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.

34 comments

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You are being too kind on the dynamics here.

This is not about financial advisers having off-kilter priorities, this is about financial advisers having exactly the priorities that the free market pays them for: They want to make money by managing other people’s money.

Basically, every piece of sushi consumed means less money in their pockets, so they oppose the consumption of sushi.

It is in the rational self interest of financial advisers to maximize their sales, and hence their profits.

Posted by Matthew_Saroff | Report as abusive

“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.”

So tell us Felix, how exactly were you able to afford the down payment on your $1.195 million Manhattan condominium on a “starving reporter’s” salary?

Posted by Nichols7 | Report as abusive

You’re presenting a reasonable argument for consumer goods vs. savings, but I’d criticize it on the durable vs. nondurable consumer goods basis. Beyond a certain amount of food consumption you’re not even banking fond memories as intangible future benefits since it all blurs together. Diversify your hobbies, possibly into some that have collectible value.

Posted by absinthe | Report as abusive

@Nichols7, funny you should ask, I’m actually thinking of telling that story in some detail. But for the record, I never characterized myself as a starving reporter, nor was I ever one.

Posted by FelixSalmon | Report as abusive

All finance is smoke and mirrors. Yearly return is meaningless in an index fund. What matters is when you put it in and when you take it out. 1000% growth for 100 years followed by 99.99% drop when you have to take it out makes your return negative.

Posted by Zdneal | Report as abusive

sympathetic to both sides of this debate.

if you view the wealth you can grow by wise saving and investment as an exponential curve, by starting later you are lopping off the right side of the curve, spending now instead of being able to spend a large multiple later.

at the same time, figuring out your tastes, priorities, and how to live and budget in NY is an investment and education in itself. it’s ‘consumption capital’ – seeing the Beatles at the Cavern Club and learning to enjoy their music is something that paid dividends the rest of the audience’s life.

the money you enjoy wasting is not wasted.

Posted by druce | Report as abusive

Actually underspending your income, saving and investing is wise at most times. There are times when it is impossible, but most of the time if you can do it, it is wise to do so. You don’t need a guru to explain this to you if you have rudimentary brains. People with no savings and no investments are in a precarious situation most of the time. Not very desirable. So while I agree that paying attention to gurus is pointless, saving and investing is not.

Posted by Chris08 | Report as abusive

Its like a friend said (I am one always going on about saving) – a dollar spent when your 19 probably gives you more fun than 200 dollars spent when your 79.

Posted by fresnodan | Report as abusive

fresnodan, think about spending 200 when 19. I’m 70 now. I never saved, just earned for some time more than I wanted to spend. Period.

Posted by hansrudolf | Report as abusive

*shrug* We’re savers. For a while (2005-2007) we saved $35k/year on $105k/year income. Both are up since then…

There’s no particular economic reason for us to save so much. We could live in a larger house, drive a fancier car (or even TWO fancier cars), eat out more often. Or we could pursue the activities we love, activities that happen to PAY us rather than COST us, and put the money away until we can figure out a use that would generate pleasure rather than pain.

But there is a sense of freedom in not being owned by the earning/spending cycle.

Posted by TFF | Report as abusive

Stunning take-down, Felix. Bravo.

Posted by Eericsonjr | Report as abusive

I’m with you Felix – in addition to the self serving viewpoints of the personal finance types, people can’t be and should not always be completely sensible and practical, or feel guilty when they are not. We are first and foremost human. Let’s agree that meaningful savings for retirement, like colonoscopies should not begin before some age, that age being at least 30, possibly much higher, in the case of savings. We are becoming a society of overly cautious, risk averse. timid mice!

Posted by LouisF | Report as abusive

Saving whatever you can afford can help to smooth consumption over your lifetime.

I maxed out my 401(k) contribution when I got my first job at 21, and started saving up additional money in some mutual funds in a liquid/taxable account a few years later. I also didn’t spend _every_ dollar I earned — I didn’t move from the tiny basement flat I’d been in during my first attempt at grad school (from which I dropped out because trying to live in Berkeley on $18k/yr of stipend plus research assistant wages _suuuuuucks_, and I wasn’t happy enough with the program I was in to be willing to go into debt for it). My two luxuries, though, as soon as I had income, were the SF Opera, and food.

Of course, the fact that I saved a good bit helped a lot when I went back to grad school for a second try — I was able to more or less continue my opera and food habits without putting myself into serious financial distress. (I shifted somewhat from dining out to spending more time cooking, and started selling about half of my opera subscription tix each year, but I didn’t give either one up.)

