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Personal Finance Absurdities Seen in the Media

One of the themes of this blog is that frugal habits are often learnt as a child from seeing what your parents do. However, there are many other factors which influence people’s approach to their finances, and one of them is what they read in the mass media.

Newspapers and magazines run many articles on financial matters, including analysis of different consumer alternatives, profiles highlighting readers’ financial situations, Q&As where an expert responds to a financial question, etc. Many US and Canadian newspapers have dedicated personal finance sections.

A Squandered Opportunity

And yet, it’s not at all uncommon that I read something about personal finance in the media that makes me cringe. Usually, these are statements which, either explicitly or implicitly, normalize excessive spending, low saving rates and a lack of control over one’s finances.

Journalists writing about personal finance have an amazing platform to put out some bold ideas about how people should manage and spend their money. Yet it seems to me that many of them pander to the lowest common denominator, rarely pushing their readers to do better with their money or acknowledging the financial illiteracy that is epidemic in today’s society. Despite seeing themselves as bearers of crucial information, these writers seem to repeat the same old set of harmful messages: saving is almost impossible in today’s society; middle class salaries do not cover life’s necessities; Generation Y is screwed. Sound familiar?

Personal finance writers often seem to handle readers with kid gloves, going on and on about the financial difficulties that they face, and rarely questioning whether the problem may be the way people are spending their money or making financial decisions. It seems that these writers prefer to coddle readers rather than challenge them. My guess is that they and their publications think that indulgence will sell better than tough love. But if they took note of the way that frugality and financial independence blogs have exploded in recent years, I think they might change their mind.

In this article, I will highlight some statements I have read in the media which I found absurd and unfortunate. This may become a series, as there is certainly lots of ongoing material to fill future posts!

Did I Just Read That?

Discounting of People’s Capacity for Thoughtful Decision-Making

I’ve said many times that the best way to save for retirement is to automate the process – have money transferred into your registered retirement savings plan or tax free savings account every time you get paid.

The idea that the best way to save for retirement is to put the process outside of your control dumbs readers down rather than encouraging them to control their financial situation. It seems to imply that if readers don’t automate the transfers to their retirement accounts, they will spend all of their money - as if spending is an unavoidable force that cannot be tamed. While there is nothing wrong with automatic transfers, what I don’t like about this statement is that it treats people like primitive animals rather than thoughtful individuals who can, and should, make financial plans and consciously conduct the transactions needed to make their plans come to fruition.

Inexplicable Financial Decisions Portrayed As Normal

We have no retirement savings, because we emptied a small 401(k) to pay for our younger daughter’s wedding.

– Neal Gabler, The Secret Shame of Middle-Class Americans , The Atlantic

This quote needs to be read in context to fully understand the absurdity of it. In this article, Neal Gabler talks about his struggles to build up any kind of savings and his kinship with the 47% of Americans who supposedly couldn’t come up with $400 for an emergency (a staggering finding). He spends most of the article discussing the challenges of the American middle class and explaining how he ended up where he is. While he admits to some mistakes, there are also a lot of justifications and excuses, meaning that the statement I have quoted isn’t said with any kind of irony; the author truly believes that it was reasonable to empty out his 401(k) to pay for his daughter’s wedding.

The idea that it makes sense to empty your retirement fund to pay for a big party is truly mind-boggling. It perpetuates many myths, including the idea that it’s no big deal if you don’t have savings for your retirement and the idea that a wedding is worth going into dire financial straits over.

Weddings are a luxury, not a necessity, and in no way something that should come ahead of meeting basic financial goals. A person who can’t come up with $400 for an emergency has no business planning an expensive wedding. Unfortunately, media statements like this have the effect of continuing to make people think that this is reasonable behaviour.

Ignorance of Basic Financial Concepts

Conventional wisdom calls for using your tax refund to pay down debt and boost savings. And certainly, anyone swimming in debt or without emergency savings would likely be better off if they used the cash for those goals. But financial advisers say some people might benefit from spending at least part of their windfall, especially if they feel like they’re on the right track when it comes to savings and if they have no debt.

