I stumbled upon an article today by Larry Ludwig, the creator of the very popular Investor Junkie website. I’m happy to say that I’ve met him a few times at financial conventions and he brings a unique perspective to almost any conversation. And I mean that as a great compliment, even though “unique perspective” can be a phrase that could be used in a negative connotation.
In this article he states, All Personal Finance Experts Are Liars. That’s a strong, bold take and it’s one of the reasons why I like Larry. It’s a great article. You should read it. Seriously. I’ll wait.
Just in case you didn’t read the whole article, I’ll be reviewing and probably quoting a few parts.
To start things off, I wrote that you should ignore your personal finance guru back in 2010. Much like Larry did, I went through and named some personal finance experts and why they are bad. At least he didn’t mention Robert Kiyosaki or Dave Ramsey’s support of pyramid schemes.
Summing Up All Personal Finance Advice
Larry presents a decent summary of Generally Acceptable Personal Finance Advice (GAPFA). (I just made up this term now.) I could quibble with some of it (such as buying a house is your best investment). However, the point he makes is important:
“You’ll do slightly better than average if you follow this advice, but in personal finance, average really sucks.”
He then goes into all the statistics on why the “average person’s” personal finance situation is terrible. It’s here that start to see some problems. For example, the average person doesn’t have enough savings, but “31% have less than $500 saved.” There’s also information about how the average person has “has over $5,700 in credit card debt with a 17.89% interest rate.”
By the very definition of following GAPFA, you would be FAR AHEAD of the average. You would have “Eliminated all debt” and “have 6 months in emergency savings.” So by only picking out those two things, we’ve dramatically improved the finances of the average person by at least $25,000 – $20,000 in emergency savings and that $5,700 in high-interest credit card debt.
Another item has the average person “Spend[ing] 56% on their food budget.” I caught up with Larry on Twitter, because that seems like a lot, and he said it was $61/day. That comes out to be more than $22,000 a year. That’s not quite 56% of the average $49,000 income, but I can see it after taxes.
If you barely scraping by and are spending $22,000 a year on your food, you definitely can benefit greatly from some personal finance advice. We can probably add another $16,000 to our bottom line by following the GAPFA item of, “Minimize your expenses.”
Ludwig gives himself a little wiggle room, “Even if you were to improve these stats by 30%, does that sound like you would be rich?”
It doesn’t sound like it would. However, we know about compound interest since we read up on the summary of personal finance advice. Each piece of advice helps a little, but it all adds up. For example, the most questionable of the GAPFA is “buy a house.” The house we bought in 2011 was $400,000. It’s worth $700,000 now. Does that $300,000 in home equity (that we can’t spend) make us rich? It doesn’t, but renting the same house today would be very expensive and it looks great in our net worth tracking.
The Personal Finance Expert’s Lies
Ludwig transitions to the following conclusion:
To put it simply, all bul#sh!t.
It’s like trying to gain muscle by dieting. It’s never going to happen.
How do I know this? Ask yourself this one question: How do you think these personal finance experts got wealthy? Did they follow their own advice?
All of the personal finance experts got wealthy from the businesses they owned.
It’s true that Orman, Bach, Ramsey, and Kiyosaki (for good measure) all got rich selling their books. However, Stephen King got rich selling books too. It’s not a crime. Being a successful writer doesn’t mean that what you are writing about is fundamentally flawed. In fact, it probably indicates the opposite.
There are also numerous personal finance experts that aren’t included is these four famous names. To stick to these names is basically confirmation bias or cherry-picking. For all these people who built their brand on these books/courses, there are thousands of personal finance “experts” who aren’t getting rich off the media. You just don’t read about them, because… well… they aren’t telling their story.
For example, you can take my wife, a military pharmacist. She makes a good very good income and I’ve been documenting how we’ve followed the generally acceptable personal finance advice (GAPFA). The military benefits allow us to save money in a few areas. She also has a very strong pension, good and cheap healthcare for life, and a GI Bill to cover a big chunk of our kids’ college expenses. I’ll get into my side of things a little later on, but this isn’t close to the “average person.”
