Everything You Thought You Knew About Personal Finance Is Dead Wrong—Here's the Truth:

[HughBeaumont]

http://www.alternet.org/economy/everything-you-thought-you-knew-about-personal-finance-dead-wrong-heres-truth

LP:Media figures like Suze Orman, David Bach and David Ramsey tell us, "Follow my advice and everything will be OK." Why is this promise a lie?

HO: All of these people are in the business of selling simplistic solutions to complex problems. Should we live below our means? Of course. Is it always possible to do so? No. It’s not easy to live within your means if your means are a $300-a-week unemployment check. As if that were not enough, some of the advice they are purveying is flat-out wrong. Our financial woes are not the result of spending our funds on lattes and other small luxuries, like David Bach says. You can’t choose not to participate in a recession, despite what Dave Ramsey thinks. Personal finance can’t do it all for us.

LP:You write about the financial literacy movement, which, on first glance, looks like a helpful educational crusade. How has it conspired to make us poorer? What does it mean that big banks like Capital One promote it?

HO: Financial literacy classes sure sound good. But students who take the classes don’t seem to retain much of the knowledge. And, when you think about it for a moment, that makes sense. The idea that taking a class on how finance works at the age of 17 can save someone from a predatory 100-page small-print mortgage when they are 40 is just preposterous. Don’t believe me? Tell me how the French and Indian War contributed to the American Revolution. See what I mean? I swear that was taught in your high school history class.

[DrDan]

1. I have watched the Suze Orman show - I sure hope folks are not taking her

financial advice as gospel . . . calling it "simplistic" is overly generous. She seems to have an elementary financial model that does not take into account individual's circumstances and economic vagaries.

I think personal financial literacy classes are a good thing . . . as long as they cover things like how to balance a checkbook, the pros and cons of bank auto-pay, and basic stock vs bond options. To expect a high schooler to grasp the intricacies of futures, puts and calls etc. is crazy.

[Snarkoleptic]

7. Well put.

Her sage advice seems always to be something like- Take you million dollars, spend carefully and invest in a balanced and conservative manner.
The notion that millions of people are having trouble feeding their families seems to be an impossibility in her worldview.

[ProfessorGAC]

11. Always Reminded Me Of An Early Steve Marting Routine

How to not pay taxes on a million dollars? Well, first make a million bucks. . .

I think she is nothing more than a TV person who had the ambition of being a TV person and realized she could sell what amounts to financial snake oil.

[yeoman6987]

53. She was homeless for a number of years.

She tells how she got out of it, but not really any other ways. She's good on some things like the six month emergency funds and no credit cards, both those are pretty obvious to most. She does keep it simple.

[Initech]

13. I'm an accounting major and I've found the advice Suze Orman gives is laughable at best.

Most of the advice she gives is stuff that you learn in Accounting 101 and Econ 101.

[Agschmid]

18. And most Americans never took those classes... So if that where they get that basic advice.

Is that a bad thing?

[DrDan]

24. I don't think her advice comes close to the elementary economics and accounting courses

she has a simple, single model that she applies to everyone regardless of individual circumstances. That is a bad thing.

[joeglow3]

42. Most of what she says applies to 99% of the population

To pretend like there even exists a message that applies to 100% of the population is disingenuous.

[joeglow3]

41. As a 15 year CPA, I find her advice great,

as most people have never learned Accounting 101 or Econ 101.

[Yavin4]

25. Her advice in sum: Give ALL of your money to Wall Street

in the form of 401Ks and Roth IRAs, etc. That's really, really bad advice. First, most of us have no idea of how much money we'll be making from one year to the next, so there's no way that we can plan for years in advance. Second, retirement is a long term risk. Most of us face short and medium term risks like income disruptions, health care needs, housing needs, education needs, etc. If ALL of your money is in your retirement accounts and we have another collapse like 2008, then you are screwed.

[4Q2u2]

28. Suzy can be very harmful

Last edited Fri Dec 19, 2014, 01:38 PM - Edit history (1)

See #9

http://www.goodfinancialcents.com/suze-orman-bad-advice/

Curious advice in the Vid, sell out your fellow worker to advance yourself.

Nice

[DrDan]

30. those are excellent links for anyone considering advice from Suze

[1StrongBlackMan]

52. So let me see if I've got this right ...

Suze tells young 20-something, Lauren, to reject a relatively good paying ($65,000/yr) job and continue on in a waitress position, while she searches for a job in her dream industry. And, that advice is validated because young Lauren, found a $30,000/yr job in that industry (more than 2 waitressing months later).

