My 5 Most Controversial Financial Advice Nuggets Make Perfect Sense

I’ve always said it – personal finance is just that, personal.

What’s right for me could be devastatingly wrong for you, and vice versa. After all, we may be wildly different from each other. We may have:

• Different life circumstances;
• Different goals and priorities; and/or
• A totally different temperament.

Still, there are general guidelines that should work well for most people if their circumstances, priorities, and temperament aren’t outliers compared to the rest of us.

That’s where you can find the value in reading personal finance articles, whether mine or someone else’s.

In the commonalities.

In things that work great for many and at least reasonably well for most.

And it’s up to you to decide if what I write has any value to you personally.

Just as it’s up to you to decide if you should instead follow “common sense” and “conventional wisdom” that, in too many cases, turn out to be neither sensible nor wise.

But enough prefacing. Here are my five most controversial nuggets of financial advice, so you can consider if they make more sense to you than what the so-called “experts” out there preach.

“Common-Sense” Claim #1: To Build Wealth, Cut Expenses Until It Hurts

Remember how, a few years back, Australian real estate billionaire Tim Gurner said, “When I was trying to buy my first home, I wasn’t buying smashed avocado for $19 and four coffees at $4 each.” His point was that millennials can’t buy a first home because they fritter away their money on unimportant stuff.

That raised a (mostly justified) worldwide backlash because today’s housing prices are far higher relative to wages compared to what they were decades ago. Not to mention the large loan Gurner’s grandfather reportedly gave him to get him started.

Still, cutting expenses is often promoted as crucial to building wealth.

FIRE (Financial Independence, Retire Early) adherents cut their expenses so much that they sometimes sock away up to an eye-watering 70 percent of their income! Then, once they have, say, $1 million, they retire and live on the $40k or so a year that such a portfolio can throw off, plus whatever extra they can scrape from blogging about their early retirement.

My Controversial Response: You Don’t Have to Be Uber-Frugal to Become a Millionaire

Personally, I find that path undesirable on several levels.

• I was never interested in retiring in my 30s, 40s, or even 50s. If you’re so hell-bent on retiring that early, consider if perhaps you’re in the wrong job or the wrong career.
• Living on 30 percent of your income requires you to have a crazy-high income and/or to live so frugally that it hurts me to even think of it. And if you have kids, forget about it!
• Since living that frugally is so challenging, few people can keep at it for 20+ years. Instead, they pull the trigger as soon as they hit a minimum threshold, like $1 million. Thing is, that sets a pretty low limit on the comfort of their retirement and/or on where they can retire.

The path I chose is much easier.

• Choose a career you enjoy, and find a job (or start a business) you enjoy working at.
• As soon as you can, start setting aside at least 10 percent of your income(15 percent is better, and 20 is better yet).
• Invest what you set aside as aggressively as you can stomach without panic-selling when, not if, the stock market crashes 30-50 percent. However, aggressive doesn’t mean speculative. For example, I’ve never bought any cryptocurrencies and don’t expect to do so in the future.
• Each time you get a bonus or a raise, allocate at least 50 percent of it (I shoot for 67 percent) to your retirement portfolio and invest it as soon as you can.

This method lets you enjoy some of the fruits of your advancing fortunes in the here and now, making it sustainable. It also limits your “lifestyle inflation” to plausible levels.

Finally, unless you’re stuck earning sub-median income for life, when you reach your 60s you should have a sizable fortune saved up. And I’m talking multiple millions, if not more.

“Common-Sense” Claim #2: All Debt Is Evil, So Pay It Off ASAP, Including Your Mortgage

Personal finance “guru” Dave Ramsey hates debt.

With a passion.

For example, he says, “We have a fun little saying around here when it comes to debt: Debt is dumb. It really is. Debt robs your present and steals from your future. Debt keeps you stuck in a cycle that makes it impossible to build wealth.”

He then summarizes, “Let’s get one thing straight: The only ‘good debt’ is paid-off debt.”

My Controversial Response: Some Debts Are Useful – For Example, Paying Off Your Mortgage Early Is Usually Foolish

My take is far more nuanced.

Sure, taking on high-interest debt, such as carrying balances on high-interest credit cards, is a bad idea. Unless all your other alternatives are worse (e.g., not getting life-saving treatment because the only way you can cover the cost is by using a credit card).

However, there most certainly are “good debts” that aren’t paid off!

