Dispensing personal finance advice to the masses is big business. Authors such as Robert Kiyosaki ("Rich Dad, Poor Dad") and Dave Ramsey ("The Total Money Makeover") have sold millions of books. Ramsey also has a large web and radio audience, and advisor-authors like Suze Orman frequently dispense advice to national television audiences.
1. How Much Should I Save?
Bestsellers: Save 10% to 15% of your income regardless of your age and current life circumstances; save more if you can as you get older. The reasoning? Tony Robbins ("Money: Master the Game," 2014) cites the value of compounding and how it's critical not to avoid interruptions in your savings plan.
David Chilton ("The Wealthy Barber Returns," 2011) argues for saving in one's early career because income is low and the costs of getting established in life are high. Costs rarely stabilize, Chilton says, and most people can't transition successfully from saving nothing to saving a large percentage of their income.
Professors: Choi notes that academics have a different perspective: "Because income tends to be hump-shaped with respect to age, savings rates should on average be low or negative early in life, high in midlife, and negative during retirement."
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2. Should I Use Mental Accounts for Savings?
Bestsellers: Divide savings into mental accounts devoted to different goals. According to Choi, commonly mentioned mental accounts are a fund for emergencies, a retirement savings fund, a fund for major purchases such as a house or a car, and a fund for children's college tuition. Burton Malkiel ("A Random Walk Down Wall Street," 2019) writes, "A specific need must be funded with specific assets dedicated to that need." Dean Karlan et al. ("Getting to the Top of Mind: How Reminders Increase Saving," 2016) argue that mental accounting increases motivation to save by "making salient the link between today's saving and specific future expenditures."
Professors: "Standard economic theory does not earmark portions of household savings for specific purposes; money is fungible." Yet "using mental accounting when choosing savings rates has some advantages," he continues.
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3. Is Dividend Investing a Good Strategy?
Bestsellers: Dividends are a good thing. Malkiel ("A Random Walk Down Wall Street," 2019) recommends coping with the current low-interest-rate environment by holding relatively stable dividend-paying stocks in place of bonds. Kiyosaki ("Rich Dad, Poor Dad," 2012) believes that cash flow from the investment is the only relevant factor.
Peter Lynch ("One Up on Wall Street,"1989) argues that "the presence of the dividend can keep the stock price from falling as far" because "if investors are sure that the high (dividend) yield will hold up, they'll buy the stock just for that."
Professors: Dividends are irrelevant. Franco Modigliani and Merton H. Miller's early research ("Dividend Policy, Growth, and the Valuation of Shares," 1961) proves that in a frictionless market with no taxes, a firm's payout policy is irrelevant for its valuation. The intuition is that any investor who desires a certain amount of cash from their investment can generate it by selling shares instead of relying on a dividend.
Also, in the real world, according to H. Kent Baker and Rob Weigand ("Corporate Dividend Policy Revisited," 2015), dividends and interest are tax-disadvantaged relative to capital gains in the U.S., which makes the prevalence of dividends a puzzle.
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