Intimated by a pile of debt? Wondering how much to save? Stumped on how much money to pour into the stock market?
If an individual reads a book offering personal finance tips and then talked to an economist about these same money questions, there’s a good chance they’d come away with different strategies.
That’s because “popular advice often deviates from economists’ advice,” according to a new paper from Yale School of Management Professor James Choi, released Monday by the National Bureau of Economic Research.
Choi surveyed the tips and teachings of nearly 50 books on personal finance from authors including radio show host Dave Ramsey, writer of Total Money Makeover, and Robert Kiyosaki, the author of “Rich Dad Poor Dad.”
Then he contrasted and compared those views against academic theories on the economically “optimal” ways a person ought to proceed when it comes to topics like debt management, savings and investment strategy.
“ Personal finance experts focus on habit and emotion in a way that economists could consider. ”
— Yale’s James Choi
Turns out personal finance experts and economists might each learn a thing or two from the other side, Choi said.
Personal finance experts focus on habit and emotion in a way that economists could consider, Choi said, while the experts could benefit from the economists’ global view of stock markets
At a time when high inflation is gnawing at savings accounts and the volatile stock market can pop high and drop low, regular consumers could benefit from hearing both sides. Here’s a look at some of the differences.
When it comes to figuring out how much money a person should be saving, the economic focus is on finding the best consumption rate. Then, the savings rate is “whatever the difference happens to be between income and optimal consumption,” Choi wrote.
So, theoretically speaking, it’d be okay for a worker in their 20s to save less because they are making less and when they earn more in the career that’s still in front of them, they can save more.
“Because income tends to be hump-shaped with respect to age, savings rates should on average be low or negative early in life, high in midlife, and negative during retirement” Choi wrote, explaining the economic view.
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