The Billfold Book Club Discusses Helaine Olen’s ‘Pound Foolish’

it's my desk yo

I want to start the discussion of Helaine Olen’s Pound Foolish: Exposing the Dark Side of the Personal Finance Industry with a true story.

When I finally got a job that paid over $50,000 a year, I started doing all the right things.

I paid off all my debts—both the medical debt I owed on an unexpected foot surgery and some non-student-loan educational debt. I contributed to my 403(b) and took the full company match. I started a Roth IRA and made the maximum yearly contribution. I got a “high-interest” ING checking/savings account which—I just checked—was paying 1.5 percent interest that year.

In order to further this financial prudency, I did all the other stuff too—I got the slow cooker and started packing it with lentils, I walked instead of taking taxis, I continued my long-standing love affair with the public library.

And then I started doing the math. As I wrote in a now-defunct blog on April 18, 2009:

If five years of working earns me enough savings to live on for one year, then how many years will I need to work to be able to have enough savings for retirement?

Never mind the variables or inflation or 401(k)s or anything like that. Let’s even ignore things like getting married, having children, buying a house, traveling, major medical expenses, etc. Let’s just look at the basic math.

5=1. 10=2. 20=4. And even after working for the next 40 years (which would make me 67 years old) I’d only have enough money saved for 8 years of retirement.

Again, we’ll leave the variables out (and the response “but people usually spend less money per year when retired,” which I will balance out with “yeah, but stuff is going to cost more in forty years”).

What does one do when looking at an equation like this? Try to invest? Try to save more? I can’t be the first person who’s stared down the end of this equation.

Helaine Olen’s Pound Foolish also stares this question in the face, and doesn’t quite come up with an answer.

You Can’t Buy Financial Success From Financial Experts

A good chunk of Olen’s book breaks down the financial advice by the self-appointed experts: one chapter each for Dave Ramsey, Suze Orman, and Robert Kiyosaki. Why are these experts so financially successful? Because they get the rest of us to pay them money to learn basic financial principles as well as a fair chunk of dubious advice.

The advice is sometimes large-scale dubious, along the lines of Rich Dad Poor Dad seminar leaders who give attendees scripts to use so they can call their credit card companies, get their credit limits raised to $100,000, and use those funds to invest both in real estate and to pay for their seat in the next level of the Rich Dad Poor Dad seminar system—a course which costs a whopping $12,000 or more.

Sometimes the advice is simply small-scale dubious, like Dave Ramsey’s famous Snowball Method of debt reduction. (Olen notes that mathematically, paying off your smallest debt first is not always the wisest financial choice, especially when bigger debts have higher interest rates.)

Okay, fine. The “financial experts” are handing out a bit of snake oil along with their advice. Are there other ways to be financially successful? And why do so many of us have trouble managing our finances?

Individual Choices in an Uncontrollable System

Olen argues that the reason so many of us “can’t save enough” or find ourselves in debt or worry about how we’re going to pay for our retirement is because we’re trying to make small, individual choices within an uncontrollable financial system.

For example: in the early 1980s, the national savings rate was 10 percent. In 2013, it is three percent. Did an entire country of people become irresponsible spendthrifts? Or is there some other reason why we aren’t saving—say, for example, the fact that (to quote Olen) “the cost of raising children increased a stunning 40 percent over the course of the first decade of the twenty-first century.” Or that interest rates dropped to the point where 1.5 percent was seen as “high-interest.” Or, shall we say, the recession.

It’s clear—and Olen does the math to prove it—that we aren’t in financial trouble because we’re drinking too many lattes or buying too many smartphones. We’re in financial trouble because the equations don’t work in our favor.

(This includes, by the way, the 401(k), which is the most frightening chapter in the book. I mean, if you’re a child of the ‘80s or ‘90s you grow up learning that 401(k) and 403(b) accounts are the safe and conservative retirement funding choice. To learn that they’re essentially an untested and unproven experiment makes me really, really nervous about my retirement savings.)

We’re trying to be good by saving pennies and following other people’s financial advice, when we can lose everything we’ve saved in an instant due to illness, unemployment, stock market fluctuations, and countless other factors.

Or, maybe, we’re “bad.” We’re the people who run up our credit cards buying useless consumer items, the “those people” who are the target of holier-than-thou internet commenters. It doesn’t matter. Whether you’re “good” or “bad,” it’s financial drops in a bucket, pennies in a storm.

So now I’m turning the discussion over to you. Do you agree with Helaine Olen? Are personal finance experts peddling snake oil, or has she misjudged them? What role should the personal finance industry play when offering financial advice to consumers? And is there a solution to the equation we spend much of our lives staring down: how to spend, how to save, and how to make sure there’s enough for tomorrow?

 
Previously: Suze Orman’s ‘The Money Book for the Young, Fabulous & Broke’

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89 Comments / Post A Comment

Maybe snake oil is too strong a term, although it goes in the right direction. When they say that we can all be rich if we just XXX, well, yeah, that’s a lie. But some of the little tips may have value, if not to help us save and become wealthy, at least to help us accommodate ourselves to the new normal: frugality is good because it gets us accustomed to privation. And barring some sort of radical systemic shake-up, privation in some measure is what aging and infirmity will mean for most of us.