For example, say I gave you two options when buying a $30,000 car – you can (a) sell $30,000 from your investments and pay in cash, or (b) take out a 0-percent loan of $30,000 and pay it off over the next five years at $500 a month.

(And sure, if you can’t afford the payments, you should find a cheaper car!)

If inflation runs at say 3.6 percent a year, the value of the dollars you owe in option (b) drops about 0.3 percent each month. By the time you pay off the loan, you’ll have saved over $2650 of the $30,000 because each month your payment is worth a little less (after adjusting for inflation).

Also, because you didn’t touch your investments, by the time you pay off the loan, the $30,000 you didn’t sell would be worth over $40,150 inflation-adjusted, assuming a 6-percent real return.

Sure, you could invest each month the $500 you don’t have to pay against the loan in option (a), but because this money comes in gradually, by the end of the five years, your monthly investments would be worth about $34,080, or around $6060 less than in option (b).

All told, option (b) leaves you over $8700 further ahead than spurning the loan.

But what if you can’t get a 0-percent loan?

In that case, your gain would be smaller. In fact, if the interest you’re offered is significantly higher than inflation, option (a) would be your better choice. However, that’s rarely the case if you have a good credit score.

How about your mortgage?

As I’ve written elsewhere, it’s almost always a terrible idea to prepay your mortgage.

The gist is that in most cases, the combination of the mortgage-interest tax deduction and inflation will leave you far ahead by not paying the mortgage off any faster than you must, and investing any extra cash you’d have paid against the principal.

Further, such investments would let you continue paying your mortgage should you temporarily lose your income, so you can save your home from foreclosure.

Prepaying extra doesn’t do anything for you in such a situation (unless it happens after you’ve already paid off the loan, but even if it happens that late, the investing option would have left you with far more than you need to pay off the mortgage in full if you choose).

“Common-Sense” Claim #3: Buying New Cars Is Stupid, They Lose 20 Percent as Soon as You Drive off the Lot

If you follow so-called “conventional wisdom,” you’d buy into this sort of claim:

“The average person owns 13 cars in a lifetime, each costing an average of $30,000, according to a report by the National Automobile Dealers Association. If each of those cars was 3 years old, instead of new, you could save nearly $130,000 during your lifetime.” – Philip Reed on Nerdwallet

My Controversial Response: Unless You’re an Auto Mechanic, Buying New and Driving the Car for at Least 10 Years Is Smarter than Buying Used

In defense of Mr. Reed, he wrote the above five years ago, before Covid did a number on the supply of chips needed for cars, making new cars far harder to find, and pushing used-car prices sky-high.

Still, even then, it was bad advice, and I had the data to prove it back in January 2020, also pre-Covid.

In March 2021, also before Covid hit the supply chains, my research proved that not only is it cheaper to buy new instead of five-year-old cars, it was actually cheaper than buying cars that are a year old, or two, or three, or four.

The thing Reed, and so many others over the years, missed is that depreciation is just one piece of the car-ownership-cost puzzle.

If depreciation was the only consideration, you could have purchased 13 cars that were old enough to cost, say, $4000 each, and sold them for $2000 when you replaced them, for a total depreciation of just $26,000, saving you $159,000 – better even than Reid’s $130,000 claimed savings!

But let’s dig a bit deeper into this claim…

First, how many cars should you really own over your lifetime?

According to a Bankrate study, Americans think the ideal age to buy your first car is 21. Neglecting those cases where people stop driving before they die, we can use the Social Security Administration’s “Period Life Table” to find the average remaining life for 21-year-olds is about 58 years.

With cars becoming more expensive and more reliable all the time, people are keeping their cars longer and longer. According to iSeeCars, “The average length of car ownership for the top ten models ranges from 9.7 to 11.4 years.”

This means, on average, you could buy six cars new and drive them until they’re about 10 years old, or you could buy five-year-old cars, replace them as they turn 10, and own a total of 12 cars.

Looking at, say, a Toyota RAV4 Hybrid, the first option would cost you $128k in total depreciation, while the latter would cost you $132k! Even considering just depreciation, buying new wins out!

Worse, once you add in insurance, maintenance, repairs, taxes & fees, financing, and fuel, your total cost would be $413k for the “buy new” option, vs. $468k for the “buy used” one.

Thus, not only does buying used not save you money in the long run, it actually costs you an extra $55k over your lifetime.

