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Wake Up, America! We're Paying Billions for Personal Financial Advice, and It's Making Us Poorer

An excerpt from the new book, "Pound Foolish: Exposing the Dark Side of the Personal Finance Industry."
 
 
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Wake up, America! We're paying billions for personal financial advice, and it's making us poorer. From financial "coaches" to leading academics paid to tout dangerous products, members of what former financial columnist Helaine Olen calls the "personal finance industrial complex" are ripping us off, preying on our fears and ensuring that our financial futures are anything but secure. Olen exposes the bogus -- and well-compensated -- advice issuing from the mouths of slick celebrities like Suze Orman, David Bach, Dave Ramsey, and Jim Cramer. She blasts through the mirages of 401(K)s, mutual funds and gimmicks of the do-it-yourself retirement plan that America has foolishingly embraced, along with the real estate schemes and stock market fantasies we turn to when the numbers in our savings accounts don't add up.

In a book that's indispensable to anyone seeking to understand financial reality, Olen reveals the industry's uber-myth: that it's your fault if you're not rich and that tinkering with retirement calculators and investments can save you from financial ruin. That lie, meant to shame and cow us, has a big pay-off for the personal finance predators: it diverts attention from the giant social and economic problems like flat wages, job insecurity and soaring healthcare costs that can bankrupt the most virtuous penny-pincher in the blink of an eye. The antidote to this snakeoil, Olen tells us, is to stop obsessing on our individual financial prospects, and start thinking collectively -- before it's too late.

The following excerpt is adapted from Pound Foolish: Exposing the Dark Side of the Personal Finance Industryby Helaine Olen by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Helaine Olen, 2013.

The Latté is a Lie: Selling the Myth of the Fiscally Promiscuous American

A quick cup of coffee, a few moments of pleasure. What could be wrong with that? If you ask David Bach, a lot.

According to him, the Starbucks latté is one of the leading sources of our money woes. A former Morgan Stanley money manager, Bach parlayed his experience into multiple book contracts, a nationwide seminar, and ultimately, a regular gig on theToday Show.

Bach believes we can all become millionaires by the time we retire if we arrange to make our savings automatic by having money deducted from every paycheck we receive and funneled into an invest­ment account. It’s not a bad insight as far as savings strategies go. But first people need to find money to invest, and that’s a challenge for Americans. Just under half of us are living paycheck-to­ paycheck existences at least some of the time, with nary a penny left over for savings.

That’s where Starbucks enters the picture.

Bach calculated that eschewing a $5 daily bill at Starbucks— because who, after all, really needs anything at Starbucks?—for a double nonfat latté and biscotti with chocolate could net a prospective saver $150 a month, or $2,000 a year. If she then took that money and put it all in stocks which, ever an optimist, Bach assumed would grow at an average annual rate of 11 percent a year, “chances are that by the time she reached sixty-five, she would have more than $2 million sitting in her account,” he wrote in his first book, Smart Women Finish Rich, published in 1999. “Are you latté-ing away your financial future?” Bach asked his readers.

People couldn’t get enough of the Latté Factor. It seemed to ex­plain all our woes, all our lack of financial discipline. Give up that latté, and save a six-month emergency fund! It was a simple solution to a long-term problem. “Extraordinary,” said Lester Holt on NBC. An Australian mutual fund company debuted the "Latté Challenge” to get savers to put aside money for retirement (in their funds, of course). The Bank of Nova Scotia announced a deal with Bach in late 2004, buying up 250,000 copies of The Automatic Millionaire to promote its “Find the Money” initiative, which encouraged customers to sign up for automatic de­posits in the financial institution’s retirement plans. Search Google today, and you’ll find more than 70,000 unique mentions of the latté factor.

OK, to be fair Bach didn’t just blame the latté. In Bach’s universe, the latte stood for all the small, regular luxuries we treat ourselves to. It could be the once-a-week sushi lunch or the premium cable package or ... you get the idea. “Most of us waste a lot of what we earn on ‘small things,’ ” Bach wrote in The Automatic Millionaire. “The so-called small things on which we waste money every day can add up in a hurry to life-changing amounts.”

There was only one thing wrong with the latté factor. It wasn’t true. It didn’t work mathematically. It didn’t work in terms of what we were actually spending our money on. It didn’t take into account what life costs were actually rising or falling. The latté factor was, to mix our drinking metaphors, the financial equivalent of the Miller beer—it tasted great, but was less filling.

Bach, whether by design or true belief, had concocted a catchy slogan that appealed to our desire for a quick and easy fix, but one that bore little relation to economic reality.

Bach knew his archetypal latté guzzler could not be spending $5 on a single latté, not in 1999. So he added a biscotti to the bill and factored in the incidental Diet Cokes and candy bars he assumed his subject also bought. Even then his numbers didn’t quite add up. Five dollars a day, 365 days a year, is $1,825. So Bach “rounded” the num­ber up to $2,000 annually, the better to exaggerate the amount of money that the latté was, in the long run, costing the person who was drinking it.

Other numbers were equally as suspect. A 10 or 11 percent average annual return on stock market investments? Such a number had no basis in reality, as anyone who was certified in anything financial should have known. The Dow Jones Industrial Average showed a 9 percent average annual rate of return between 1929 and 2009. And that was a good, long-term, 80-year number, a period very few people besides a lucky trust-fund baby who made it to an old age could hold on for. The short term could be much worse—as we all now know.

There’s more. A blogger at Bad Money Advice, a popular personal finance blog, noticed another problem. Bach, a supposed expert financial adviser, did not take inflation or taxes into account. When Bad Money Advice ran the numbers, remembering those two pesky fi­nancial details, he came up with $173,000. Not chump change, for sure, but way short of a million dollars.

Other personal-finance experts came up with even lower numbers, many using Bach’s own “Latte Factor Calculator” on his Web site. Kim­berly Palmer at U.S. News & World Report calculated a $3-a-day habit earning three percent annually would net $50,000 in 30 years.

Someone else had been on top of the latte factor too. Unno­ticed by almost everyone, first lady of personal finance Suze Orman had also discovered it in her 1999 bestseller The Courage to Be Rich. And what was Orman’s final total?

One medium size Starbucks coffee a day costs $2.75, which means you’re spending $1,004 a year on morning coffee. Invested at 10 percent, that’s $57,504 over 20 years, $98,740 over 25 years, and $165,152 over 30 years.

Even then, our hypothetical Starbucks junkie was not only the luckiest investor ever, we were still assuming that he would en­counter no financial ill winds over the course of his career, and no unexpected trips to the unemployment or doctor’s office that would force her to drain the latté money. Because the truth was, de­spite the claims of Bach and others like him, Americans’ dismal spending and savings habits had very little to do with a caffeine addic­tion.

Helaine Olen, author of "Pound Foolish," has written for the New York Times, Los Angeles Times, Washington Post, Salon and other publications. She blogs at Where Life Meets Money, and she is the Money blogger for The GuardianUS.