Then when, young Lauren comes back to tell Suze that she can't make it on the job, in the dream industry, on what that job pays, Suze tells young Lauren to work just harder (78 hrs/week) than anyone else at the company AND don't ask more money, just wait for the management to recognize her for her hard working genius that she is ... AND, oh yeah, until the company's management comes to that realization, finance the wage gap with her credit cards. AND, when the company finally does recognize her for the hard worker that she is, DON'T negotiate for the money you need and/or deserve ... no, let them pay her what they want to pay her because, of course, managers will pay her fairly because she is a hard worker.

Did I get that right?

Suze is completely disconnected from the reality most of us live.

[Orrex]

2. Great article

Over the years, I've seen a lot of people scolded for failing to be financial wizards skilled in precognition with a $50K nest egg squirreled away for just such an emergency.

Nice to see an article plainly spelling out the reality of the situation.

[TBF]

3. It is like everything else right now

with capitalism. You can make the wisest individual decisions but the deck is still stacked against you. The repugs want you thinking on the individual level so you don't question their capitalism. But it is the system that is the biggest problem, and we need to drastically reign it in or start over.

[HughBeaumont]

8. Wage theft affects all of us, especially our futures.

We cannot save/invest what corporate America continually STEALS from us via real-dollar wage stagnation versus a never-decreasing cost of living. Never mind the long odds of never, ever having any financial landmines that can instantly wipe out years of progress . . . the quest alone is a 65 degree uphill slope.

Investment requires disposable income, something the wealthy have and we just plain and simple do not. All the "literacy" in the world can't extract blood from an overworked and underpaid stone.

[marions ghost]

9. +++

no disposable income. This has now become the main difference between the Haves and Have-nots.

And when the Haves are enjoying their leisure activities, buying lots of new stuff, traveling where ever & when ever, building trust funds for their children, building security for their older years--are they thinking of the rest of us?

Nah.

[raouldukelives]

21. Exactly. Because we don't have capitalism. We have inverted socialism.

I actually think capitalism might work out if we tried it.

[HughBeaumont]

23. +1000.

I love it when conservatives talk about "SOSHULIST" this and "SOSHULISM" that . . . the only "SOSHULISM" going on in America is one where the wealth is being vacuumed to the TOP of the mountain. It's unfettered Laissez-Fail for everyone else.

But they are right about one thing - the whole "we're working harder and harder to pay for lazy freeloaders who DON'T work barely at all!!" canard. We just vastly differ on specifically who the "lazy freeloaders" are.

[Odin2005]

35. No, we DO have Capitalism, REAL Capitalism, not the fantasy capitalism of Capitalist Propaganda.

THIS is Real Capitalism, not the idealistic "perfectly free market" of the Libertarian idiots.

Realizing that THIS is what Capitalism really is, is the first step on recovering from a lifetime of brainwashing.

[raouldukelives]

58. I don't think we are living in Adam Smith's fantasy.

I think we are living in Milton Friedman's.
I do agree with you, I do not think the "perfectly free market" the libertarians rail about is or ever was a good idea. Although meth dealers would be happy.

I still think capitalism, heavily regulated, is our best option. Call it Christian Capitalism, fair trade, whatever. We could be using our money, power & very lives to lift billions out of poverty and oppression the world over, instead many of us use it to assure they never experience democracy if we can help it. Just as they have finally turned around and assured we never will at home. We see it happening in front of our eyes and it still plows ahead. All thanks to people who really do care more about money than being a person of even moderate moral fiber.

Anyhow, what others might call socialism, I call providing for the general welfare. Health care, retirement, housing, food, clean water, a liveable climate, labor protections, living wage, mental health services etc. We should have that at home and we should be exporting it to others as a condition of trade with us.

I am not opposed to socialist economic theory. I just feel, realistically, that we have a better chance at rescuing people from themselves through capitalism than implementing a brand new system not only here, but worldwide, at this point.

[sendero]

4. While I don't think anyone has the..

.... "answer" to managing their personal finances, to say that none of these ideas have merit is absurd.

Way too many people, I know them personally as friends and family, simply don't exercise any self discipline nor put hardly any thought into how they spend their money.

Of course its true that a minimum wage worker cannot save a nest egg. But I know plenty of people that make pretty good money that are one missed paycheck from insolvency.

Anyone not seeking to avoid that situation is a moron.

[TBF]

17. Absolutely true - but the fact is that you are focusing

on the trees while avoiding the forest. The billionaires at the top love when we focus on the trees (and berating each other) while they walk off with the rest of the forest.