Adding insult to injury, buying 12 used cars instead of six new ones means spending a lot more time waiting for your used car to be fixed; a lot more time researching and buying your next car, and selling your previous one; and driving cars that are, on average, five years older.

“Common-Sense” Claim #4: Frugality and the 4-Percent Rule Are All the Retirement Planning You Need

If you’ve been paying any attention to retirement planning, you must have heard of the “FIRE” movement see above in “common-sense claim #1).

The movement traces its roots to the 1992 book “Your Money or Your Life” by Vicki Robin and Joe Dominguez.

In their book, Robin and Dominguez promoted the idea of retiring early so you can enjoy decades engaged in hobbies and spending quality time with your family and friends, as opposed to working until a more-conventional retirement age in your mid-to-late 60s.

In the 20 years since this idea caught on and expanded into a full-fledged movement.

You can read here about the FIRE movement, its history, and the different variants proposed over the years. The gist of it though is this: “Aggressive saving and investing are the cores of the FIRE movement. Many looking to achieve FIRE put away around 50 percent of their income, but up to 75 percent may be necessary, depending on your goals. The ultimate goal is to save enough money to draw 4 percent of the funds each year. When you reach that number, you have achieved financial independence and can retire early.”

In short, FIRE adherents live as frugally as they possibly can until they amass a nest egg large enough that they can live on 4 percent of it.

Can we spell 4 p-e-r-c-e-n-t r-u-l-e?

My Controversial Response: Early Retirement Is Really Hard (Impossible for Most), and Even Timely Retirement Is Safest with Dynamic Draws

The problem is that the 4-percent rule was never designed to support early retirement, just a 30-year one.

Further, even for a 30-year retirement, the 4-percent rule has an estimated 87-percent likelihood of success (i.e., dying before you run out of money).

Also, current projections of future market returns are far lower than historical averages, though volatility is expected to stay in the same range – making a 4-percent initial draw far riskier.

Current estimates put the likelihood of successfully retiring for 50 years with a 4-percent initial draw, and accounting for management and transaction fees at under 10 percent!

Clearly, something’s gotta give!

Since early retirement means you won’t have Social Security benefits, potentially for decades, and you need to draw far less to be safe over a 50-year retirement than a 30-year one, you’d have to choose between amassing 2-3× as much for early retirement or living on 33 percent to 50 percent of what you’d be able to live on if you retire in your 60s.

Here’s why…

Say you’re 25 years old and have no retirement savings (but also no debt).

You want to retire with an $80,000 budget and you’re expecting $30,000 from Social Security if you retire at age 67. The 4-percent rule tells you to accumulate $1,250,000, giving you an 87-percent chance of success.

You also have 42 years to reach that lofty sum if you work until your “full retirement age” per Social Security.

What if you want to retire by age 45 instead?

You won’t have that $30,000 from Social Security for over 20 years, so you need your portfolio to provide the full $80,000. Following the 4-percent rule, you’d think $2 million is what you need. However, you also need to reduce your initial draw to say 2 percent if you want to have a 90-percent chance of success (instead of a 10 percent chance).

That means you need to amass $4 million!

Further, you only have 20 years to do so, rather than 42 years!

If you accept there’s no way you can reach $4 million in 20 years, you might need to trim your retirement budget from $80,000 to a far less comfortable $30,000!

Instead, why not find a job you enjoy (or start a business, if that’s more to your liking)?

Then, have a long and fulfilling career. Do everything you need to save and invest a good chunk of your earnings, including my suggestion in response to “common-sense” claim #1 above.

Finally, when it’s time to call it a career, use the so-called “guardrail approach” – a dynamic approach that lets you draw as much as 25 percent higher initial draw (e.g., 5 percent instead of 4 percent), and reduce your risk from around 13 percent to under 4 percent.

It’s called a “dynamic” approach because your draw isn’t predetermined (beyond the 4-percent rule’s inflation adjustments) for the entirety of your retirement. Instead, you modify your draw when your portfolio crashes or soars.

As an example, you may set your guardrails 20 percent above and below a nominal 5 percent draw. Then, anytime your inflation-adjusted draw exceeds 6 percent of your portfolio (following a crash), you cut your draw by 10 percent. Conversely, if your portfolio soars so much that your inflation-adjusted draw will be less than 4 percent, you bump it up by 10 percent.

The result is a more comfortable retirement with a far lower risk of poverty in your old age.

