saved 70% of their after-tax income and then I find out they made easily over $200k, their “sacrifice” is a bit hollow.  Yes, there are people who make $200k+ at age 25 and blow it all, but I can tell you that it’s not that hard to save when you make a lot and have few liabilities.

How do I know?  Because I was easily able to save 40% of my after-tax income without ever creating a budget.  I never analyzed what I was spending because I didn’t need to.  Yet, I traveled to 15 countries, dined at expensive restaurants weekly, and lived in an apartment in one of the nicest areas of San Francisco.  Where was the sacrifice?  There wasn’t any.

And I am supposed to tell you how to get wealthy?  LOL.  Earn a high income and just keep buying.  Great advice, right?

Unfortunately, the sad truth is that most Americans will NEVER be able to do this.  They will never earn enough money to invest and get rich.  Remember that 54% of U.S. households don’t own any stocks and 69% of working Americans save 10% of their income or less (with 21% of working Americans saving nothing at all).

This is why the personal finance industry loves the “cut your lattes and get rich” style of advice.  They love it because it opens a new door in a world where the other door (high income) is closed for most people.  It makes the dream seem attainable.  But it’s all bullshit.  How do I know?  Because, as my colleague Ben pointed out, to get rich by “cutting lattes” you need to earn 12% annual returns!  This is ~3% above historical averages (when compounded).  Math.  Simple math shows it’s a fantasy.

My only solace is knowing that your life satisfaction doesn’t depend on your finances beyond a certain point.  As I have said before, “It’s not about the money.”  Then again, why would you listen to me for financial advice?  I’m one of the victors.

Thank you for reading!

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This is post 121. Any code I have related to this post can be found here with the same numbering:

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42 Responses

  1. Anonymous commented on Apr 23

    Congrats on the expensive restaurants

  2. Anonymous commented on Apr 23

    Thanks for the shoutout! I realize that most of my wealth is mostly luck, which is why I’m trying to recreate the magic by building Financial Samurai into a worthwhile site to see if I can do it again.

    We’ve all got the ability to write and create. Blogging doesn’t require much money. Let’s see what happens.


  3. Anonymous commented on Apr 23

    On point and very true. I love that you wrote about unspoken true. It is a lot about how high you earn, but still some of those stories can inspire few people to create something similar.

  4. Anonymous commented on Apr 23

    This is so spot on, no one ever saved their way to being rich.

  5. Anonymous commented on Apr 23

    Love your work, and will keep reading you, but half of this message is trash. Granted, high income makes it a LOT easier to save a lot.However, if an enlisted soldier can earn the equivalent of 40-50K, and save half of what they make (it’s not common, but it’s possible) your message (given your well-deserved authority) is hyper discouraging to folks who might otherwise have the discipline to save even with a low income.

    • Nick Maggiulli commented on Apr 23

      There is a difference between saving to life a comfortable life (what you discussed) and getting rich. I am arguing that most Americans will never be rich, not that they shouldn’t try to save or live comfortably. Most of the “get rich” advice is disingenuous in this way. Hope that clears this up.

  6. Anonymous commented on Apr 23

    This is great stuff. I’m a financial planner, and I encounter people regularly who have little hope of anything above a subsistence lifestyle due to low income.

  7. Anonymous commented on Apr 23

    The point if saving and investing is not to get rich: it’s to not die poor.

  8. Anonymous commented on Apr 24

    Totally agree with your comments about Financial Samurai – disingenuous to act like he is like mainstream America when he is wealthy (ie. acting like it was a great sacrifice for him to take time off when his son was born when it wasn’t really a sacrifice at all as he is wealthy – not the same tradeoffs as a parent needing to juggle work & home life). While it is hard for many Americans to achieve FI through saving 40-50% of one’s salary, it can be done. Most Americans just don’t want to do the hard work to sacrifice what it takes to achieve.

  9. Anonymous commented on Apr 24

    As a South African financial adviser I fully agree with what you say ,and nail on the head accurate!
    In a way advice may become just a mere boast and not pertinent advice at all

  10. Anonymous commented on Apr 24

    Very well said Mr Ma-Julie.
    And true indeed.
    If this were not the case, the world would not be filled with so many one-hit wonders.
    But it is – and they are.
    Thanks for that refreshing breath of fresh air.

  11. Anonymous commented on Apr 24

    Keep the good work! I love your blogs and have read every one of them. I have a lot of doubts on those FIRE stories and they share some similarities in your blog.

  12. Anonymous commented on Apr 24

    Hit the nail on the head, Nick. That was my issue when I read FinSam on his $1 million. I still enjoy reading on the site, but most FI/RE blogs have a big survivorship bias. Also, as dad said, “You make money to spend money”, but do so while keeping your future secure. Balance is the key to life.