The main point I want to make is that there are a lot more people who are your doctors, lawyers, pharmacists, software engineers, fill-in-your-high-income-career, than Suze Orman or Dave Ramsey.
Another missing piece here is that there’s no agreed definition of rich. When I read it, I say that a million dollars is rich, but a million dollars doesn’t go as far nowadays. Everything with money is relative, so to the “average person” above a million dollars is enormous. If you have a net worth of $10 million dollars, someone with “only” a million dollars may seem “not too rich.” Perspective is everything.
How Personal Finance Experts Get Rich
Larry correctly points out how those experts got rich:
In reality, they used these techniques to get rich:
– Generate income not based on hours worked
– Minimize taxes
– Leverage time and debt
This is true, but I think something is missing here unless you argue it is baked into the first point. They are brands that have a strong audience scale. Tom Brady’s income is based on hours worked whether you count in the training room or on the field. The scale of the NFL allows for a few great quarterbacks usually about five at any given time. You can pick a movie star of your choice, but it is similar. They scale their brand.
Scaling a brand is not for everyone. If anyone gives you personal finance advice that you should practice throwing a football until you become the next Tom Brady or go to Hollywood and become the next Scarlett Johansson, well… that’s simply bad advice. It would be a terrible book. Would you pay to read a Dave Ramsey book that’s a few pages long starting with, “Step one: Sell a lot of books” or “Step one: Become the greatest quarterback of all time”?
The Average American as a Tax Slave
There are a few other parts of the article that I want to cover, but I’ll start with this:
To be clear, I do agree that a lot of the tips and techniques they recommend will make you better off than the average American. But the average American gets paid for hours worked and is a tax slave.
This is why, when seeing reports that Donald Trump paid little in taxes, the average American is outraged. The average person does not understand basic business concepts, taxes, and finance. They don’t understand as a business owner you have much more control over your income and the taxes you pay. Business owners have the capability to delay taxes (in some cases indefinitely).
Applying this to my wife, she is a “tax slave.” (I’m not sure she’ll be thrilled with that categorization.)
Donald Trump is an extreme example of someone who inherited a ton of wealth and used it to build a brand. It was noted that in 2015, Trump would have had more money if he simply invested in index funds such as using GAPFA. In fact, if we use that article’s assumption of Trump’s own wealth estimate of $500 million in 1982 he’d have $20 billion today. It’s more likely that he now has closer to $2.5 billion. One could reasonably say that Trump is rich with $2.5 billion dollars. One could also reasonably say that he would have $17.5 billion more dollars using GAPFA. He could at least be a lot closer to Warren Buffett’s $100 billion dollar net worth, right?
Above I glossed over my own income when mentioning my wife. I had been a software engineer making six figures in a Boston suburb and in Silicon Valley. I started learning about GAPFA and got interested enough in it to make this blog. I got burnt out as a software engineer and took a big pay cut to try to run my blog as a business. Financially, I would have been so much better off as a tax slave. Yes, I can minimize taxes using my blog as a business…
… However, sometimes my income is less than 1/3rd of hers. It’s very difficult to build a brand to scale in the attention economy. Personal finance is a very crowded space probably because many people can understand GAPFA. In addition, I run a successful dog sitting service, but the income is limited to the number of dogs I can sit at one time (it gets tough after 5-6) and how much people will pay per dog. It’s not exactly being an hourly tax slave, but it doesn’t have the ability to scale like a big brand. It’s a side hustle and I’m comfortable with that. Lastly, I do some freelance work, but other than the home office tax deduction, there aren’t great tax savings there.
My wife and I have rental properties as well, but so far we’re just building equity. We won’t see actual money until the mortgages are paid off or we sell the condos. So we’ve got a lot of moving pieces, but in 2015, I estimated it could be $200,000 a year in income. I need to update that article because it’s looking like it will be more now.
