The Economist Who Asked Me for Financial Advice

The Economist Who Asked Me for Financial Advice

October 18, 2022

Sometimes it is all about the little things. One of my morning podcasts on the way to work (“Freakonomics Radio”) had a title that hooked me like chicken liver on a fishing line catches catfish. It read “Are Personal Finance Gurus Giving You Bad Advice?” However, what made me cheer was not the title.

The host, Steven Dubner, mentioned hiring a CFP as a means of finding decent financial advice! Apart from a brief commercial on Hulu once that brought me to my feet, this was the first time I had seen the term CFP in mainstream media. In my strange little world, it made me cheer in my car with a little unbridled glee, not unlike the typical Washingtonian might cheer when they realized the Mariners were finally making the playoffs again. My apologies to the woman in the minivan who probably thought I was shaking my fist and yelling at her.

Like I said, sometimes it is the little things. However, the rest of the podcast’s material was what made me write about it.

The gist of the conversation was this: would people be better off listening to economists instead of the Dave Ramseys and Robert Kiyosakis? Economists have a bad habit of writing in places and ways that are tough for normal people to access. Meanwhile, financial gurus tend to say attention-grabbing things (“avoid debt at all costs!”) and recommend strategies that we know are not logically the best answer.

The difference between the two is partially an appreciation of human frailty, and partially a matter of audience. Everyday readers don’t need the precision and bulletproof arguments that an economic paper requires to be taken seriously. The result: most readers wouldn’t make it past the abstract! And Mr. Money Mustache would be laughed out of the room by economists for his blog posts a few years ago about not having health insurance. The same goes for Dave Ramsey’s advice about paying the smallest balance credit card off first rather than the highest interest rate credit card first.

The blog post reminded me of an economist who once asked me for help.

Financially, he was highly sophisticated—large municipalities hired him as a consultant to help them make financial decisions and create models to optimize their budgets. He was not simply competent for larger entities, either; he was quite knowledgeable with personal finance.

Too knowledgeable.

By the time he approached me, he was at an impasse. He had Excel spreadsheets evaluating all of his potential outcomes, choices, and costs. If he had printed them out, the paper alone would probably have cost us the rest of the Amazon rainforest. He was feeling paralysis by analysis: he was overwhelmed with information and could not see the path forward. It was a testament to something that podcast also mentioned: economists are as guilty as the next person of not applying rational decision making to their own personal lives. Financial gurus have a point: behavioral psychology is real and should not be ignored.

Somewhere between the financial gurus and the economists is where good financial planners nest. Out goes the “rules of thumb” we hear about how much debt we should have. Gone too are the economic theories on the logical way to save money (economic studies lately say we shouldn’t save money until we are older, because the “rational individual” wants to perfectly smooth their spending across their life).

What remains is personalized advice that takes who you are in stride on the path to making good choices. John Deere and Kathy Sue might both hear their favorite financial radio personality say “Everyone should save 10% of everything they make.” Not knowing any better, they could both take that advice. Never mind that John is 40 with no retirement savings, while Kathy is going to eventually inherit three million dollars from her beloved uncle’s estate. Following the same advice, John will wind up incredibly short (or working into his eighties) and Kathy will struggle unnecessarily in the short run to make ends meet with her modest salary as a grocery clerk.

If each of them met with a financial planner and did a little planning, they would realize they should be saving completely different amounts to be financially secure. Success is in the details—details that a planner can take the time to identify one on one. Success is also in the story: a good financial planner can take the time to listen and understand someone’s story (if you missed last month’s post about money stories, you can read it here). By understanding that story, they can help you overcome what is behaviorally “easiest” and guide you to the best possible decision.

What happened to the economist? We talked about retirement, debt, cash flow, tax efficiency—the same things most clients tend to ask about. By the end of our last meeting, he said how relieved he was, like being rescued from a self-created trap of quicksand. Talking through things with me was exactly what he needed. Most of what I recommended was not even new to him: the key was having someone double check his work and infuse him with some confidence about a path forward.

In the words of Abu Bakr, “Without knowledge action is useless, and knowledge without action is futile.”


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