Summer Reads

Have you heard recently from family or friends about a must-read personal finance book? Simon Constable writes for the Wall Street Journal and published a July 9, 2023 article, “Five Books to Make You Smarter About Money,” with the sub-title, “Young Americans, in particular, don’t know much about handling money. But they can fill the knowledge gap by reading these books.” After reading the experts’ reasons to rush to the bookstore, I would wait.

I am around young Americans nine months out of a year and can testify that while undergraduates may be green in experience, they have brains. My sample is skewed. A very good private university that looks like a resort and is priced accordingly. There are not many from my sample that contribute to the statistics reported by the latest national FINRA financial capability study. In general, I have found my undergraduates outperform the national averages on the standard set of financial literacy questions when I test them at the beginning of the semester. I attribute their performance to a good basic education and the ability to think.

Most personal finance writers assume their readership needs financial information, but the words on the page need to emanate from a body of knowledge. Unfortunately, there is a lot of information delivery in these works unattached from economic theory. Diversification of investment holdings is the exception. If AI can deliver increasingly reliable information, then would the words offered by pop writers with social media savvy assist the obsession with resolving financial illiteracy? AI may already be enough. Financial knowledge based on economic principles differentiates great reads from those that should be hidden in the back of the stacks.

Math Matters

To my eyes, Constable’s article screams the need for a great book on personal finance. One that is an accessible, foundational, standard bearer for personal finance that educates and entertains the reader without resorting to financial rules of thumb or how to beat the stock market. We do not need more personal finance articles like Mr. Constable’s article where he rolls together a few self-described experts who opine on books they like and then be brash enough to write the reader can “fill the knowledge gap.”¹

One recommended book by the panel of experts is Tiffany Aliche’s book, “Get Good with Money.” While I am unsure what she means to get good with money, I am sure the cited highlight of Ms. Aliche’s book, a “novel” approach to handling credit card debt, is a textbook illustration of a poor financial choice. You do not need to be a math pro to approach the solution to this question:

If you have numerous credit cards or other forms of debt, does it make sense to pay off the cheap debt first?

Yes? That is Ms. Aliche’s solution. Round up all the sources of debt and rank them by least owed. Knock out the least owed first. Here is an example that explains her strategy. If you have two credit cards, one with a teaser APR of 0% and a balance of $500, and the other with an APR of 24% and a balance of $2,000, pay off the former. That is NYT bestseller stuff? That wouldn’t be a top-of-the-class performance on a college quiz. Ironically, this is initial evidence of one who is not financially literate, but to be fair just one of Ms. Aliche’s recommendations. Still, a B-level performance. I should explain.

Suppose our debtor can make a $500 payment toward their accounts. The debtor who owes $2,500 and erases the $500 interest-free balance will have $40 of interest charges attributable to the $2,500 account plus the late payment penalty. That is at least a total debt owed of $2,550. Now, let’s merge some math with the real world.

If the debtor takes their $500 payment, makes the minimum monthly payment of $50 on the interest-free account, and puts $450 toward the larger credit card debt, there are no late payment fees, and the total debt owed drops to $2,541. Not much in this example, but that is this example. The debtor is better off and the credit card company is owed less money.

Reconciliation

James Choi has written a very good article in the Journal of Economic Perspectives on the disparity between what we know as economists and the advice of financial practitioners. It is a thoughtful piece, in part, because Choi is trying to reconcile popular financial advice with economic theory. Choi asserts the ease at which people can understand personal finance rules keeps them in play. A rehashed rule-of-thumb savings rate offered by a guru is easier for most individuals to understand than a discussion about how to achieve the best living standard. Most practitioners argue for the value of routine behavior.

If we are going to strive to be better off financially and want a good summer read, preview books for the presence of principles, not catchy phrases. If the book appears to fall short, take the $20 and apply it to credit card debt. That will be the better financial decision.

1. As paid subscribers know, I have been on this box before. Please help us Julia Carpenter!