The biggest advantage to my mix of various jobs is that I can control the time I work to some degree. That’s important because it allows me the flexibility to deal with a lot of the kid issues while my wife works.
Why Personal Finance Experts Don’t Push Starting a Business
Ludwig mentions that few personal finance experts recommend starting a business:
An employee gets paid for the hours worked, so by its very nature your income is not scaleable and your wealth creation ability is limited.
Yet you almost never hear the financial experts recommending that you start a business.
Nor do these guys tend to mention the importance of understanding how taxes work.
Why do you think this is?
The average person wants the easy way out. They want the miracle pill that will make them thin or buff. They want something that requires little effort.
But in reality, there is no such thing.
He’s not wrong. The “miracle pill” stuff sells. You’ve been able to see in the tabloid headlines at the supermarket for decades now.
However, that’s not the complete answer. I think Larry gets a little closer to the answer in my opinion when he writes, “Creating a business takes lots of effort with no clear path to success.”
The problem is that once we acknowledge that creating a business is hard with no clear path to success, we realize that it’s impossible to write useful, actionable information about it. The best anyone can do is write broad generalizations. Perhaps these could be motivating for some people, but many, many others would criticize such a book as being fluff. Whatever business you may start is going to be very personal to your skillset and the tools that you have available. No general personal finance book is ever going to be able to address that. You need a full feedback loop such as a business coach.
I’ve recommended starting a business numerous times on this blog over the years. However, that’s about as far as I can go with it. I can (and have) talked about taxed benefits and things like that, but that is just a rationale for why to start a business, not how to start a successful one.
Are People too Lazy to Start Businesses?
Perhaps… but it’s much more than just that.
As Larry points out:
“Only 10% of consumers complete a book or course they’ve purchased. I suspect fewer even implement what they’ve just read. So most can’t even follow the basic advice the experts recommend. It is similar to the stationary bicycle that eventually turns into a clothes hanger.”
This is not surprising. If you look at the “average person” above, they’re drowning in credit debt and have a very small emergency fund. I imagine that they are so busy and tired at their job that it’s easier to just order take-out or go to a restaurant which is the only logical explanation of why they would spend 56% of their budget on food.
I know that I finish less than 10% of the books I try to read. (Fortunately, they go back to the library and I try another one.) I used to be able to, but now that I’m juggling three separate side hustles, rental properties, kids, and household duties (dishes, laundry, shopping, etc). How can I take a week off of everything to read a book? (I’m a slow reader.)
The implementation of the book better be damn easy. Don’t give me anything difficult. I have it better than the “average person” because I’ve managed my finances well enough to be able to outsource landscaping and afford a cleaning service.
This is the very reason why GAPFA is so powerful. You don’t need to read a book to learn GAPFA. Larry had a decent summary of it just a tiny blog post. In fact, most of it can be consolidated to a single index card. (Admittedly, it feels very backward to read about a book about information that can be consolidated to an index card.) Most people can follow an entertaining blogger and get it.
Most people I know don’t want to spend their lives learning about money or starting businesses. They have 10% of their life energy to focus on it, so GAPFA gives a path to maximize that. They are likely to get 80% of the benefit from that 5-10% of the time. We’ve already seen how much better off the average person can be when they follow GAPFA.
People can see progress with GAPFA almost right away. They can see money saved with frugality and the emergency fund grow. They can see the investment account getting $50 a week, end the year with almost $3000 in it due to growth. For that “average person”, this is tremendous progress with very little effort. If you are that “average person”, which of these is better:
1. GAPFA – Easy and steady progress that you can measure.
2. “Creating a business – takes lots of effort with no clear path to success.” (I added the dash to the quote above for formatting.)
It’s not surprising that one is more popular than the other. Is it?
Should You Start a Business?
I’ve written that you should many times in the past. Larry agrees:
“I know this is going to sound like blasphemy but ignore mainstream personal finance advice.
Follow what the personal finance experts do, not what they say — start a business.