HelloTheFuture (#5,275)

@Josh Michtom@facebook wooooooo hoo privation

Stina (#686)

@Josh Michtom@facebook Yeah I agree. She does make the hugely valid point that we, probably as a way to reassure ourselves that we’ll be ok, assume that the only reason people are poor is that they are lazy, stupid people who make stupid decisions. We completely ignore the barriers and inequalities put up that threaten us and the society as well. I do slightly disagree that there are people that are their own worst enemies (across the class spectrum) it’s just that poor people can more obviously and more easily be taken out by even fairly modest missteps.
One thing that I personally think needs to be in the general sphere is the more nuanced view that *steps on soap box* while I 100% believe that in a lot of cases bad things can be prevented, we don’t have a magic barrier that guards us against plain old bad luck, unforeseen consequences, OR the poor decisions of others. Like you should wear your seatbelt and not drive drunk to help keep you safe while in a car, but that doesn’t protect you necessarily against someone else driving drunk or the car maker hiding a defect with the car. Eating well and exercising will help prevent heart attacks. But 1. If you are very poor you may not have access to every advantage , good food etc and 2. Plenty of heart attacks have an unknown cause or one unrelated to personal habits. We humans just in general have a hard time accepting that we aren’t fully in control of what happens to us. I guess this circles back to the financial industry that can’t accept that maybe the financial system is too large for them to fully be able to understand and control what happens. Or on the other hand maybe the motivation is to at least give other people the impression that they know more than they do and make money off of it.

@fo (#839)

@Stina

Black Swan!

the_famou_boat (#6,415)

Your savings calculations don’t account for compound interest and all that other good stuff, though, do they? I’m about to embark on my post-college financial adventure and my expectations about the miracle of compound interest are legit one of the only things that keep me from descending fully into the Millenial retirement-anxiety k-hole

HelloTheFuture (#5,275)

@the_famou_boat 1.5 interest rates aren’t that miraculous! If you save $10,000, you only get $150 in interest. Nothing at which to sneeze, of course, but…… that’s, like, one pair of (good) shoes.

@the_famou_boat right! I came here to say that. Compound interest is the magic that makes it all work. If you get an 8% rate of return for 40 years that initial investment will be worth 21 times as much! Obviously most of your money won’t compound for that long, but still.

caryatis (#7,233)

@HelloTheFuture the_famou_boat was talking about *compound* interest. So $150 for one year, but keep the money in the bank for 40 years, and you’ll have…more. Sorry, too lazy to do the math.

Plus I certainly hope your retirement savings are not going to sit in a checking account the whole time!

beastlyburden (#6,122)

@caryatis Yes! If you earned 1.5%/year on $10K, after 40 years, you would have $18,140.18. If started with $10K, added $5K/year, and earned 6%/year, you’d end up with $923,095.60. And yeah, that’s pretty much how people should plan to retire–save early, save often, and invest.

NoName (#3,509)

@the_famou_boat I was about to say no wonder Nicole got frusterated with retirement savings! Savings accounts are one of the worst places to keep you money long-term, second only to checking accounts and burying it in a cigar box in the backyard. Not only are you making a miniscule amount of interest, the cash is losing value to inflation every day. Savings accounts should only be used for emergency money you think you’ll need to access in a hurry – retirement savings should be in an index fund, bond fund, or some other financial instrument that gives you at least a 10% long-term return.

@fo (#839)

@caryatis “So $150 for one year, but keep the money in the bank for 40 years, and you’ll have…more”

Yeah, you’ll have $8,140.18 (plus your $10k principal!), assuming you get credited for fractional cents the whole time. And that’s before considering the tax payable on that OI, which, at 25%, reduces it to $5,643.77.

caryatis (#7,233)

@@fo @beastlyburden Thanks for doing the math! “Save early, save often, and invest.”–good strategy! $5K per year is only ~$400 a month. Doesn’t seem too hard for a person making $50K, even in a city.

@fo (#839)

@NoName “retirement savings should be in an index fund, bond fund, or some other financial instrument that gives you at least a 10% long-term return.”

What is this magical financial instrument that gives *at least* a 10% long-term return?

See, eg,

http://online.wsj.com/news/articles/SB10001424052748704407804575425851977494576

Where a non-super-aggressive investment strategy (ie, one similar to what we all are likely to follow as non-traders) returned 9.5%/yr from 1985-2010.

If *at least* 10% is the requirement, then you have to be pursuing a quite risky path, and then timing becomes super important. And if you’re that good at the timing, then you *should* be a trader, and won’t need to worry about long term returns, bc you’ll make so much in the short term (bc you have that gift for timing investments).

HelloTheFuture (#5,275)

@NoName Part of the book addresses the idea that there are very few guaranteed 10% returns anymore, not even with conservative investments. Of course, it could all change in the future.

@fo (#839)

@caryatis The calculator in Windows 7 (at least) switches to “scientific” easily and makes basic FV/PV/return calcs easy by having an x^y button.

@fo (#839)

@HelloTheFuture “not even with conservative investments”

Not even with *aggressive* investments, no?

HelloTheFuture (#5,275)

@@fo guaranteed=conservative, aggressive=risk v. reward, yes?

NoName (#3,509)

@HelloTheFuture Fair enough – I’m a little older and got into investing maybe a little earlier than most people here. Nevertheless, there are investments that do better than 1.5%.

@fo (#839)

@HelloTheFuture “guaranteed=conservative, aggressive=risk v. reward, yes?”

That’s basically how I read it.

And if anyone knows where to get *guaranteed* 10% returns for a 20+ year investment period, I’d *love* to hear it.

DebtOrAlive (#5,233)

@caryatis only ~$400 a month. Doesn’t seem too hard for a person making $50K, even in a city

LolWUT. Making just under that, after rent, transportation, debt payments, & consumer goods (i.e food, toiletries, househould item, etc.), there were four digits in my checking account each month… counting the decimal places.