[sendero]

48. Nobody..

... is more disgusted with, and has done more around here to educate (well except Manny and XChrom) the ripoff we are enduring at the hands of the banksters starting with the Federal Reserve.

That said, the world is not going to change soon and every person is responsible for dealing with the reality that is, regardless of how fair it is.

[TBF]

49. The Federal Reserve huh?

[forthemiddle]

27. Bravo!!!!

I am dealing with a relative right now that claims she doesn't have the extra $$$$ to put her portion in towards a joint gift that was planned earlier this year (in fact it was her plan).
She works for the State, and I know exactly what she and her husband make. Her mortgage and car payments are lower than mine, yet she is ALWAYS complaining about how broke they are. This despite the fact that this morning I read on facebook about how much fun they had going out last night at an expensive restaurant. Last week she went to a NFL game, and multiple other things.
I have no doubt she is in major debt (she admits this too me), yet I also know that she hasn't dealt with job loss, medical bills, or anything else that truly can ruin someones life. She just lives for the moment, and spending money is the life she wants.
I generally don't care, yet now she wants me to pay for her portion of the gift, and she will pay me back in payments over the next few months. OH did I mention, she makes more than I do.
She could certainly use Dave, or Suzies advice, and I am sure we all know more people like her, than the few we know that have fallen on hard times!

[hobbit709]

5. My financial decisions are based on one simple question.

Do I have enough to pay this bill or will it have to wait a few days?

[yeoman6987]

54. You may be spending too much.

Your not alone. Sadly most are. Good luck. Susie is not bad on advice especially those in debt and need managing assistance. Best to you! In a few months you will be fine especially after reading a lot of this thread.

[hobbit709]

57. Spending too much? That would be almost funny on $952/mo. on Social Security

[phantom power]

6. I think teaching some financial literacy in HS home-ec is a great idea

It doesn't magically make financial problems go away, but it can sure as hell prevent people from making avoidable mistakes out of ignorance.

Credit card debt is a hell of a lot easier to get into than get out of. ARM loans are a time bomb. Stuff like that.

[dawg]

10. Millions of people need to be schooled in the sort of "simplistic solutions" that Orman,

Ramsey, and others promote. The self-help gurus are not the problem, and listening to them could be helpful for many. "Spend less than you make" might be tough advice for someone making $24,000 a year. But there are people making $80,000 a year who really need to take it to heart.

[MissB]

22. Yep.

Spend less than you make is good advice to heed for the middle and upper-middle class. Not so much for those living a below-middle-class life and utterly useless for wealthy folks.

Of course we are all bombarded with advertising in our consumeristic society, so not many folks that could listen do so.

It's also a lot easier for me to preach than live someone else's life. I came from a lower-middle class family (as did dh) and we are comfortably upper-middle. We were both able to obtain degrees in engineering, which was our ticket upwards. We've been fortunate to not hit any bumps that would otherwise derail our financial lives. We've each been with mostly one employer for our careers (him: 27 years, me: 9 years, with an 8 year gap between year 3 and 4.) All this makes us very lucky. But if we didn't plan for tomorrow (with the abilities afforded us through education and steady employment), we'd be looking at a bleak future.

[yellowcanine]

12. Personal finance is actually fairly simple.

1) Understand how compound interest works - for debts but also for saving.
2) Save something from every paycheck, even if it is only $10.
3) Don't treat housing as an investment. Sometimes renting makes a lot more sense than owning - particularly for young people just getting started where job moves are likely. If you do buy, buy about half the house that the real estate broker says that you can afford.
4) Avoid revolving credit card debt as much as possible. If you do have large credit card debt, try to pay it off by making regular payments - but don't make the mistake of trying to pay off too much at once and leaving yourself cash poor. Do not touch credit card debt consolidation schemes - it is very easy to end up owing much more money even though the monthly payments may be lower.
5)Join a credit union if possible - fees tend to be much lower than banks for checking, etc and car loans are usually much cheaper than what you can get from a dealer. Forget the low interest deals from dealers - they are generally only available on selected new models and you usually pay more for the car than the best negotiated price you could get - anyway, generally a low mileage used car is a much better deal. Get a pre approved loan from the credit union for the monthly payment you can afford and then go the the dealer and pick out the car you can buy with that loan + the down payment you can afford. When the loan is paid off, keep paying the payment into your savings account and drive the car until it costs more to repair it than what it is worth.

[MissB]

16. All very good advice!

Very similar to the messages I've been trying to impart to my teens.

[Nye Bevan]

31. I would add (6) never lease a car.

Too many people just love getting that brand new car every 3 years. And leasing makes the pricing opaque so that it's easy for the dealer to rip you off. Buy a car (a good used car if necessary) and keep it as long as you can.