I agree that there are major structural problems — opportunities to invest at low risk with any kind of return are simply not available right now, and capital has for three decades systematically siphoned off the fruits of economic growth rather than letting any of the benefits flow to labor. (And even if you think that we’re experiencing capital-biased technological progress — google the phrase with site:krugman.blogs.nytimes.com if you need an explanation of what that is — and thus we can’t really prevent gains from accruing to capital, the obvious policy implication is that the government should strengthen the social safety net and shift the tax burden towards capital income.)

Still, I don’t think the advice is _totally_ off-base. If you’re spending literally every dollar you earn, and don’t have even a month’s worth of expenses in the bank, and you have a choice between starting to save up such a cushion and buying expensive restaurant meals, I’d advise choosing the savings. I’d also advise voting for politicians who will strengthen unemployment insurance and stuff like SNAP, but this is a totally orthogonal issue.

Posted by Auros | Report as abusive

Too much savings never did anyone harm. Too little savings can be a road to disaster. To live at the edge of your income is simply not wise.

Posted by Chris08 | Report as abusive

Ah, yes. Here we have a twofer.

First, there’s the “kids should pull themselves up by their boostraps to save a down payment for an apartment in Manhattan” from a Times columnist. It’s implied but never said that the Times writer did the same themselves, though it often tends to be the case that either Mommy and Daddy paid their down payment, or they married well. No idea if that’s true here, but the sanctimony about the glories of real estate is certainly in keeping with precedent, as is the cluelessness about its inaccessibility to anyone not profiled in the real estate section.

Second, Ms. Bellafonte wrote one of the most ridiculously condescending pieces about OWS I’ve ever read, one in which she went to great pains to find every discrediting facet of the story possible while studiously avoiding any discussion of substance – pure Style section writing

That she is now opining on the financial choices of Kids Today – and doing it so poorly – is just par for the course. Hats off to Felix for taking this on.

Posted by Anchard | Report as abusive

” 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.”

Dave Ramsey has said a million times on his radio show that the #1 most important thing a laborer can do to improve their station in life is to somehow boost the value of their labor… more education, professional certification, becoming a business owner… on and on.

If the 23 year old is investing all their time and energy on getting their medical degree, their MBA, or buying a riding mower and trailer for their landscaping business… well all of those things are likely to beat the index fund like a drum.

The 23 year old getting their first entry level foot in the door office job should sure as the sun will rise be maxing out the match in their 401k because it’s a 100% 1 year return. Every year you delay saving for retirement in practice translates into another year you must work later in life to make up for the time you willingly lost.

Saving 5, 10, 20, 50% of income=good.
Consuming 97, 99, 101, 115% of income=bad.
Nothing will ever change that truth.

Posted by y2kurtus | Report as abusive

There’s a moral judgement in here too. Criticizing people who spend all their income but can afford to save, gives you a mental framework for relieving guilt you might feel when seeing poor working mothers struggling, or guilt for doing well yourself.

Posted by BarryKelly | Report as abusive

OK, now I’m convinced we are marching into Weimar II when otherwise intelligent people like yourself write this stuff. And, to use that Helaine Olen’s book to support your argument. Please. How decadent these children are, stuffing their little hipster faces with overpriced meals and considering themselves accomplished when they probably could barely get a steak grilled correctly at home. It not just “eating” as you point out too many times. Poor people “eat” a lot in New York. Bloomberg is constantly fighting with them to eat less. It’s all about spending too much on what you eat, and thinking that you are above the little people and part of the crowd sitting at the better tables who can actually afford being there or are expensing the meal.
I spent most of my younger adult life in NYC, and ate very well, thank you, in the hundreds of ethnic restaurants available to me in the city. Probably ate better than the social climbers who spent five times as much in the eatery of the week uptown. Learned how to cook pretty well, too. Now, I’m looking forward to a relatively comfortable late life, because I put ten percent of my income into savings and invested regularly. I didn’t whine and say, oh, why save, it’s only throwing my money into a rat hole managed by thieves, or, oh, woe is me, my income is flat to down over the last decade, why oh why should I save? lalala, live for today.
I tell you, the Boomers are heading into a nasty “retirement” phase, after their profligacy and living for today during their lifetimes, but, one only wonders how these kids will wind up at 50 or 60. Poor and overweight? Most likely. Unless daddy and mommy save them from their fates. Which seems more likely.