Create at least a side hustle. You’ll learn much more about finance, taxes, entrepreneurship, and marketing than in any classroom or what the media thinks it knows about owning a business.
I think there’s room for both. Since GAPFA can be implemented fairly easily, it can serve as a safety net in case the business fails.
As for starting a side hustle, it can be a good idea, but it isn’t always one. I could easily argue that the side hustle of starting a blog took my attention away from software engineering. With a time machine, the best financial move for me would have been to follow GAPFA, never write about it, and focus more on my six-figure salary. Those checks look a whole lot better than dog sitting. I think the best case for a side hustle is as a pivot away from a job you don’t like or to supplement an early retirement lifestyle.
Can You Get Rich with GAPFA?
I wrote earlier that I wasn’t going to quote the whole article, but I’m this far along, so why not continue it? Larry starts to the end article with this:
“I’m not suggesting the advice the gurus are giving is outright wrong. Their recommendations will make you modestly successful. You’ll more than likely live an OK life and have an above-average net worth.
But you won’t be rich.”
It seems like a very definitive answer that you won’t be rich. I found a “net worth calculator by age” and my wife and I (combined) are in the 95% for our age. It would be in the 98% if we counted the value of her pension. By most people’s measure that would be rich.
However, if you probably couldn’t tell unless you looked at our bank accounts. Most of the money is locked in retirement accounts or investment property equity. It looks a lot closer to “an OK life.” We might have taken GAPFA too far with investing in retirement accounts instead of money we can more access now. We also have the option of retiring 20 years before most people with a lot more (mostly passive) income than most people, which should qualify as some amount of “rich.”
The biggest difference on whether you can get rich with GAPFA is income. A very good income and time is a great combination. If your income is just enough to scrape by with GAPFA, it’s unlikely you’ll be rich. However, that “OK life with an above-average net worth” will certainly look better than the mess of the “average person” that isn’t using GAPFA.
Can You Get Rich Working for Someone Else?
“You’ll NEVER get rich by working for someone else. That’s something you’ll never hear from any personal finance expert. But being a business owner is how they got rich themselves.
This makes all personal finance experts liars.”
I guess we could never say that Warren Buffett is rich since he works for a lot of people (commonly referred to as “shareholders”)
We could never say that any CEO is rich for essentially the same reason.
We could never say that Tom Brady is rich because he works for
Robert KraftBryan Glazer, the owner of the Tampa Bay Buccaneers and takes orders from Bruce Arians every workday. However, even Bryan Glazer is “working tirelessly to support the Buccaneers franchise and brand” according to the team bio. I guess Glazer isn’t working for someone else, but I couldn’t help but note the “working tirelessly” description.
You could argue that Tom Brady now has several of his own businesses. However, he wouldn’t have had any of them if he hadn’t been successful working for someone else. It’s not like his TB12 Sports business would have gone anywhere.
These are just a couple of famous examples. However, there are plenty of other high-income people who are able to get rich working for someone else.
The reason why you’ll never hear any personal finance expert say “you’ll NEVER get rich by working for someone else” is probably because it simply isn’t true.
One of the reasons why I chose the name Lazy Man is because I wanted to give people the easy “miracle pill” to money. If your situation allows you to follow the advice it will make you rich. It’s mathematically proven what compound has done time and time again. However, we may have to define rich as 1 to 3 million dollars and the timeline as “eventually” depending on your income and how much GAPFA you implement.
Way back at the beginning of this article, I mentioned that I wrote about “ignoring your personal finance guru” back in 2010? That article has a bunch of typos and a reference to Jack Bauer of the show 24, which puts some perspective on the timing of it. The idea behind the article is good, but the execution is terrible except for one tiny section that stands out:
“No personal finance guru is perfect. There are enough gray areas in math, psychology, and other factors that make all information open to some interpretation. They are great for learning the concepts of personal finance, but you should probably adapt them to your own situation.“
The best book if you are interested in this stuff is actually mentioned in Larry’s article, The Millionaire Fastlane. It is a great book, often one that I recommend the most. It uses a street metaphor for different paths to wealth:
The slowest lane is gambling and lottery, stuff that never really works.