Now an argument could be made that I didn’t need to focus on debt payment so aggressively, but would you turn down a guaranteed 7% and 29% “return” on investment? I’m not saying it’s impossible, but it’s a little more than just blithely socking away $400 a month.

j a y (#3,935)

@caryatis Yes, so… some people don’t have $400 to save and that’s legit.

However,in a rebuttal of latte factor snarkery, if I spend an *extra* $10/day because I eat out instead of eating at home (AND I DO! So I’m not innocent here!) that’s $300 bucks that I’m prioritizing on fun rather than saving or debt repayment or whatever.

@HelloTheFuture In addition to the surprising effectiveness of compound interest, many here are ignoring the effect of taxes. When drawing down your savings, you don’t have to pay taxes on the principle and that has a pretty big effect on your finances. Let’s run a few numbers. Assuming you’re making $50k/year (before taxes) you’re paying roughly $10k/year in taxes (6k income tax + 4k social security+medicare employee share) and saving $10k from of what remains means you’re actually LIVING ON 30k/year, not 50k.

If you save 10k/year for 40 years at an interest rate of 1.5%, you end up with 560,819 = which would be ~19 years of savings if you spend 30k/year. Except it’s really closer to 21 years, because you keep earning interest on the part you haven’t spent yet as you draw it down. And that’s ignoring social security payments – IF you include that (and draw down less), your savings probably do last for the ~30 years you need, covering ages 60-90.

So it *is* kind of doable with the parameters given, but it’s a LOT easier if you can get even a slightly higher interest rate. You don’t need 10% – the math works just fine with 5% and is probably manageable with 3%. Saving 10k/year for 40 years at 5% gives you >40 years savings – which again would be MUCH more if you count Social Security benefits.

Aunt Scar (#5,377)

@j a y EXACTLY. I can save $400/mo for retire now but I 1)make less than $50K, 2) don’t own a car in a city where it’s realy inconvenient not to and 3) don’t want to own a house, furniture or more than a special needs cats and some books.

breezee (#3,701)

So, I admit I haven’t finished the book yet but I did read a nice chunk of it, and there were a few things that really made me think. As far as pensions really being a better system than 401K, I guess theoretically I agree BUT I swear I hear of pension reductions ALL THE TIME and it just really upsets me to think that retirees who were counting on something are having those benefits reduced at a time when they probably can’t go back to work and earn more, and/or when they’re likely not able to fight back all that much. I’d rather save for myself, and if it all goes away, well, then, it’s on me (kind of).

The other thing that irritated me a bit was the part about how lattes don’t matter, that it’s a big expense that really can cripple you. And I agree with that. But I don’t feel like it’s an excuse to fritter it all away on lattes, and I kind of got that feeling from this section. Maybe my views on this are skewed because I was reading this while on vacation with a cousin who frittered all her money away on tchotchkes and then was short when it came time to pay the hotel balance! I know that skipping the latte won’t make you rich, but skipping one now and then might help you when that medical emergency happens…one thing this did help me to realize is that a medical emergency will happen, and that it will be expensive.

@fo (#839)

@breezee “I’d rather save for myself, and if it all goes away, well, then, it’s on me (kind of)”

BUT, bc we are in the transition period, you get to pay for the Pensions (thru taxes or increased prices of goods/services) AND get no (personal) benefit from Pensions.

spex (#1,159)

@breezee I felt similar ambivalence about the latte discussion. Frittering away money on small luxuries isn’t the reason people are poor, but that stuff isn’t totally irrelevant, either. It seems like most of us around the ‘fold strive to track where our money is going and consider the ways habitual spending can add up.

HelloTheFuture (#5,275)

@spex I’m of two minds about the “latte factor.” I value financial prudence and thinking before you spend. But Olen’s point is also that we can only control pennies, not pounds (we can control $3 lattes, but not $200 health insurance premiums) — and those bigger expenses are what actually make the difference.

spex (#1,159)

@HelloTheFuture For sure. And I do appreciate how she acknowledges that the notion of total control over your financial life is a (kinda) comforting fallacy.

cjm (#3,397)

@HelloTheFuture I do think we can control pounds, to an extent. If you can keep your housing and transportation costs low, then the difference between $50 on groceries and $60 on groceries doesn’t matter as much. The thing is it doesn’t seem like millenials are wasting money on housing and transportation like prior generations. We aren’t buying $350,000 McMansions with 3 car garages to park our Lexus SUVs in. We are ALREADY keeping fixed costs low and STILL struggling.

@breezee What’s also infuriating is that many people pay into pensions! It’s basically like social security for them, which is good because I don’t think most people understand that if you are a government employee with a pension (at least in the state of Massachusetts) you do NOT get SS payments! So when people talk about pension reductions, they are basically talking about making my mom live her retirement in abject poverty. Cool. Thanks. Real nice.

breezee (#3,701)

@franceschances And it seems like pensions are on the chopping block more and more…good thing your mom lives in Mass. and not Detroit. Ugh. Pensions are just as scary as 401Ks.

caryatis (#7,233)

“If five years of working earns me enough savings to live on for one year, then how many years will I need to work to be able to have enough savings for retirement?”

Well, yeah. If you assume you will have an entry-level salary your whole life, you probably won’t be able to afford kids or a decent retirement. That’s why people work so hard to get raises or promotions or change jobs. Those “small, individual choices” might not change the whole financial system, but they make a huge difference on the individual level.

And by the way, you describe marriage as an expense, but marriage would likely actually improve your standard of living. Two can live more cheaply than one.