Posted by BennyProfane | Report as abusive

Felix-

I get your point but it is overdone by a long shot. My wife and I certainly haven’t become rich by saving, but we have become very comfortably off. In our late 50′s now, we sent our kids through school with no debt and have a reasonable chance of retiring in the next five years or so. Living beneath your means almost always makes sense. It doesn’t even have to be very far beneath your means. When we newly married, and very poor, worrying about money nearly drove us apart. Knowing that you have some dry powder is a very powerful thing. The very best thing you can buy with money is choices that people with no money can’t afford.

Posted by ChazE | Report as abusive

“Too much savings never did anyone harm”, but saving on food can certainly do you a lot of harm down the road. I am not talking about splurging on restaurant bills, but investing in healthy, organic, good food. Yes, it’s an investment – the one with much higher dividend and return over the years, than you can get from saving by eating in Mc Donalds and giving your money to gamblers on the Wall Street.

Posted by Iva22 | Report as abusive

anyone else think it was hilarious when Dr. Phil and Suze Orman came out in those Acura commercials during the holidays belittling people about being responsible with their money, but to also buy a high-end Acura?

Posted by dudemcdude | Report as abusive

“Dave Ramsey has said a million times on his radio show that the #1 most important thing a laborer can do to improve their station in life is to somehow boost the value of their labor.”

Worth repeating, y2kurtus…

But I would qualify that with the #1 most important thing a consumer can do to improve their financial security and satisfaction — control their spending. If you can settle into a lifestyle that consumes less than you earn (whatever that figure might be), you’ll never need to worry about money. Since that is the #1 cause of stress in our lives (and a key contributor to #2 and #3), it is by far the simplest way to improve your quality of life.

The key is that you don’t need to cut back by much. Find somebody that earns 10% or 20% less than you do, and follow THEIR lifestyle. One notch down in the housing market, one more year on the car before replacement, a couple fewer dinners out, and cancelling that HBO subscription that you never watch anyways. Not a night-and-day difference by any stretch.

This isn’t meant to apply to those who are TRULY struggling, or to those who have had a major financial setback (divorce, job loss, whatever). But for young professionals who are in the middle of finding their “station in life”, PAY YOURSELF FIRST. It won’t cost you that much life satisfaction, and it will ultimately reduce your stress tenfold.

Posted by TFF | Report as abusive

The really ridiculous piece of this is her assumption that Frederick could have put away $300 per week in the S&P rather than $300/week for food. She does have to eat something.

The other dark side of this advice is that it is has bad macro effects. If people spend less on food, then there is less revenue in food services, fewer jobs for cooks and waitresses, etc. – all spending is revenue for someone else. The impact of increased savings can be profoundly recessionary.

If everyone were even able to put significant amounts of their income into S&P index funds rather than spending it they would inflate the price of the S&P while simultaneously reducing the overall economic activity supporting S&P returns – which is a recipe for a market crash.

Posted by Ragweed | Report as abusive

“The other dark side of this advice is that it is has bad macro effects.”

That depends what is done with the money saved. Invest it in your education, in starting a new business, in building a new home, or (as a country) in infrastructure, and future productivity may increase.

We’ll be investing massive (for us) sums of money in our kids’ education, through grade school, college, and perhaps graduate school. Could easily top half a million per kid, even in current dollars.

All money is spent eventually. The government makes sure of that, even if we don’t.

Posted by TFF | Report as abusive

Good advice TFF. One great way to “mandatorily save” is to take a shorter mortgage than you need. Yes it might some dumb when rates are allow, but the way it eats into your cash-flow helps you maintain a lower level of spending than you might slip into anyway.

My wife and I have decent middle to upper middle class incomes for our age (~30), but we will be debt free by 40. Mostly because we bought 2/3s as much house as we could afford, and survive on one 13 year old car instead of 2 newish cars (which is what almost everyone with our jobs would normally be doing).

Sure we spend a little extra on food and movies and such, but a life with an extra $100/month on food will be just as enjoyable as a life with $600/month in car payments, and you will have way way more money on the back-end.

Splurge on the little things and be frugal on the big things.

Posted by QCIC | Report as abusive

I have compared myself to my parents many times. We had one phone, and no cable only an external antenna. Now I spend 140 on cable (including internet), 6 cell phones at 310. We eat out 2 or 3 times a week so 120 a month (we already have food at home). This is like 570 a month for stuff my parents didn’t pay for. There is a lot of truth here, we can pick on the examples but it’s still true.

Posted by RossSmith | Report as abusive

I see a few good points from each of Felix and Bellafante, but also plenty with which I differ. I think several of the commenters – Chris08, TFF, y2kurtus, and Auros – make better points.