The middle lane is “A dogmatic financial plan based on the fatal presumption that 40 to 50 years of gainful employment circumscribed by frugal living, tortuous saving, and regimented stock market investing, will somehow make you a millionaire.”
The fast lane is “An enterprising financial plan based on leveraged entrepreneurship that creates extraordinary incomes…”
I think he’s overselling the dream of the millions with the fast lane. However, the only that sells better than a “miracle pill” is “the dream.” I think he undersells the middle lane which misses the whole FIRE movement that condenses the path to financial independence to around 15 or 20 years, not 40-50 years. I think it’s also more likely to be a couple of million dollars, not “somehow make you a millionaire.”
There’s one more thing that I want to leave you with MJ DeMarco. It seems he made his money buying Limos.com around 1999 and selling it in 2000. He bought it back at a discount and sold it again in 2007 for $4.5 million. He seemed to have invented affiliate marketing and did well in-between.
What did he do after that? He did the same thing that personal finance experts do, building a brand by selling books. He’d probably claim that he’s more genuine because he experienced what he’s selling. However, maybe he should consider smaller writers (like me) following GAPFA who are doing quite well with it… with a lot higher success rate.
This is over 3500 words and there are three more things that I didn’t have the space to address:
1. Do personal finance experts like Certified Personal Finance lie as well? I suppose they may lie sometimes by pushing products that they earn commissions on. However, I think it would be a stretch to say they lie in general.
2. If we consider the personal finance expert book authors people who research a topic in-depth, shouldn’t we expect them to get paid for it? If someone researched the topic of car repair and wrote a popular book about it, would we say that they are lying? Can we hire psychiatrists and psychologists who study mental conditions or must they have personally experienced them as well?
3. Where do we say about personal finance experts like Clark Howard who actually do live by what he says. Despite having money from his big brand, he still buys a cheap car and lives frugally? On any given day, he can probably spout off the top 5 cheapest cell phone plans for almost every type of user. He knows fine details of things that change all the time and I don’t think can be confused as selling a miracle pill to anyone.
Some of the links in this article may earn me a commission if you buy a product after following them.
Great article. Personally my least favorite human is Dave Ramsey. When I was a young married man and we had 7 different credit cards(low balances), a book by Larry Burkett changed our trajectory. Dave Ramsey gives the same advice, doesn’t give the late Mr. Burkett credit, and as the other author mentioned, Dave is a jerk about it. And now Dave sells insurance and investments and other crap, and has made himself quite rich.
By the way, some experts estimate that Donald Trump actually has negative net worth and is being propped up by large loans from foreign investors. So the “genius” turned a couple of billion into less than zero.
Lazy Man says
Oh, I’m not familiar with Larry Burkett. I’ll have to look him up.
Larry Ludwig says
Thanks for the mention!
Trump is definitely NOT an entrepreneur to be modeled. He’s more of a great salesperson and negotiator. He was never a good execution guy.
Great post. I loved Larry’s article and your take on it. I saw my parents, middle income earners at best, grow a seven figure portfolio. I have a net worth of multiple millions all made working a 9 to 5. But his points are largely valid. A hugely successful business generally trumps a salary. But if you have a high paying job then the risk of leaving that to start a business is not a slam dunk by any means. I don’t begrudge Dave or Ramit or other gurus. Suze is a wonderfully kind person in real life. Tony Robbins is a mesmerizing, gentle giant who honestly cares about others and has donated a huge amount of money to help feed people. They have all helped people make smart choices. And they have earned their money working extremely hard building successful businesses.
Impersonal Finances says
Love the GAPFA term, and I’m a huge fan of Clark Howard over the Dave Ramsey Suze Orman types. It’s really a Catch 22 that a lot of personal finance experts end up becoming a parody of themselves and not practicing what they preach.