In this discussion, Yale economist James Choi challenges popular financial advice, such as saving aggressively for retirement and the reliability of the stock market. He explores the concept of 'wealthy hand to mouth,' revealing how asset-rich households can still face cash flow problems. Choi also examines mortgage choices, advocating for a personalized approach rather than a one-size-fits-all strategy. With insights on investment strategies and the importance of portfolio diversification, he prompts a reevaluation of conventional wisdom in personal finance.
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volunteer_activism ADVICE
Consistent Saving
Save a consistent percentage of your income, even in your 20s, to build a saving habit.
Start saving early to benefit from the power of compound interest.
insights INSIGHT
Smoothing Consumption vs. Savings
While economists suggest smoothing consumption, popular advice promotes smoothing savings rates.
Choi acknowledges the benefit of disciplined saving despite economic models.
insights INSIGHT
Mental Accounting
Mental accounting, while economically irrational, helps simplify financial calculations for goals.
It can be valuable for budgeting for specific events like weddings or vacations.
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The nine steps to financial freedom
Suze Orman
This book offers a comprehensive approach to managing money, going beyond mere financial tips to address the emotional and spiritual barriers that prevent people from achieving financial freedom. Suze Orman provides steps such as seeing how your past influences your financial future, facing your fears, trusting yourself, and understanding the money cycle. The book emphasizes the importance of respecting your money and yourself, and it includes practical advice on managing debt, investments, and retirement plans.
The Total Money Makeover
Dave Ramsey
The Total Money Makeover provides a comprehensive plan for financial fitness, focusing on seven 'baby steps' to help individuals get out of debt and build wealth. The steps include saving a $1,000 emergency fund, using the debt-snowball method to pay off debts, saving a 3-6 month emergency fund, investing for retirement, saving for children's college, paying off the home mortgage, and building wealth. The book also corrects common money myths and offers practical advice based on real-life success stories.
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"Save aggressively for retirement when you're young." "The stock market is a sure-fire long-term bet." "Fixed-rate mortgages are better than adjustable-rate mortgages." Popular financial advice like this appears in all kinds of books by financial thinkfluencers. But how does that advice stack up against more traditional economic thinking?
That's the question Yale economist James Choi set out to answer in a paper called Popular Personal Financial Advice Versus The Professors. In this interview, he tells Greg Rosalsky what he found. Their talk marks another edition of Behind The Newsletter, in which Greg shares conversations with policy makers and economists who appear in the Planet Money newsletter.
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