HelloTheFuture (#5,275)

@caryatis In 2013, the median household income was $52,000. It’s not always an entry-level job salary (nor was my $50K job an entry-level job).

@fo (#839)

@HelloTheFuture “In 2013, the median household income was $52,000.”

Yes, but that includes retirees, and the unemployed, etc–ie, lots of people saving $0 for retirement–so not a fair comparison to a (hopefully!) upwardly arcing careerist who is endeavoring to save for retirement.

Not that that means you’re wrong about the (seeming, at a minimum) impossibility of it, Nicole, but it’s not indicative of the annual lifetime earnings of the middle 20% of *wage earners* either.

HelloTheFuture (#5,275)

@@fo That is worth noting — is there research out there that shows more accurate earnings by age? I’m imagining the Department of Labor probably has some stats.

caryatis (#7,233)

@HelloTheFuture I wasn’t saying it’s impossible to live and save on ~$50K, but for whatever reason, you (as of 2009) didn’t seem to be able to do so (maybe you lived in an expensive city), so you needed to make more money. Obviously easier said than done, but still easier than changing interest rates or reforming the global economic system!

@fo is right, and I would add that regional cost of living varies widely. Someone in Iowa with $50K is a lot richer than someone in DC.

@fo (#839)

@HelloTheFuture I think that there is, but do not have a handy link. I do know that it is easy to find the “family” (no, I don’t remember the exact definition) income stats v “household”, and that “family” is (basically) always quite a bit higher.

jquick (#3,730)

@caryatis Agreed that she isn’t accounting for the fact that she should be making more money as she gets older, thus will be saving more. There is a rule of thumb that you should have saved/have in investments 10,000 times your age. Thus, you should have $400,000 by the time you are 40. Depending upon how long you were in uni, and paying off student loans et al, $300k by 30 might be tough, but you should be able to make it up in your 30′s+. After all, it’s just $10,000 per year.

caryatis (#7,233)

@HelloTheFuture Here’s something that shows lifetime income trajectories–not BLS but at least to give you an idea.

http://finance.townhall.com/columnists/politicalcalculations/2011/11/13/average_lifetime_earnings_trajectories_by_education/page/full

HelloTheFuture (#5,275)

@caryatis Pulling the data out for other people reading the comments: the chart & accompanying info indicate the average college educated worker will earn an entry level salary of $35K and hit $75K at age 50.

HelloTheFuture (#5,275)

@jquick I’m not sure how many people I know who have $300,000 in assets at age 30 (or even $400,000 in assets at age 40) but I would love to hear more stories from people who consistently save $10K a year (I did it… once).

We talk a lot about “saving is hard” stories, so it would be interesting to share some “I’m making the savings thing work” stories.

beastlyburden (#6,122)

@HelloTheFuture I hope you get some volunteers! I would LOVE to read some “making savings work” stories on TB.

j a y (#3,935)

@HelloTheFuture I did it, it was hard. Now, not so hard, because I’ve been lucky enough to be earning more than I started earning – and because of the hard years.

Also, lucky that parents only charged me $700/month room and board till I moved out and only $300/month while in university, which was close-ish.

@HelloTheFuture I did it mainly by staying continuously employed in tech for 20 years. And by being lucky in several other ways.

I started out renting a room in somebody else’s house, Then when I bought a house of my own I rented space to one or two tenants using those “spare bedrooms” whatshername talked about…

ThatJenn (#916)

@HelloTheFuture I blame the combination of reading the Billfold and a concurrent raise for the fact that savings suddenly started to work for me. Our household income is about the same because my dude quit his job right as I got that raise, but our habits are different and consistent cheerleading here (and having a concrete plan for how to deal with the raise to avoid lifestyle creep) really helps.

AMoney (#6,678)

@jquick @HelloTheFuture I’ve read that $10,000 per year of your age metric before, but I got the impression it made more sense for people older than 40. Isn’t $300,000 by 30 not possible by saving just $10,000 a year? It would be if you started saving $10,000 a year the minute you were born, or if the rate of return were much higher than average. If you start when you get out of college, maybe age 22, you only have 8 years to amass $300,000 of retirement savings by that guideline.

viewfinder (#5,201)

@HelloTheFuture < >

I was in my mid 30′s before saving for retirement (or anything else for that matter.) Leaving grad school, getting married, and expecting a baby in the span of 2 years really motivated us to save and invest. We’ve maxed out the 401(k) and Roth (when eligible) for most of the past 18 years. Luck was a big part of the equation: 1) we were healthy for the most part. 2) No long term unemployment. 3) we were able to build a trusting, caring, supportive marriage. BTW, my wife is a SAHM.

The first 3-4 yrs were difficult as neither my wife nor I had discipline financially but it did get progressively easier through the years. We have friends who are in similar situations as us, others who never quite got started, and some others who struggle to stay afloat financially because of job loss, divorce, or health issues.

No matter what anyone says, luck plays a hugh component in finacial well being. You have to be lucky AND play your part.

@AMoney wrote “Isn’t $300,000 by 30 not possible by saving just $10,000 a year?”
Saving only 10k/year you’d need an interest rate of 23% to hit 300k in ten years. (Though saving 20k/year you’d only need an interest rate of 9%.)

Achieving 300k net worth by 30 was a lot *more* attainable when real estate prices seemed to be monotonically increasing. If you could manage to buy a house at a young age, in the earliest years your real estate investment has the most “leverage”. Suppose you only put down a 5% downpayment to control a property whose value increases by 10% in the first year – that’s a 200% return on your initial investment!

