The invidious reach of personal-finance snake oil

By Felix Salmon
January 14, 2013

Ginia Bellafante’s column this weekend is depressing on two parallel fronts. Firstly, and unmissably, there’s the way it’s shot through with a miserable kids-these-days condescension. You really couldn’t make this one up: Bellafante’s theme is that young people in New York often spend too much money on — wait for it — food. Back in her day, 20 years ago, “it was possible to go for very long periods without meeting even one 24-year-old who could tell you anything about sea urchin”. Sadly, that’s no longer the case:

Every generation of young New Yorker finds its own way to squander its meager earnings, and this one seems content to spend the money it makes on expensive, curated food with little sense that it is really squandering anything at all.

This is clearly idiotic: as Ben says in the comments, “if any young person is fortunate enough in this punitively expensive city to have the money to spend on a luxury that she enjoys, then carpe diem and bring on the sea urchin”. Different people, and different generations, like to spend their money on different things. I have much more money now than I did 15 years ago, and yet there are certain things I spent money on 15 years ago which would seem ridiculously wasteful to my present-day self. And that’s exactly as it should be, not least because the fundamental driving force of capitalism is that trade can be mutually beneficial, thanks to differences in the way that two people value the same thing.

Bellafante’s Exhibit A is Yaffa Fredrick, a 23-year-old production assistant at MTV who spends some $300 per week on food. Indeed, Frederick loves her food so much that she “works an additional 10 to 15 hours a week tutoring and baby-sitting” so as to be able to afford more of it. Good for her! Except, that’s not how Bellafante sees it:

It surely comforts modern parents who have spent fortunes educating their children to know that these children are spending money on pork belly and not, for instance, cocaine. But what solace can it offer to realize that $300 a week put into an S. & P. 500 Index fund over the past five years would have provided an annual rate of return of 10.34 percent and grown to $100,354 today? Even saving $300 a week at a 6 percent rate of return would have yielded about $91,000, Mark X. Chemtob, a financial adviser at Ameriprise, said, adding that in both cases, the sums would qualify for a down payment on a starter apartment in New York.

This is the point at which Bellafante’s column both jumps the shark and at the same time demonstrates just how invidious a certain strain of personal-finance thinking has become. Obviously, this line of thinking is profoundly silly. For one thing, five years ago, Yaffa Fredrick was 18 years old; there’s no conceivable way one could expect her to have been saving $300 per week over the past five years. Not when most of those five years were spent in college. And in any case, at no point during the past five years — or during the next five years, for that matter — can anybody save $300 per week at a 6% return. Even 1% is pretty impressive, these days. In order to get anywhere close to 6%, you need to take a serious risk of losing a large chunk of your money, and/or you need to tie your money up in some highly illiquid investment. Neither approach makes a great deal of sense for a 23-year-old who could need her money at any time.

On top of that is the ridiculous idea that accumulating “a down payment on a starter apartment in New York” is such an obviously wonderful thing to be able to achieve that it’s worth not eating food for five years in order to get there. I think Bellafante might make an exception for a stuffed pork loin once a year, and maybe whatever bare-minimum expenditure might be necessary for purely nutritional purposes. But basically, she seems to be saying that if you’re 23, then to a first approximation you shouldn’t be eating out at all, and instead you should take all the money you can scrounge up from tutoring and baby-sitting, and put it into an S&P 500 index fund.

There’s an inescapable conclusion from Bellafante’s column: if you’re just starting out in the big city, a 23-year-old living on a relatively modest paycheck, then it behooves you to spend an additional 10-15 hours per week doing things like tutoring and baby-sitting, just so that you can take the proceeds and invest them in the stock market. Never mind that no 23-year-old in her right mind would ever do such a thing.

There’s an interesting question, though, hidden behind this silly column: Why does Bellafante think this way? Why does she think that saving money today is better than spending it on food, and why does she think that buying an apartment is better than renting one, and why does she think that when you’re 23, future consumption is more important than present consumption, and underneath it all, why does she think about the consumption of young New Yorkers in terms of bizarre opportunity costs?

To answer these questions, you couldn’t do better than to read Helaine Olen’s new book, Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. As it happens, Olen had an op-ed in the same issue of the NYT as Bellafante’s column, and her message is clear. First, if we don’t have money it’s not our fault: household net worth has been falling as living expenses have been rising and median incomes have been stagnating. There are deep structural reasons why most Americans don’t have any real savings; those reasons explain substantially all of the problem, as Elizabeth Warren, for one, never tires of explaining.

As those deep structural causes took hold, so did the number of Americans struggling with their finances. I’m not talking about the young free and single here: I’m talking about mothers, in particular, working very hard to feed and clothe and house their families, finding themselves perennially short at the end of the month, and as a result spiraling into credit card and other forms of debt. That’s a horrible situation to be in, and when you’re that desperate, you grasp at anybody offering solutions to your problems.

Hence the rise of the personal-finance industry: gurus like Dave Ramsey, David Bach, and Suze Orman, who promise that they have the solution to your financial woes. These gurus have become extremely wealthy peddling their messages, mainly because the natural demand for what they’re offering is very large and growing. And there’s one thing they all have in common: a message that you can fix these things on your own, and somehow, magically, become fabulously wealthy — or at least financially independent — even without earning more money.

You can’t, of course: that’s a myth. But it’s a powerful myth, all the same: just cut out a daily latte habit, and the next thing you know, you’ll be a millionaire! Whether she realizes it or not, Bellafante has internalized this kind of personal-finance snake oil — the advice that you can reliably expect double-digit returns by investing in the stock market; that leveraging yourself up and going hundreds of thousands of dollars in debt by buying “a starter apartment” is an entirely sensible financial decision; and that indeed it’s so important you should probably deprive yourself of restaurant meals for half a decade in order to get there.

In reality, none of these things are true. A single 23-year-old in New York is going to spend all the money she earns, one way or another, and that’s absolutely fine. Saving is a means of delayed gratification: it’s a way of trying to buy future consumption, and it’s not something that most of us are very good at, especially not when we’re 23, when the marginal benefit of present consumption is probably at its absolute zenith. There’s a time and a place for saving, of course. But that time and place is probably not New York city at age 23. And in any event, people on modest incomes don’t, in reality, become rich through saving. That’s a myth peddled by personal-finance gurus and amplified by financial-services professionals peddling savings products. And it’s curiously powerful.

Update: It turns out that Yaffa Fredrick does save a substantial amount of money after all: “about $450-$500 a month—split between a personal savings account and a 401(k)”. Indeed, it seems that she’s actually one of the most fiscally prudent 23-year-olds in New York. Which you would never have guessed from Bellafante’s column.

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