Creating a Personal Finance Plan from a Template

Through this article I hope to encourage the reader to create a customized financial plan for themselves by drawing on and synthesizing multiple experts in a critical way, rather than taking a single plan at face value. Disclaimer: I'm not licensed as a financial or legal adviser.

I previously wrote a critique of Dave Ramsey's approach to debt. I'm hardly the first person to have critiqued Ramsey. He has a few standard rebuttals, many of which I dealt with in the previous article. I will deal with two additional rebuttals in this article. I have also given Ramsey credit for a number of his better ideas.

Two common responses Ramsey offers to a critic are:

1. My methods have made me wealthy
2. My methods are consistent with the results of a survey of millionaires
   

Dave Ramsey is a popular financial expert one might encounter through a simple google search:

I took the above list of Top 5 Personal Finance Experts to Follow in 2016, and I also added additional experts from 8 experts recall their best personal finance advice, and I listed them below by their estimated net worth when I could find it:

1. Grant Cardone - 350 million
2. Robert Kiyosaki - 80 million
3. Peter Schiff - 70 million
4. Dave Ramsey - 55 million
5. Wayne Dyer - 20 million
6. Chris Hogan - Unknown, but likely less than Dave because Hogan is a recent member of Ramsey's organization and network
   
7. Brandon Turner - Unknown, but likely more than 1 million dollars
8. Joshua Dorkin - Unknown
9. Gary Belsky - Unknown
10. Neale Godfrey - Unknown
11. George Kinder - Unknown
12. Rieva Lesonsky - Unknown
13. Peter Navarro - Unknown

A more sophisticated analysis might correct for each person's age, the wealth of their parents, and other factors. Grant Cardone and Kiyosaki both recommend strategic use of debt and obtained wealth through real estate. Same for Brandon Turner and Josh Dorkin, although I don't know their net worths. Peter Schiff is a well known investor focused on precious metal, not real estate. Schiff has been a strong critic of risky lending, mortgage industry concerns, and certain financial policies, but he has been a proponent of smart loans and certain trading instruments which require the use of debt. For example, Schiff shorted the sub-prime market before the Great Recession, but shorting requires lending. I'm also pretty sure he's also engaged in margin and options trading, which involve lending.

Basically, as far as I can tell, Ramsey is the only person on the list who whole-sale eschews debt. He's also not at the top of the list, but he is on the list and there's something to be said for that. He makes some good points, but if we think critically we can adopt his good points without adopting his weak points.

What about his point that his methods are consistent with a large survey of millionaires? I echo this Bogleheads post in saying that I can't find the survey data. The data that I do have indicates that savers are only one category of self-made millionaire. The other category is risk takers, and in fact the savers were in the minority, were less rich, and took longer to get rich. Taking risk isn't a good fit for all people, but if your personality can genuinely accept that a risk may go well or go poorly, debt is a risk which can generate significant payoff.

Like many leading financial experts, Dave Ramsey has a particular approach to finance. In this article I refer to the prescriptive financial plans obtained from a  financial expert as a template. This approach involves certain simple pillars like the debt snowball and the envelope system, but to fully understand the approach with respect to the smaller details one would need to consume at least several of his more than 50 print books and audio books.

It's important to note that many financial experts recommend importantly different templates. Which should be preferred? The answer is that we should prefer the correct plan, but the problem is that no one has a perfect plan. We have basically three options:

1. Completely ignore the experts and do whatever the hell you want
2. Try to implement an unedited template from an expert
3. Try to learn from the experts, then do whatever the hell you want

A major key here is that at the end of the day you are responsible for your own financial future. Even if you choose option 2, it is you who is responsible for you choosing option 2. There is no escaping your own responsibility for the decision. This is also completely applicable to theological decisions and the attempt to interpret religious text.

As an economist, I don't believe in a winner-take-all approach. Instead, I recognize gains from trade. I would weight Grant Cardone's advice heavily, but I would also try to synthesize that with Kiyosaki, Schiff, Ramsey, and the other financial experts, weighted by the degree of their success. That is to say I recommend option 3.

Option 1 is simply foolish, but I can appreciate that some people will be extremely concerned about their own ability to form a plan, in which case they might desire to choose option 2, where they take the expert's template at relative face value. When selecting option 2, keep in mind that expert templates will often adopt two strategies:

1. The expert will depend on a typical or average case data in making a recommendation to the reader, generalizing over special cases.
2. The expert will recognize that different strategies work for different individuals, but they will ask the learner to identify their own type and select their own strategy, perhaps from a curated selection.

To the degree strategy 2.1 occurs, the learner will be foregoing optimization or even predictably executing an error. I'm trying to emphasize that following an expert over your own intuition is not obviously the safer option. It simply results in a different kind of error. Strategy 2.2 is basically equivalent to option 3, where the individual selects their own strategy, incorporating and valuing what they have learned from the experts. So again, I recommend option 3 over options 1 and 2.

There is a strategy 2.3 which is that the expert will personally engage the learner and develop a customized plan, but this is not the sort of expert help which is yielded by reading books and such. That would be when you actually go out and hire a financial adviser, utilize a paid service, or similar. There are obvious benefits to that strategy, but obvious problems as well. First, assistance comes at a price. Second, the individuals selling such services may face an incentive to benefit themselves over their client, you.

Feel free to utilize such services, but be sure to track the costs and benefits of such services. If you notice a service costs more than it generates in benefit, get rid of it. Remember that a service's benefit is not measured by your increase in wealth per year. It's measured in the difference between the wealth per year with help compared to the wealth per year without help.