@fo (#839)

@AMoney “If you start when you get out of college, maybe age 22, you only have 8 years to amass $300,000 of retirement savings by that guideline.”

That’s a good point, and if you were somehow *at* $300k by 30, you’d be falling behind to “only” have $400k by 40.

honey cowl (#1,510)

@caryatis $50k is definitely not an entry-level salary in most fields and in most areas of the country (I’ve been working 4 years and make barely more than half that). And we used to be able to assume that we’d make more as we grew older but I’m not buying it at this point.

OllyOlly (#669)

@HelloTheFuture I saved $9,790.02 in 2012 and $11,867.88 in 2013. I am 25 and live in DC. My salary was between $42k and $49k during that time. AMA.

I am about to save no money for the next three years while in school, so no way will I have $300k in assets by 30.

OllyOlly (#669)

@OllyOlly I actually feel like my only secrets are:
1. Have no student loans
2. Watch a lot of Netflix instead of going out / be generally the type of person who enjoys sitting around the apartment by herself
3. Have no financial emergencies

Worgchef (#6,838)

I didn’t read the book. But that (your?) coffee mug is totally boss.

HelloTheFuture (#5,275)

@Worgchef That is my coffee mug! :) I was delighted to watch Parks and Rec and see the same mug on Leslie Knope’s desk.

@fo (#839)

This:

“Olen notes that mathematically, paying off your smallest debt first is not always the wisest financial choice, especially when bigger debts have higher interest rates.”

misses the point of the snowball. The point is to tackle your mess, and to get some positive progress (relatively) quickly. Because the most dangerous thing is ignoring it, and we (people!) tend to go in avoidance mode when problems seem overwhelming.

10 bills to pay seems a lot better than 14 even if the total owed is only reduced by 1%.

j a y (#3,935)

@@fo
If logic and math don’t work for people, then an emotional approach that works is clearly better. I do wish they’d try some other motivational trick though, so that they’d pay off the debt efficiently.

cjm (#3,397)

I think the Penny-wise advice can help people to avoid the totally expected, not surprising, “emergencies” and irregular expenses. Like the $1,000 car repair, the $500 doctors expense, the $1500 to move unexpectedly, or the $2000 home repair, etc. They can keep people out of pay-day loans. But, it seems clear that cancer, divorce, long term unemployment (6+ months), a sick baby, etc. will almost always result in financial ruin for the “bottom” 85%. And only a lucky few avoid all of those things for an entire lifetime. The best hope is they happen early, and the last 30 years of our working life is stable. As Olin argues, cutting cable and is not going to pay your $100,000 medical bills or $25,000 legal fees, or even $12,000 for 6 months of living expenses. But, it might be enough to prevent a spiral downward that starts with 30 days notice from your landlord or the need for a new transmission.

@fo (#839)

@cjm “cutting cable and is not going to pay your $100,000 medical bills”

The only things that “pay” your $100,000 medical bill are (1) insurance of some sort (which includes, for certain categories of wealth, self-insurance), and (2) bankruptcy. Normal people just don’t get stuck with $100,000 medical bills and *ever* actually pay them.

It’s much more likely to be $8,000 in medical bills and lost wages (bc of the time lost to the medical issue) that put people over the edge. And it’s at least plausible for a middle quintile person/family to save enough to survive a $20,000 hit, and there is *no doubt* that forgoing cable and lattes (like what? $2,500/year?) can help that savings *a lot* pretty quickly.

cjm (#3,397)

@fo I disagree that $2,500 a year adds up “pretty quickly” to $8,000 or 20,000. Assuming no debt, that’s 3 years and 3 months to 8 years. So, you better not have any other big expense in that time before you get it saved! Like replacing a car, or having a baby, or losing a job for a month or two, or paying a new security deposit. Those would set you back a year. AND, of course, this saving should probably be on top of your 15-30% retirement savings, right? AND, once you spend it on the emergency, it’s not like there is any guarantee that the next big thing waits for the next 3-8 years to happen.

eatmoredumplings (#3,808)

@cjm Yes. Emergencies don’t necessarily come one-at-a-time, well-spaced out. Sometimes you can blithely sock away money for five years, and that’s awesome, and then sometimes you wind up with a huge move, a breaking down car, a baby, and unemployment all in the same year.

@fo (#839)

@cjm

Okay, and it’s *easier* to have that emergency savings if you *do* spend that $2,500/year on lattes and cable?

Because it’s hard, there’s no point in trying? Fine. One can file chapter 7 bankruptcy once every 8 years and chapter 13 as frequently as once every 2 (but mostly every 5, under current law). That’s the alternate backstop to the $20,000 medical bill, and works pretty well if you have no non-retirement-fund (ira/401) savings.

cjm (#3,397)

@@fo In the current system, one should do it, sure. However, because it is hard, we should not judge and blame and shame people who either have not done it, or who had 2 emergencies in 3- 8 years. AND, one should not do it with the expectation that this is the key to riches. I think that is Olin’s point- the PF industry is selling whole wheat bread (good for you, kind of gross) as a miracle cure (the road to eternal wealth and happiness).

@fo (#839)

@cjm

“selling whole wheat bread (good for you, kind of gross)”

Yeah, uh, I’ve thought that *not*-whole-wheat bread is more than kinda gross (limited exceptions for good fresh/sourdough) since I was about 5 (aka a loooong time ago). So I guess I’m the weird one?

jalmondale (#6,721)

There’s a couple things that you can do to make the retirement equation work out a little better:
1) Live on less than your income – if you contribute 20% of your income to retirement, then you actually only need 80% of your salary, so it’s not 5=1, it’s 4=1.
2) Reasonable investments – not savings accounts. If you have a while until you retire, 6% returns are not crazy (although they do involve more aggressive, and thus more volatile, investments – that’s why you don’t want these if you might need to pull the money out at a specific time, since cashing out at one of the ‘valleys’ is a bad idea). Factoring in 2% average inflation, with an average investment time of 20 years (over a 40 year savings timeframe), you will get a little over 2x growth in what you save. Now it’s down to 2=1, so after 40 years, you’ll have enough for 20 years of retirement, which gets you past average life expectancy.