[yellowcanine]

44. Leasing is similar to buying a new car financially.

Except you don't actually own the car at the end of the lease. And you may in fact owe money if you drove more than the allotted miles. For the miles most Americans drive in a year, leasing doesn't make much sense. For about the same monthly payment in many cases of buying a late model used car you can own the car after 3 or 4 years. And you are correct - it is very difficult to tell how much you actually paid for the experience of having a new car to drive.

[tabbycat31]

55. That depends on the car

With some cars, a 2-3 year old used model is nominally less expensive than a new one (Subaru is a good example). If the difference between a used car with 40K miles and a new car is $2000, then I'll just get the new one.

(I'm not a typical car buyer, I hate payments and will drive the car into the ground).

[bluesbassman]

14. Back when I was in the mortgage business I had a client that was waiting for his house to be built.

I had pre-qualified him and his credit score put him in the top tier for best rates. Although I advised him not do anything credit wise until after his home had closed, he apparently had been listening to the advice of Suze Orman and cancelled all of his existing credit cards except one. The problem surfaced when I had to re-pull his credit and his score had dropped due to the good standing accounts no longer being active. The result was a .5% higher rate than he should have received. He was pretty upset, but as we had to close his sale there was no time to correct the mistake.

[yellowcanine]

15. That also shows that credit rating is a bit of a scandal as well.

Given that it is basically run by the big banks, what a surprise.

[bluesbassman]

34. It really is.

A lot of abuse allowed where collections and such are concerned.

It's interesting to note that at one point prior to the crash in 2007, the banks put so much weight on FICO scores that a credit score of 760 or better could get one a fully "no doc" loan. No income or assets stated or verified, essentially a signature loan with the house as collateral. These were some of the loans bundled into huge blocks of mortgage backed securities and sold on Wall Street. All insured by Fannie Mae, so when the bubble burst and those houses went underwater and the owners walked away the banks got reimbursed for the deficiency and then got the house at foreclosure. Basically they set up the failure and profited on it from beginning to end.

[Mariana]

19. Interesting. So his actual history was irrelevant?

The fact that he'd paid his bills on time for years and years didn't matter, the fact that he had PAID OFF all those loans in full didn't matter?

What a fucking scam.

[bluesbassman]

29. Well it is for part of the credit history.

Installment loans (cars, houses, etc) are one part of the algorithm and revolving debt (credit cards) are another. The installment good history is ongoing as is shows one paid as agreed. The revolving debt is only considered good as long as it's on going and paid as agreed. The theory there is if one is not utilizing the revolving debt then there is no ongoing payment pattern to judge. Of course the other edge of the sword is that any +30 day lates accrued on the card will stay on your credit and adversely affect it for at least one year.

And you're right, the FICO scoring system is a scam.

[joeglow3]

39. This is where I agree with Ramsey: don't worship at the altar of the FICO score

[bluesbassman]

40. Yes, except it can affect other financial areas of ones life too.

Auto insurance, job opportunities are just a couple of ways that a poor FICO score can have an adverse affect.

[hunter]

20. Teaching people about the power of unions, general strikes, comfortable minimum wages, etc.?

Oh, I see not. I agree, the "financial literacy movement" is bullshit. Sure, there are a few people who could learn something, but mostly it's propaganda and diversion.

Why fix a broken economic system when we can simply scold people for poor choices?

All those poor people really ought to be handing over their spare change to financial vultures who promise to make it magically multiply.

Yeah, that's right... "Feed the Pig!" I heard it as a public service announcement service on the radio. All those pennies add up!

Especially when you are a big-shot capitalist leaching away the pitiful incomes of millions of poor people.

Do they ever mention the "pig" drives a new car, lives in a gated community, has access to a company jet, and has no idea why anyone would ever buy a single forty-ounce bottle of cheap malt liquor or an individual cigarette from a scary shop where the clerk sits behind bullet proof glass?

Most affluent people are utterly unaware of what it's like to live in a world of severely limited choices and daily struggles for survival.

"If only those people..."

Blah, blah, blah, soothing noises on the television and radio...

[Odin2005]

36. Encouraguing people to "invest" is a way to bind them to Capitalist explotation.

By definition all the money you get from the stock market is wealth expropriated from workers, capital gains is essentially theft.

[kelly1mm]

51. hmmmmm, most people's single biggest capital gain in their lifetime will be the sale of a home. Is

that theft as well?