For many taxpayers, the tax refund is the largest check they’ll see all year. And at an average $2,800, some people might find the check can be large enough for them to make progress toward more than one goal.

Here are some ideas from advisers and other money experts for smart ways to splurge with your tax refund: Go on vacation… Upgrade your ride… Tackle home-buying fees… Replace important furniture… Invest in your side gig.

– Jonnelle Marte, Smart ways to splurge with your tax refund , The Washington Post

What makes this article absurd is its entire premise, which is to treat a tax refund as some sort of additional income which is separate from our regular paychecks and should have different rules applied to it.

A tax refund simply means that you had too much tax deducted from your paycheck throughout the year, generally because the source deductions that your employer made did not account for tax deductions or credits that you were entitled to. In other words, your paychecks throughout the year were lower than they should have been, and you are now getting back the difference.

A tax refund of $3,000 is no different than having received a biweekly paycheck that was higher by $3,000 / 26 = $115. So the question must be asked: why would you treat this refund as different than an additional $115 in every paycheck?

Freegalistas know that income is income is income, regardless of when in the year you get it and whether it is a salary, a bonus, a travel allowance, etc. Income acts the same regardless - it is money that can be spent or saved.

If a new car or a new piece of furniture is the right decision for a person based on the decision-making parameters we outlined in Frugal Manifesto: 5 Critical Success Factors for Frugal Living, then it is the right decision regardless of whether they received their income throughout the year or during tax season.

This article is also a missed opportunity to talk about the concept of the time value of money, which is the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. When discussing tax refunds, it would be more beneficial to explain to readers that if they are getting a refund, they have essentially lent the government money interest-free. The time value of money means that it would have been to their advantage to get their money sooner by having a higher paycheck throughout the year. They could then have invested the additional amount and earned a return, or paid off a debt and reduced interest costs.

In some jurisdictions, there are actually ways to get your employer to take into account your expected tax deductions and thus deduct less tax from your paycheck. In Canada, the TD1 form can be used to inform the employer of expected personal tax credits. Form T1213 can be used for other expected deductions and credits, including contributions to registered retirement pension plans.

When a person understands the time value of money, they are more likely to take advantage of these opportunities. And even if someone doesn’t have this option, they would still benefit from being reminded of the time value of money and understanding what a tax refund truly means in financial terms.

Unbelievably Low Expectations

Fresh data released Wednesday shows that expenses for “average households” sit just under $75,500 a year, according to Statistics Canada. It’s a catch-all sum that covers everything from the basics, such as food, shelter, transportation and taxes to what some may consider perks, such as cellphone and Internet costs and even gifts. That figure compares to average annual household incomes of $79,600, according to Statistics Canada – meaning there’s a sizable surplus between what we make and what we spend. So does that mean Canadians are in fact a nation of savers, after all?

– Jamie Sturgeon, Are Canadians really spending more than they earn? , Global News

Um, what?

Yes, you read that right - this article is saying that an annual difference of $4,100 between income and expenses, which equates to about 5% of income, is a “sizeable surplus.” The writer has concerns with the way the rate is calculated (since debt repayments are not considered as an expense), but says that a legitimate savings rate of 5% would make Canada a “nation of savers.”

I have no idea how the author could have possibly come up with the idea that 5% is a high savings rate or that $4,100 per year is a large amount to save. I am truly and completely baffled.

It can’t be through mathematics - after all, 5% is a small fraction that is much closer to zero than one, and 5% of income saved means 95% of income spent.

It can’t be based on an assessment of how much in savings is needed to lead a healthy financial life. An annual saving of $4,100 over a 45 year career will result in household assets of $184,500 - good luck living on that amount for 25+ years of retirement.

It can’t be based on a comparison to Canadians’ historical savings rates either. According to Statistics Canada, the household saving rate has been declining steadily since 1982, when it stood at 18.86% (see chart below).

What is it based on, then?

I can only conclude that the writer is starting from the assumption that it is normal to spend one’s entire income, and that any savings rate above zero is a good savings rate.