As far as savings go, I’ve found a focus on housing is more effective than a focus on lattes – housing is about 30-50% of the typical budget, and while cutting back usually does mean some effect on your quality of life, it can be helpful to run the numbers (adding a roommate, smaller place, longer commute) and see if it’s worth it. For me, I moved to a place with a 30 minute longer commute, but the savings mean I earn an effective pre-tax wage of $30/hr while commuting; on the one hand, the commute is gross and terrible, on the other hand, that’s not a bad wage for dealing with traffic.

eatmoredumplings (#3,808)

@jalmondale Agreed, but the problem is that housing costs are not something you can control the way you can control latte spending. For example, for my partner to get to work, we either have to spend a minimum of 60% of his monthly take-home on rent to live within an hour’s commute, or spend more like 35%…but then spend another 20% to pay for an expensive, 2.5 hour commute. So then we’ve got an extra little bit of money at the end of the month, but pretty much no family time.

When the reasonable answer is “the only solution is to get paid a lot more or get a job with a lower cost of living,” which is the case in a lot of tough financial situations, I think we have to admit that it’s not an issue of personal responsibility. That doesn’t mean people can’t try to get different jobs, but we also have to look at wage stagnation and job opening vs. seeker numbers and recognize that at some level, we have to deal with what we CAN get.

cjm (#3,397)

@eatmoredumplings Right, the majority of people in the US have a lot of housing and transportation options on a spectrum from livable + affordable + high-reasonable commute to luxurious + Expensive + short commute. This site attracts a lot of people who don’t have those options (San Francisco, New York, Boston, maybe Chicago & DC). So, if you live in Phoenix, Houston, LA, Vegas, or Atlanta, don’t rent/buy the place that is 1/2 your income so you can have a hot tub or 3 extra bedrooms, or 3 car garage. Meanwhile, in those high cost cities, your main option appears to be to earn more or move out? (Totally sucks, I get it.)

eatmoredumplings (#3,808)

@cjm Yes, that is exactly the main option. But the only full-time job opportunity between the two of us happens to be located in one of those cities (how did you guess?!). It just doesn’t happen to pay enough for a family of 3 to live on there, so we have to hope to find a second job in the same place relatively quickly, or a better financial option for one of us to pop up elsewhere after putting in a year or so at that job.

Outside of major cities you do sometimes run into the problem of housing being cheap, but jobs being primarily around minimum wage and part time, which I think is a symptom of the same issue. If you’re a 30 year old with kids working retail 25 hours a week, your housing may not cost very much, but it can still be a huge portion of your monthly budget without the extra bedrooms or hot tubs. I really think that housing affordability is a huge issue related to wage stagnation and the casualization of the workforce.

sallysitwell (#3,606)

I’m actually really surprised that the the consensus here is that “yep, people just need to be better/smarter/more hardworking”. What we need is a social safety net!

I think Olen does a great job of explaining why personal solutions don’t work for systemic problems. Being smart and hardworking but that isn’t going to protect you from financial ruin when you or a loved one gets a chronic illness, has a disabled child etc. Even if you can weather the first storm of bad luck, it will make a serious dent on your savings for retirement and the second emergency.

So many of life’s disasters are random, and none of us will make it through unscathed. I don’t know why the thought isn’t that we should join together and collectively insure ourselves against these risks. Even if I’m extraordinarily lucky, my neighbour likely won’t be. I don’t think a lack of financial savvy or ambition is sufficiently blameworthy to justify people losing everything. Even if it did, we are all better off when our neighbours are not desperately poor.

Surely I can’t be the only lurking Canadian socialist?

eemusings (#6,021)

@sallysitwell lurking New Zealander here :)

Though from my Canadian friends I understand you guys have a much better way of dealing with unemployment than we do (not sure about other types of benefits though)

beastlyburden (#6,122)

@sallysitwell Well, it’s not either/or–I certainly believe in both a stronger social safety net AND increasing personal savings. I think the people (including myself) who are saying that it’s not mathematically impossible to save for retirement are more responding to Nicole’s math, which leaves out the confusing but ultimately important variables of compound interest, tax-deferred contributions, the possibility of increasing both your income and your savings rate over a lifetime, and Social Security.

samburger (#5,489)

@sallysitwell I’m in the US and I’m with you 100%.

It’s really, really hard to focus on that. I work for a company that lays off hundreds of people every year. I’m laser-focused on being able to withstand a layoff because that’s what affects me and literally all I can control is how I prepare.

We have a strong incentive to focus on spending habits, I think.

Marille (#5,933)

@sallysitwell Lurking American socialist!

LanuHoos (#6,333)

I should start out by staying: long time listener, first time caller :) I’ve read this blog and seen the argument that if you save 20% a year it will take 5 years to have 1 year in retirement. But isn’t that math wrong? Since you’re already saving 20% you’re only living on 80% of your income so it will only take 4 years to gain one year. Right?

dude (#5,879)

@LanuHoos – “But isn’t that math wrong? Since you’re already saving 20% you’re only living on 80% of your income so it will only take 4 years to gain one year. Right?”