“Common-Sense” Claim #5: Passive Investing Is Always Better than Active

He’s been called “The Oracle from Omaha” and is arguably the most successful investor of all time.

Warren Buffet.

In his 2016 Berkshire Hathaway annual shareholder letter, Buffet wrote, “Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund.” (My emphasis)

This wasn’t the first time he made this argument.

In fact, as he says later in his 2016 letter, “In Berkshire’s 2005 annual report, I argued that active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of ‘helpers’ would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.”

Buffet famously won a 10-year bet that the S&P 500 would outperform actively managed funds, wagering $500,000 that “no investment pro could select a set of at least five hedge funds – wildly popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender.”

The above, along with a great deal of research that claims actively managed funds fail to outperform passive index funds, have led many to proclaim that active investing is, almost by definition, a losing proposition.

My Controversial Response: The Average Actively Managed Fund Underperforms the Index, but You Can Learn to Pick Above-Average Funds that Outperform over the Long Term

As of this writing, I’ve been investing in actively managed T. Rowe Price mutual funds for just under 20 years.

T. Rowe Price is, in my opinion, a great fund manager.

This doesn’t mean all their funds are great, nor that any particular one of them always outperforms the market. However, I’ve been able to pick a range of outstanding funds from their offerings and outperform the market.

Let’s first compare the performance of my non-401(k) fund picks over nearly 20 years to the S&P 500’s.

According to Yahoo Finance, the S&P 500 Total Return (including dividends) returned 9.96 percent annualized over the ~20 years I’ve invested with T. Rowe Price. Not shabby at all, especially when you consider this includes a 15.9-percent loss suffered by the S&P 500 year-to-date.

Accounting for Vanguard’s 0.14-percent fees, that performance drops to about 9.8 percent.

According to T. Rowe Price, over that same timeframe, my “Personal Rate of Return” (PRR) for my non-401(k) investments is an annualized 10.42 percent, outperforming the index fund by about 0.56 percent annualized or 11.8 percent total over 20 years.

Considering that my allocation has typically had about 10 percent in bonds and cash, we can safely estimate that my outperformance is actually north of 1 percent.

However, most of my invested money is in my solo 401(k), which I started in 2012, and there the story is even more interesting.

T. Rowe doesn’t calculate the PRR for 401(k) plans, so I had to do my own calculation.

As the hypothetical passive case comparison point, I assumed a 90/10 mix of Vanguard 500 Index Fund (VFINX) and Vanguard Bond Index Fund Total Bond Market Index Fund (VBMFX), approximating my own 90/10 stock fund/bond fund mix through most of my 401(k) plan’s existence.

This hypothetical passive case, following the investment amounts and dates schedule I used, would have returned an average annualized 11.5 percent – not bad at all.

However, I invested in several actively managed T. Rowe Price funds instead.

So, how’d I do?

My picked funds (see my fund-picking method here) generated an average annualized return of 13.1 percent, outperforming the index fund approach recommended by Warren Buffet by over 1.4 percent a year.

Two comments, though:

• First, in early 2021, expecting a market downturn, I shifted to a 70/30 mix. Had I not done so, my portfolio would have come out a bit further ahead. However, since I’m comparing my active management to completely passive management, I left the hypothetical passive portfolio at the same 90/10 mix throughout.
• Second, had I started my 401(k) much earlier, with say a 20-year average time-in-market, my 1.4 percent annualized outperformance would have resulted in a 33 percent total outperformance.

So, still think I should have invested passively, Warren et al.?

I beg to differ.

I think a long-term 1.4-percent annual outperformance is worth a bit of effort to educate myself on picking great actively managed funds, and investing in those.

Sure, you’d do better investing in low-cost index funds compared to the average actively managed fund. I even agree S&P 500 index funds outperform most actively managed stock funds (research pegs that at 80 percent of active funds).

But if you spend the time and effort to learn how to pick well-managed active mutual funds that charge reasonable fees (rather than hedge funds charging exorbitant fees) you absolutely can outperform the market over the long term.

The Bottom Line

It’s unfortunate but true.

Conventional wisdom may be conventional, but it’s often far from wise. And “common sense” often makes too little sense.

The above are five of my most controversial financial advice nuggets, which helped me move from financial struggles and a negative net worth 30 years ago to being very comfortable now, and on track for a wonderful retirement.

I invite you to consider if any or all of them make sense to implement in your life too.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.