Bellafante’s example of saving 100% of food spending doesn’t make sense, an S&P 500 Index Fund is a poor investment choice for saving money that’s going to be spent in the next 5 years, and residential real estate is itself a durable consumption good/inflation hedge rather than an income-producing investment. Also, Bellafante hints at Ms. Fredrick’s total financial picture but omits a lot of meaningful information. Does she have any savings? Does she have credit card debt? Is she foregoing an opportunity to take advantage of a 401(k) match from her employer? If she manages to save some money after her baby-sitting and tutoring income, I might even say good for her working extra to indulge her expensive taste while still being financially responsible. Contra Felix’s assumptions, though, Ms. Fredrick could in fact earn a quite strong return on additional savings if she has credit card debt at double digit interest rates or could put money into a 401(k) with a 50% or more employer match on her contribution.

There’s also value to developing the habit of living within one’s income and saving something. Expanding on TFF’s point about “settling into a lifestyle that consumes less you earn”, I bet that we’ve all encountered people who spend 100% (or more) of their income and have a mindset such that they would probably do so for any level of income. To me the main message of Suze Orman and Dave Ramsey is to counter that mindset – “spend less than you earn, build up savings to fund emergencies or special events rather than incurring credit card debt, be frugal regarding large purchases like cars to avoid consumer debt when possible” – and get people in a mindset of saving at least part of their income. I understand that income and life circumstances make that extremely difficult for some people. In this case, though, we’re not talking about a single mom struggling to feed and clothe her kids. We’re talking about a 23 year old with apparently limited financial obligations, a modest income, and a taste for expensive meals. It is reasonable for her to save some money.

Posted by realist50 | Report as abusive

P.S. – Yaffa Fredrick’s worst financial decision, though, might be discussing her tutoring and baby-sitting income in the New York Times. If she hasn’t been reporting that income on her tax returns, now would be a good time to start doing so.

Posted by realist50 | Report as abusive

Financial advisors are a joke, in general. Having said that, all Americans…. not just young people and not just New Yorkers… spend far too much of their income going out to eat now. I think my family went out to eat a total of 12 times in my entire childhood. But I know many families and couples now who go out 12 times a MONTH (3 times a week or so). That’s not uncommon and it adds up to a lot of money. Not that I care, it’s their money. But listening to them bitch about being broke is hard to take seriously. You can make a burrito at home for about 70 cents. And it tastes like a burrito. Surprise!

Posted by AlkalineState | Report as abusive

@felixsalmon @realist50 You might be interested in reading about her actual financial situation –

She’s already cleared her student loans, has no credit card debt, is contributing 7.5% of her two paycheques (outside of tutoring/babysitting) to a 401(k) and has two other savings accounts for emergencies and travel that she contributes to regularly. I’d certainly not call that ‘living paycheck to paycheck’ or in any way irresponsible. the 300$ a week is way overblown and inaccurate, too. As another 23 year-old with obsessive spreadsheets and savings accounts, Mr. Salmon’s first point really was the one that hit home: that piece was all bluster and judgement with no substance.

Posted by lgl | Report as abusive

Too much is made of personal finance. If one person wastes their money, someone else is receiving it. A restaurant, a store, a ‘brothel in Madrid’ as the Pogues would say. Who cares?

Posted by AlkalineState | Report as abusive

I feel that this article oozes of immaturity.
To suggest that it’s OK to spend 1200.00 per month on restaurants and take out is simply irresponsible. It sounds like the author is one of the entitled ones – “I want it now” and – “there’s nothing I can do because the system screwed me”. Thought – pick up a cast iron skillet, head on over to the local butcher and get yourself a nice 20oz rib steak and cook that sucker up. Good eats for 1/3 the cost. Perhaps the next article could be a little more well rounded and less “silly”, while educating 20 somethings how to still enjoy the finer things without spending irresponsibly.

Posted by erott | Report as abusive

@igl – Thanks. A follow-up from The Billfold with real facts was linked in the 1/16 Counterparties. I will quote my prior comment – “If she manages to save some money after her baby-sitting and tutoring income, I might even say good for her working extra to indulge her expensive taste while still being financially responsible.” – and say good for her (and that her tastes aren’t really as expensive as stated in the NY Times piece). It was a terrible piece by the Times. The Times should correct it and apologize to Ms. Fredrick. Based on the writer’s response to The Billfold, however, that’s not going to happen.

Posted by realist50 | Report as abusive

The revelation she’s saving money makes a mockery of the original article and this worthless retort. Opinion columns blustering about half truths. What a shock.

Posted by markydee | Report as abusive