Correct. I recommend this post:
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

It’s basic math. One can argue all day long about whether or not it’s possible to save 50% or greater than one’s income, but the bottom line is, there are many people out there who are doing it (my wife and I are at 38% of gross, 46% of net). Granted, I “lucked out” by landing a job in a high-paying profession (law) at a good time in history (late 90′s), but I was saving at least 10% of my income from 2000 forward (and maxing 401k deferrals since 2004). It’s got to be a mindset you establish early. And say what you will about the 401k, but investing in low-cost index funds for the long haul is an easy, historically viable way of building up a sizeable nest egg (Schiller’s research indicates a 6.7% return over the S&P 500′s history). Look at the trend of the overall stock market for the past 120+ years — it’s up, up, up. It doesn’t take any talent to harness this, just discipline. Sure, the market might go all to hell in the next 20 years, but if that’s the case, we likely have much bigger problems than worrying about a comfortable retirement.

diplostreetmix (#4,472)

@LanuHoos Yes, there is a lot of fuzzy math. The post also fails to take interest into account.

HelloTheFuture (#5,275)

@LanuHoos I think the “5 years savings = 1 year retirement” myth is so prevalent in part because of the fuzzy math. If your savings are in an investment vehicle (and they should eventually end up there, not in your savings account) there will be taxes applied at some point and interest/returns will fluctuate. Some years your portfolio will lose money.

So it’s a broad-stroke assumption in part because the individual math is harder to predict.

(Also yeah, technically it would be four years, not five, if you looked at a strict 20% of your salary.)

ThatJenn (#916)

I found Olen’s chapters about the dangers of touting personal finance as a cure-all much more convincing than her chapters that seemed to indicate that personal finance is actively harmful. I have more to say on this, but I felt like that was a jump too far.

Great personal finance habits can’t make up the wage gap or fix income disparity or replace social safety nets, and she’s right that diverting attention AWAY from those problems by focusing on bootstrapping and education is a huge problem that allows powerful people to pat themselves on the backs and make no changes. But I found her tone in a few places off-putting when it seemed to imply that the people actually executing these initiatives (i.e., NOT the Wells Fargo executives funding a non-profit but the actual people on the ground trying to reach those who need some assistance navigating the ridiculously complicated financial world we’ve built for ourselves) have bad motives. The overuse of the word “admit” comes to mind, though I’ll have to come back later with examples of the times it rubbed me the wrong way.

Anyway, I get her larger political point but think that it’s oversimplifying to imply that personal finance education initiatives and people who work to inspire personal finance excellence have no role in making some people’s lives better. (She doesn’t take a hard line on that, but does seem to take “these people have perverse incentives” to a conclusion of “therefore they aren’t helpful,” which I find a little hasty. I’d take it more to “therefore they can’t always give all the best assistance in every case.”)

Tax Token (#6,772)

@ThatJenn I feel the same way. The overstatements in the book threw me off as well, even though I was on board for the overall message that there needs to be systemic change. At times, I felt like she was throwing the baby out with the bathwater.

For example, Olen repeatedly criticizes Suze Orman’s “hectoring” about getting an estate plan together and points out that most people will not be subject to estate taxes, so why bother. But a living will/advance health care directive is important no matter what your net worth, and if you have minor children, you really ought to have a will to appoint their guardian in case something happens to you and the other parent.

Olen is right, Orman’s advice has been inconsistent and her tone condescending. But I actually had a worse opinion of Orman *before* I read YF&B at the last book club. Helping people understand the basics, like what a FICO score is, does seem like a net positive to me . . .

dude (#5,879)

Also, I think this

“It’s clear—and Olen does the math to prove it—that we aren’t in financial trouble because we’re drinking too many lattes or buying too many smartphones.”

glosses over the very real math involved here (though admittedly, I haven’t seen Olen’s math). Take a $250 iPhone, for example, with a $100/month plan — which is not at all uncommon, even amongst lower earners — and compound that money ($250 initial “investment” + $1200/year addition) and with a 6% return, and you wind up with $102,000 after 30 years. This is NOT an insignificant sum. This is the very real opportunity cost of choosing to have an all-the-bells-and-whistles smartphone. There are cheaper options. The little things DO add up, and there are lots of little things in most of our lives that we simply don’t give much thought.

HelloTheFuture (#5,275)

@dude This’s where it gets really whiffy, though. An iPhone is a monthly expense nobody could have predicted 15 years ago. Assuming we’ll have the same $1200 iPhone monthly cost for the next 30 years is equally problematic.

So people don’t say “wow, I could spend 30 years paying $1200/year on phone bills, or I could invest it in a 6 percent return vehicle and earn $102,000.” They say “This year, my phone bills cost $1,200. Last year, they were different. In 5 years, they’ll be different. I like having my phone.”

Also, for many of those high-value investment vehicles like Vanguard, you need at least $3K to buy in. So our hypothetical person who gives up a phone in favor of investment has to wait 2 years, 6 months before getting started. Let’s say that person waits until the end of Year 3 and invests $3600+250 for the phone and monthly bills not purchased, and continues investing $1200 yearly. At 27 years of 6 percent return, we’re down to $99K — not an insignificant sum, but shrinking.

Meanwhile our hypothetical person is probably investing in a Roth IRA, and that has a $5K yearly contribution max. So there’s a hard limit to what the person can invest — $5,000 yearly contribution at 6% interest for 30 years is only $447,725.84.

If your salary is more than $100,000/yr — and it’s probably a reasonably high salary if you can devote $5K a year just to a Roth — that’s four years of retirement.

