{"id":283,"date":"2022-10-24T12:00:00","date_gmt":"2022-10-24T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/is-most-personal-finance-advice-wrong\/"},"modified":"2025-09-03T18:58:09","modified_gmt":"2025-09-03T18:58:09","slug":"is-most-personal-finance-advice-wrong","status":"publish","type":"essays","link":"https:\/\/moneywithkatie.com\/essays\/is-most-personal-finance-advice-wrong\/","title":{"rendered":"Is Most Personal Finance Advice\u2026 \u201cWrong\u201d?"},"content":{"rendered":"
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I know what you\u2019re thinking: Madam, you\u2019d better not tell me I\u2019ve been wasting away hours of my life reading and consuming your opinions for you to tell me that it was all bollocks. <\/em>(Yes, in this hypothetical, you\u2019re British.)<\/p>\n

But if you exist in the physical realm, you\u2019ve probably noticed something: We don\u2019t live inside the cell of a budget tracking spreadsheet (despite my most earnest efforts; here\u2019s hoping the metaverse can deliver).<\/p>\n

I can plot out the next five years of my life neatly in the Financial Independence Planner, full of Future Value formulas, average returns, and estimates about income increases\u2014but it\u2019s mostly an illusion that provides a sense of control. If it encourages me to stick to the plan, wonderful! <\/p>\n

But there\u2019s a problem with \u201cthe plan\u201d: The human psyche. <\/p>\n

We don\u2019t live in Excel World. We live in the <\/strong>Real World<\/strong><\/span><\/a> (no, not that Real World). And in the real world, people behave irrationally.<\/strong><\/p>\n<\/div>\n

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Renting vs. buying<\/h2>\n

A few months ago, I released a podcast episode<\/span><\/a> about the \u201crent vs. buy\u201d calculus in 2022. The math it suggested to prospective buyers was simple: to determine whether it was more financially prudent with current interest rates for you to (a) buy your primary residence or (b) rent one instead, and invest the cost difference in something else. <\/p>\n

The intent was to simply flesh out and compare the two paths. Assess the opportunity cost. Look at the outcome. Decide. Easy, right?!<\/p>\n

While the example generally showed how the \u201crent and invest\u201d camp often surpasses (or, at the least, keeps up with) the net outcomes of the \u201cbuy\u201d camp in many parts of the country, there\u2019s one piece of pushback I hear every time I dig into this:<\/p>\n

\u201cBut most renters don\u2019t invest the difference. They just spend the money. Renting instead of owning <\/em>and not investing the difference<\/em><\/strong> is a losing proposition, and that\u2019s how this plays out in reality most of the time.\u201d<\/em><\/p>\n

This roughly translates to: But Katie, these people don\u2019t live in a spreadsheet. They live in the real world. <\/em><\/p>\n<\/div>\n

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\n \u201c<\/span>If you know you don\u2019t have the discipline or education to invest in the stock market every month while you rent\u2014even if it\u2019s the cheaper and more lucrative path\u2014should you work on the discipline? Or should you just buy a home instead?\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
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A home is sometimes called a \u201cforced savings device\u201d for this very reason. And\u2014fair!\u2014I have no idea if someone weighing these options is going to actually<\/em> institute either path \u201ccorrectly.\u201d It\u2019s hard to quantify the error rate for ~human deviation~ in a breakdown of this kind if Melissa the Renter forgoes one month of investing to buy a pair of Chanel shoes (*sheepishly shuts closet door*). Melissa lives in the Real World (and, evidently, a rented home).<\/p>\n

So is it true? Do most renters not<\/em> invest the difference? If \u201crenting and investing\u201d were both lucrative and common<\/em>, we\u2019d expect renters to have net worths that surpassed homeowners\u2014but according to Pew Research Center, 96.1%<\/span><\/a> of people in the \u201ctop 10% of net worths\u201d are owners, not renters. <\/p>\n

(Though I\u2019d argue this invokes a causation vs. correlation argument that would titillate my Econ101 professor\u2014put simply: Homes don\u2019t make you rich, rich people just buy homes.) <\/p>\n

That said, it begs the question: If you know you don\u2019t have the discipline or education to invest in the stock market every month while you rent\u2014even if it\u2019s the cheaper and more lucrative path\u2014should you work on the discipline? Or should you just buy a home instead?<\/p>\n

Melissa the Renter wouldn\u2019t have the option<\/em> of pausing an investment contribution to buy shoes if that payment was going to her mortgage lender. <\/p>\n

Sure, a comparison that occurs in a perfect mathematical vacuum may say it\u2019s suboptimal because 75% of that \u201cforced savings\u201d monthly PITI payment is going toward unrecoverable costs (not equity). But is it still<\/em> the better course of action if the other 25% is<\/em> building equity, if the alternative use of those funds would\u2019ve been spending anyway?<\/p>\n

How much weight should we give our psyche (or other external factors) in these types of decisions?<\/strong><\/p>\n<\/div>\n

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Investing<\/h2>\n

Another popular example? Me, constantly beating the diversification drums.<\/p>\n

While I can sit here and point to historical examples wherein adding diversification beyond the S&P 500 (Emerging Markets! Small Cap Value! Global Markets ex-US!) created outsized returns<\/span><\/a> over time within spreadsheets and flawless backtests, your average investor doesn\u2019t live inside a backtest. They live in the real world, where they need the confidence to assemble a more complex portfolio and <\/em>stay invested in it long enough to reap the rewards.<\/p>\n<\/div>\n

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\n \u201c<\/span>Surely we\u2019d prefer investing with imperfect diversification to not investing at all.\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
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Even if we can see that buying and holding a diversified portfolio of 8\u201310 index ETFs historically provided superior returns compared to a portfolio that only held one ETF, does it even matter if we can\u2019t \u201chold\u201d long enough to get them?<\/p>\n

If your average investor isn\u2019t prepared to stomach years\u2014sometimes decades\u2014<\/em>of underperformance in some categories, it\u2019s possible they\u2019ll sell (out of frustration, or to get their hands on some cash), stop contributing (out of hopelessness), or never start at all (out of confusion). <\/p>\n

Surely we\u2019d prefer investing with imperfect diversification to not investing at all, if making something so simple<\/em> that it\u2019s a no-brainer (buy one index fund and move on!) is the difference between someone investing and not investing, <\/p>\n

Should we try to change our mindsets, or tailor our behavior to fit reality for the best outcomes?<\/strong><\/p>\n<\/div>\n

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Debt paydown<\/h2>\n

Debt sparks a lot of these \u201cperfection\u201d vs. \u201creality\u201d debates:<\/p>\n