[Odin2005]

56. I'm talking about stocks and bonds, not land.

[nichomachus]

26. This personal finance thing is a trap

First people need to realize that the world of finance is basically a casino -- and it's rigged. Do some people make out? Sure -- just like some people win at the casino. But the world of finance is dominated by insider trading, back room deals, programmed trading, and supercomputer trading in which the computers "see" deals and buy and sell in nanoseconds -- before individual investors ever see the opportunity.

This is why the neoliberals are spreading the lie that you can handle your finances better than the government. They know you can't and they know they can rob you blind.

[HughBeaumont]

33. It's a world that the average person has no idea about and no time to study.

Yet, we were all somehow supposed to be MBA-level experts in managing volatility over the past 3 decades . . .. when, incidentally, author Jacob Hacker surmises that "The Great Risk Shift" began:

http://www.commonwealthmagazine.org/Voices/Conversation/2007/Winter/Great-Risk-Shift-author-Jacob-Hacker-on-the-growing-financial-perils-for-modern-families.aspx

Family incomes, it turns out, rise and fall substantially over time, and the fluctuations are greater now than ever before. This, to Hacker, is more unsettling than the recent widening in income inequality, though he decries that as well.

“The gap between Bill Gates and Joe Citizen is a lot larger than it used to be,” writes Hacker, “but it’s actually grown less quickly than the gap between Joe Citizen in a good year and Joe Citizen in a bad year.”

snip

CW: A number of these changes are fairly visible things, like the shift from traditional pensions to 401(k)s. And the whole issue of who’s going to pay and how much for health insurance is a raging debate, and has been for some time. The things in your book that I found most surprising were the increased risks that show up in the way people earn their living, in terms of incomes, and, as you mentioned, jobs. Tell me a little bit about what you refer to as the increased “volatility” of income. What does it mean to say that incomes are becoming more volatile? And what are the implications for personal financial security?

Hacker: Well, volatility is an accepted measure of the riskiness of stocks. It basically is a measure not of how big the returns of the stock are, but of how risky or uncertain those returns are likely to be. To say that family incomes are volatile is to say that families are experiencing more up-and-down movement of their incomes over time. The standard way we talk about our economy is in terms of static measures like inequality or average wages or median earnings. But volatility tells us whether the American family income stock, if you will, is more or less risky than it used to be. I have a number of different ways of looking at this. The most intuitive measure is the probability that a family, or an individual, will experience a large drop in income. In the early 1970s, the chance of an average working-age individual experiencing a drop in family income of 50 percent or greater in a given year was around 7 percent. By the early 2000s, the chance for an average individual experiencing a drop of 50 percent or greater had increased to around 17 percent.

CW: What is behind this greater volatility? What is it in the economy that makes people more subject to either big gains or big losses year to year?

Hacker: There are a number of big factors at work. First, our job market has changed in ways that increase the probability of large income drops. We know that our economy produces huge turbulence; 57 million jobs are created each year and 54 million jobs end each year. Of those 54 million that end, about 20 million represent involuntary job losses, and we know that about a third of those involuntary job losses result in people having lower incomes over the next 10 years.

[Odin2005]

32. This "financial literacy" stuff is just a new way to blame the poor for being poor.

[NewDeal_Dem]

38. +100. They spend money to have a few middle class people teach financial literacy

classes instead of spending money on jobs and living wages.

[NewDeal_Dem]

37. K&R

[raccoon]

43. Hey, Hugh, didn't know you were still around. K&R. nt

[HughBeaumont]

45. Glad to have been missed! It was a busy fall/winter.

Didn't have much time to post, but I'm back now.

That, and I've been shaking my head at the troglodytes on Disgustionist.

[Township75]

46. Reads a lot more like opinion than truth

But I guess to a lot of people their own opinion is truth.

[Marr]

47. Hate to say it, but someone who offered sound financial advice to the 99% would not be

famous or rich. I used to listen to this late night Sunday radio show about money management on my commute. The guy was great-- he would talk about the most efficient ways to pay for things, and work it out for a range of incomes. If it was about transportation, he'd point out that a car depreciates as soon as you drive it off the lot, so if you can avoid buying completely, do that. Then he'd look at gas costs, three year old cars vs. four year old cars, leases, the real cost of a car if paid off with minimum monthly payments, etc., etc.

The whole thing was almost hypnotically un-sexy, but it was all very useful, practical information that would save you a lot of money over the years. Oreman and those types seem to be selling something closer to a lottery ticket. 'You'll be filthy rich if you just stick your dollars here'.

[sendero]

50. "hypnotically un-sexy"..

.... is a perfect description. However, being flat-ass broke is never sexy. So it is worth doing.

75% of Americans should never buy a new car. Ever.