Personal finance is like politics and religion. People live and die over doctrinal debates that too often take the discussion to polarizing ends and away from the root issues and optimal guidance.
Much of the debate in financial planning lies in the investment realm. Active versus passive. Individual securities versus funds. Funds versus ETFs. Traditional versus alternative. Diversification versus concentration. Evidence-based versus hot-shot manager. Three-factor versus five-factor versus fifty-factor investing.
The insurance world is just as paralyzed by polarization. Term versus perm. Overfunding versus underfunding. Immediate versus fixed versus indexed versus variable annuities.
But no subject draws more polarized pontification in the realm of personal finance than debt. Prolific pontificator Dave Ramsey demonizes debt while “Rich Dad, Poor Dad” Robert Kiyosaki deifies it. The former makes debt a moral issue and shames anyone who doesn’t hold his opinion. The latter proudly announced that he was $1.2 billion in debt and proclaimed himself too big to fail. “If I go bust, the bank goes bust. Not my problem.”
The fact is that they’re all missing the point. It’s all sales schtick. They all have an agenda to convince us to buy their books, podcasts, funds, and policies, but one thing is missing in all of their blathering: YOU.
They could use a lesson from a college kid. My son, Kieran, is a sophomore studying kinesiology and physical therapy, and I marvel at the pace of his learning and his ability to solidify his lessons by teaching concepts to me. Over the holiday break, he was articulating the clinical concept of “n-of-1.” I asked him how he’d describe it to a layperson:
“Every person is different. You can’t use the same method for every person and expect the same results.”
Or, as they define it in a scholarly article, “N-of-1 or single subject clinical trials consider an individual patient as the sole unit of observation in a study investigating the efficacy or side-effect profiles of different interventions.”
Informative, but I think I like Kieran’s explanation even better. (Maybe I’m biased?)
Yes, personal finance is more personal than it is finance—and therefore it works best when it is highly personalized. Are there principles of personal finance that apply universally? Yes! (And here is a resource if you’re interested in exploring those principles more.) But implementing those principles could be—should be—different for each individual.
Just yesterday, I talked to a friend who knows well what he doesn’t know. He doesn’t know the stock market and he’s not comfortable losing any money. He doesn’t want to “be the bank” and invest with leverage. So, he sold his highly appreciated house in a desirable area, downsized, and bought another house with cash. He’s debt-free, and thank God, he’s now cancer-free.
With all the variables in his life, he doesn’t want a mortgage, and he doesn’t want to see his portfolio go down—at all—so he’s eliminated the debt variable and is only considering the safest of the safe investments for the remaining cash on hand. His customized strategy would likely make most financial advisors cringe, but he wants to live a simple life with a simple income stream and focus on his health and the relationships that are most important to him.
Many, many more are sitting on 30-year mortgages with 3% interest rates, pounding as much money as possible into tax-privileged retirement accounts invested largely in equities for the long term. Should they follow the impersonalized guidance to refinance to a 15-year mortgage and double the interest rate in order to check a box with a guru who doesn’t even know they exist? No. In fact, while I try to avoid Ramsey’s favorite word, to do so would likely be “stupid.”
So, what’s the debt principle that is universal here?
Debt poorly utilized can lead to financial ruin, but debt wisely used can accelerate wealth building. How and when we use debt effectively is determined not by someone else’s demanding doctrinal position, but by our goals as supported by our values.
Yes, of course, interest rates and terms and points and underlying assets and all of that matters. But the person comes first. This is an n-of-1 situation.
As financial advisors—and yes, even as financial “gurus”—our role isn’t to convince people to adopt our personal financial plan. It’s to help people create a custom financial plan of their own inspiration.