If this is the message that the media is giving the public, how can we honestly expect to do better? How can we expect to engage people to begin saving larger amounts? How can we expect to get governments to recognize the dysfunction inherent in today’s spending and saving patterns and do something about it?

This article is making annual savings of $4,100 and 5% of income out to be an impressive level of savings, and it absolutely is not. It is a sad statistic that should be bemoaned, not applauded.

Saving Seen As Astonishing

He’s a 26-year-old Ottawa resident by the name of Rob Nettleton and he’s an example not just to his fellow members of Generation Y, but to anyone who wants to save money but can’t figure out how. Even if you’re not as disciplined as he is, you can still learn from the story of how he graduated with $18,000 in debt and now has savings of roughly $32,000.

His strategy is to pay his bills gradually, rather than all at once. He puts half the money needed to cover monthly bills such as rent, cellphone and Internet into a savings account after receiving his first paycheque of the month. He then uses his second monthly paycheque to cover the remaining amount of his bills.

Another rule is to make saving and investing automatic. With the help of a financial planner, he set up a program that currently directs $200 into his tax-free savings account every month, and another $200 into his registered retirement savings plan. Still another $200 or so goes into his emergency fund. “The timing of that money coming out is very strategic,” he said. “If you get it taken out the day you get paid, you’ll never know it’s gone.”

This article really struck me when I first read it. There I was, a little younger than this person and with significantly more savings, and yet I never would have thought of myself as an exemplary case worthy of a newspaper profile. Was having a high savings rate really so abnormal, or was this another example of the media pandering to the lowest common denominator?

Articles like this make it seem like it is almost unheard of to save sizeable sums of money in your 20s. Yet your 20s are one of the best times to save. You are still used to inexpensive student living and can comfortably keep living this way for quite a while. You also have fewer financial obligations, since you usually have no house and no kids. Rather than treating the man being profiled as a maverick and making his situation seem like an unattainable ideal, wouldn’t it have been better to advise readers of the infinite wisdom of such a life and to genuinely encourage it for all readers in their 20s?

The article does refer to several smart saving strategies, such as bringing your lunch to work. But it also includes a few unfortunate statements. One of the profiled individual’s strategies is to play with his money, transferring amounts around to supposedly make it easier to pay the bills. But this does not change his total income or his total expenses, so what does it matter? Young people would be better off finding ways to reduce their expenses or increase their income.

You’ll also notice that the statement “If you get it taken out the day you get paid, you’ll never know it’s gone” is yet another perpetuation of the idea that to be responsible with your money, you have to deceive yourself and fight your base instincts. Why not encourage other instincts instead, which should seem just as natural: knowing your financial situation and making conscious decisions that will benefit you in the future? This statement, like many others, continues to bolster this image of money as a liquid that slips through your fingers without you knowing it.

Don’t get me wrong - I much prefer profiles of the young gentleman above than of people like this couple . But rather than gratefully accepting any media exposure “crumbs” we get, I think we in the frugality and financial freedom movement have a right to be critical of the coverage that we get and demand more. Rob Carrick, if you are reading this, I encourage you to take the next step. Seek out the many people who are good savers and are in control of their financial destiny. Rather than writing a single profile portraying this as an unusual behaviour, write a whole series about the wisdom of this way of living and lament the fact that financial illiteracy and consumer culture have pushed these principles to the fringes of personal finance discourse, rather than the mainstream where they belong.

A Challenge to Every One of You

Personal finance deserves all the attention it gets and much more. But personal finance writers are leaving the job undone when they choose to dumb down elementary financial concepts, gloss over the personal responsibility that we each have for our finances and ignore the urgent need for many people to change their approach to money.

Today, I challenge each of you to undertake one act which may help turn the tide: Pick a personal finance writer whose articles you read often and contact them. Send them to this blog post, and challenge them to prove me wrong. Ask them to write one article acknowledging the rampant waste in today’s society and the need for better financial literacy education. Somehow, I have a feeling that many of them would love to elevate their content, but may just need a bit of encouragement.

What impact has the media had on your approach to money? Have you come across personal finance absurdities in the media? Did you contact someone in response to my challenge?

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