In Defense of “Personal Finance Scolds”
March 05, 2015I used to think that the need for Americans to save more was pretty uncontroversial. That was before I read this article called “The pernicious ideology of personal finance scolds.” The author lambasts financial advisors for “scolding people for not saving enough money” and calls the “ideology of savings scolds…ideologically pernicious.”
I can’t speak for other financial advisors but I certainly don’t try to “scold” people into saving. First of all, that’s not a very effective approach. Nobody likes to be told to eat their vegetables.
However, it is important for people to understand how saving more can impact their life and what the consequences would be of not saving more. (Remember the fable about the grasshopper and the ants?) The key is to make a conscious, educated choice.
Some people undoubtedly decide to save little or nothing and plan to rely on Social Security and possibly pension income. On the other extreme are people like Mr Money Moustache, whose suggestion of a 50% target savings rate the article cites as an example of saving more not being “mechanically possible.” Putting aside the fact that there’s a growing number of people who have committed to such high saving rates in order to retire extremely early, very few financial advisors recommend anything close to that. For most people, saving 10-20% a year should be enough for a normal comfortable retirement.
But even that number can be daunting. One idea that has worked for many people is to start with what you can save now and then gradually increase your savings rate by one percentage point each year. You might start with 6% and then increase it to 7% next year and 8% the following year, etc. You probably won’t even notice the difference in your paycheck but pretty soon you’ll be saving more than you ever thought you could afford. Some retirement plans even have a contribution rate escalator feature that will do this for you automatically.
The article goes on to argue that even if everyone could save more, doing so would hurt the economy because it relies so much on consumer spending. But money you save is eventually recycled back into the economy as a different form of spending. Whether it goes into a bank (which then loans it out to be spent by consumers or businesses) or into stocks and bonds, that money will be spent by consumers, governments, or businesses. Much of that will be on investments that can also help the economy grow faster in the long term. In any case, it certainly won’t help the economy to have more people unprepared for emergencies, buying a home, retirement, or education expenses.
The article’s final point is that the financial industry is rife with corrupt advisors who take advantage of people’s “decision fatigue” and offer “bad investment products to a middle-class mass market based on their ability to swindle people.” There’s a lot of truth to that, which is why you should stick to financial planners who are unbiased. But the real solution is financial education that can simplify the financial decision making process, motivate lasting behavioral change, and create more demand for the right kind of financial advice.
The problem isn’t “excessive individualism” but too much reliance on underfunded government programs and disappearing traditional defined benefit pension plans. You may not like it but the reality is that no one cares as much about your money as much as you do. That’s not “ideology.” That’s reality.
Instead, the article suggests expanding Social Security as the solution to Americans’ retirement shortfall. That may or may not be a good idea but until that takes effect, there’s only one reliable way to close that shortfall in the world as it exists now. We need to save more, even if it does take a little scolding.