Runawaytwin (#2,693)

@dude even if the math you give is correct- I would still rather have the equivalent of the benefits of my iphone for 30 years (or whatever comparable technology comes out) than 102,000 dollars to give to a hospital to prolong my meager and self sacrificing life.

That is not to say that I don’t save or do as much as I can for my future but there is a limit to what (selectively) I will sacrifice for my present self no matter what you tell me the potential value of it will be in 30 years.

cjm (#3,397)

@HelloTheFuture AND, The choice isn’t usually “no phone or newest iphone every year.” So option 1 is the $200 phone/ 2 years and $100 plan. But, option 2 (the common option among my friends!” is $100/ every 2 years (offset by selling old phone or buying older model), $50-$60 family plan option. Option 3 is the $50 phone every 2 years with the $50 no data plan. No phone is not really a valid option these days. So, going from option 2 to option 3 only saves you $50-$290 every 2 years.

Same with lattes- yes, buying a $5 coffee every day adds up. But since most reasonable and/or poorish people are either buying a $2 coffee 5x a week or a $5 coffee 2x a week, it’s not $1,825 a year, it’s $520 a year.

If you are entirely prodigal and profligate, leasing cars, spending $30/week on coffee, taking cabs to work each day, buying a new iphone every time and paying for unlimited everything on your own plan, you are probably already sufficiently rich to not need the personal finance advice!

Elsajeni (#1,763)

@cjm Yep! The very cheapest* prepaid phone and plan I could find on my wireless company’s website is $15 for the phone, $25/month for the plan (250 minutes, unlimited texting, no data). That cuts your savings down to $235 for the one-time phone purchase + $900/year on the plan. Which can still add up to a respectable amount — invested at 6% over 30 years, you’d come out around $77k — but 1) it’s significantly less than the proposed $102k, and 2) that’s still making a lot of assumptions about what will happen to phone costs and interest rates over the next 30 years.

*Well, not exactly the very cheapest. There are pay-per-use plans that could be cheaper if you use your phone very infrequently. But they make the math unpredictable and complicated, so I’m going with the cheapest straightforward monthly plan.

honey cowl (#1,510)

@cjm Holla back! I try and TRY to cut back on the latte factor in my life but it makes such a significant difference in my daily happiness that there is no way it’s going to zero. Minimizing works for now.

@fo (#839)

@HelloTheFuture “a Roth IRA, and that has a $5K yearly contribution max”

1. It’s $5,500 now, and goes up periodically.
2. There is the $1,000 extra “catch up” starting at 50, which is also indexed.

“If your salary is more than $100,000/yr — and it’s probably a reasonably high salary if you can devote $5K a year just to a Roth — that’s four years of retirement.”

The professional advisers say you should plan to replace 85% of your pre-retirement income. So that alone makes it 4 years. Then you add in your maxed out SS, but reduce it by ~15% for the likely future, and that’s $27k, and that makes that $450k stretch to almost 8 years, and that’s living the *same* lifestyle that you did while working (which is where that 85% comes from–and they apply that guideline to people making $50k, $500k, or $5mm a year), which always seems crazy to me, *except* on the below median income end, where it definitely makes sense.

@fo (#839)

@HelloTheFuture Further to the prior–playing around with the SS calculator, someone who is 24 and making $40k now, and retiring at 67 (67 is the new 65) is scheduled to expect $18,500 (2014 $$) in SS–46%. Getting that other 40%–and using a 3.5% withdrawal rate, to retain principal–requires that $450k retirement account.

That $450k retirement account, at 6% assumed growth, and 43 years of investments, can be had with annual contributions of $2,500–the Latte+Cable+phone amount.

I am in *no way* asserting that life would be easy, or fun, or desirable in *any* way, but I am noting that it’s *possible* if you happen to be one of the rare people who get it figured out really early. The *key* is to get the savings started as young as possible.

facepalm (#4,409)

Here’s what I’m seeing:
1. Helen makes a great point that our system(s) are fundamental ass backwards; we need stronger safety nets. And yes investing is scary and may not always work, but you don’t get to throw your hands up and not get into a saving/investing mentality regardless of how tiny the amounts you sock away. If you’re homeless/ill/unemployed I get it, it’s impossible. But if you can do anything at all, it actually feels good and “grown up” to do after a while. (Scouts honor) Too many good discount brokers with low or no minimums and cheap trading fees to not sock away as little as $25 in a total stock market ETF or mutual fund. Again, if you’re struggling, that’s not an option (which doesn’t make you a lazy good-for-nothing) but if you can you give it a try.
2. She overstates the detriments of the personal finance industry. “Rich Dad” can get bent, as can any other “expert” trying to part you and your hard-earned money. She does though make a great point indirectly, because I believe that you don’t have to PAY for that kind of fundamental advice because it’s all over the internet on great sites, like…*cough cough the billfold* and many many others.
3. There’s a lot of luck involved (especially if you’re caught in the undertow of cyclical poverty.) I live in a tiny southern-ish city where the cost of living is pretty damn cheap, where I do my damndest to save/invest at regular intervals (auto withdrawal is a godsend) Honestly I’ve been so surprised how much it grows because I really don’t make that much.
4. I feel like an optimist on this board! Despite agreeing with about half of the book and a good portion of these comments, I’m a believer in doing what I can and trying to make it easier for people to take care of themselves and families. Let’s attack this thing at both ends then. Save, invest, repeat and keep forcing the issue on the increased costs of healthcare, childcare and housing. Also take down those predatory lending bastards. They suck.
*steps off soap box mildly apologetically*

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