  13. Anonymous commented on Apr 24

    Great work! Obviously having a high salary makes it easier to get rich, but don’t forget the crazy amount of spending going on in most middle-class households “who don’t make enough to save”. They drive around in leased Chevy Tahoes and live in houses that have more bathrooms than occupants. Not saying everyone lives like that, but look around — not hard to spot at all.

  14. Anonymous commented on Apr 27

    This article really shaked the FIRE community!

  15. Anonymous commented on Apr 27

    Very well written. Fascinating to consider a level of abstraction above the various blogs. I think when people ask you what were your secret steps to success, that’s probably a wrong question and not one that Mr or Ms Success can accurately answer because they probably never consciously chose to take those actions. They would probably be more accurate in describing who they were being all those years and what their presumptions were about becoming successful. That could evoke meaningful answers such as: I always listen over to increase my income in my 30s or I always considered whether my prospective purchase was an asset or liability. Even with this, I am 100% sure there will be some things that if improved could have gotten them much further that they are.

  16. Anonymous commented on Apr 27

    Quote: “…you can talk about cutting expenses… but it’s income that builds wealth…”. A $10 million income with a $10 million expenditure does not build wealth. What’s important is income minus expenditure. They are both important.

    Quote: “…69% of working Americans save 10% of their income or less…”. For many (but obviously not all) it’s not because they CAN’T save, rather that they prefer and choose to spend. Median US income in 2017 was $61372 (Wikipedia), it will be higher now. Anywhere near that income is easily sufficient for most to save over 10% if they CHOOSE to do so.

    Income and expenses are not assigned by chance, they’re heavily dependant on an individuals choices. Most can choose to lower high expenses. Changing income takes more effort, but people regularly retrain, work overtime, pursue raises/promotions, move jobs, take on second jobs, run their own business, etc, etc.

    For people on or above the median US income, it’s a matter of choice whether to retire early. That’s many tens of millions of people. The reason most won’t is that it means making choices that take you out of the high-spending mainstream and that’s psychologically and materially uncomfortable. It’s much easier to dismiss it as impossible for all but the rich, because otherwise you might have to admit that you only have yourself to blame. Ouch!

  17. Anonymous commented on Apr 27

    Perhaps this is a function of who a pay attention to, but I see a lot more people telling me that other people are telling me that income doesn’t matter, than I see people actually telling me that income doesn’t matter.

    A lot of people say that income is not the only thing that matters, which is absolutely correct.

    What kind of returns will I earn by not putting the latte on a credit card which I don’t pay off in full every month? Not getting an overdraft fee? Not bouncing the rent check because the money that should have been there was not?

  18. Anonymous commented on Apr 27

    Sir, this is one of the best observations you’ve made!

  19. Anonymous commented on Apr 27

    Funny how Samurai came back with a cheesy answer. After he became wealthy and got on the cusp of ‘advertising’ his luck as personal finance advise. Now he claims to prove if he can earn a nice living with a blog??? Duh, he like other prominent bloggers got to the right spot on the right time. All they need to keep ‘spinning the stories’ so, the clicks keep coming and advertising dollars will drip for life unless they get bored and sell the site. Try building a blog and writing for years while you’re working a $50-60k 8am-5pm job (commute is another 1-2 hours) and have 2 kids. It’s just bizarre reading such blogs. Luckily I got myself early that I was wasting time.
    Lies sell well. If he or any bloggers disclosed immediately from the start that they earn $150k-$300k, who would read them?

  20. Anonymous commented on Apr 27

    Very much agree with this, I have thought similarly for some time. Most FI bloggers worked in finance/IT and made a huge salary and when you do that, it’s pretty easy to save. Additionally, most seemed to hate their jobs so much that they were desperate to leave and retire – why waste 10 or 15 years doing something you hate just for the money? Personally I couldn’t (and didn’t) do it. Do something you love and you will never work a day in your life. I have friends stuck in finance and property jobs now, in their 40’s, addicted to the money, while myself who has nearly always been self-employed, effectively semi-retired at 38 and I work 4 afternoons per week. You don’t need to save £1m in the bank if you have income. The FI bloggers seems to all go back to starting small businesses anyway – my question is: why didn’t you just do that in the first place?! And you would have saved yourself 15 years stuck in your cubicle looking out the window, asking your boss if you can take a days holiday of your own life (working life is the most bizarre state of conformity).

    That said, there’s so much knowledge and finance wisdom that FI bloggers offer which have very much guided my investment philosophy over the last couple of years. In summary, read FI blogs and take the stuff you agree with and makes sense – and ignore the other stuff!