I just read “Five Reasons Americans Are Not As Wealthy As They Could Be” on Forbes. I agree with the author on some parts, but disagree with the way she thinks. Of her five reasons, three reflect facts about how wealth is created and managed, but the other two are just opinions based on conventional wisdom.
They don’t save enough.
They carry high-interest debt.
They make investment decisions based on emotion.
They spend large amounts of money on depreciating assets.
They start a plan too late.
Let’s start from the top, shall we?
They don’t save enough. She is absolutely right on this one. There is no doubt that for you to someday be wealthy, enough money has to be put aside. Her reference to The Millionaire Next Door is spot on because, yes, people who saved 20% of their household income over the past ten or more years aren’t the ones crying right now.
They carry high-interest debt. Conventional wisdom creeps in. Although the author Nancy L. Anderson, CFP® is an experienced professional, she reveals some irrelevant assumptions many financial advisers today make. In the past this was avoidable. In these times when people borrow for college, there’s not much you can do sometimes. My view is that as long as those same people can make the adjustments necessary to save 20% of their income for a majority of their working years, they’ll be just fine. This is possible, but we have to focus on the forest and not the handful of sick trees.
They make investment decisions based on emotion. This one is a no-brainer. Warren Buffet – the greatest investor of all time said: “You don’t need a lot of brains in this business. I’ve always said if you’ve got an IQ of 160, give away 30 points to somebody else, because you don’t need it in investments. What you need is emotional stability.” The first point refers to how much money is saved, but this one refers to management. People who can’t manage their own money should put it in the hands of someone who can.
They spend large amounts of money on depreciating assets. Conventional wisdom creeps in again. Her views reflect most peoples’ beliefs that items bought should be worth selling at a profit someday. I think we have to step away from that assumption. Even so-called appreciating assets like homes or stocks can be worthless for a period long enough to mess us up. I’d say that over the long-term, it doesn’t matter what you buy as long as you maintain a high savings rate (first point), and your money is properly managed (third point).
They start a plan too late. I agree with this partly. People do start planning for retirement too late, but I think many of the ones that fail could also use more than a “financial plan”. A financial plan is only as good as the strategy it’s based on. Once that job is lost, or home values take a momentary downward swing, your financial plan can turn into a worthless piece of paper. This is because “financial planning” says what to do with money, but usually nothing about how the money will be earned. A strategy does not make any assumptions about income – for most people this is what they take for granted.
My bias is towards young people who have the least job-security. Those folks will likely be better off with a 10 page “strategy” for their career than a 100 page “financial plan”. It’s competitive out there! You cannot assume that you will get another job in six months. You cannot assume that you can get another job in your city. Those that don’t strategize will be surprised by normal (so-called “unexpected”) events.
Anderson’s article is informative, but it reflects the past. For the typical Forbes reader (someone who can afford the Bentley I saw advertised on the page) this is fine. But for those facing 40 or more years of work, it is incomplete at best, and out of touch at worst. I will admit though, that in the long-term, those people who seek professional financial advice will likely do best – so she’s not that far off the mark.