One of the missing pieces of my financial education

A book review of Money Magic

It's well-known that academics aren’t great at getting the news out about their research. Concepts that have existed for decades, let alone new ideas and advances, often don't make it into practice. This is a great loss for those relying on outdated assumptions and rules of thumb. 

In my work with farmers, this meant they were often applying too much fertilizer at the wrong time, which was at the expense of their bottom line and the environment. Just by changing the timing of their fertilizer application, they increased its efficiency. By taking a few measurements of their situation, they could calculate what their plants actually needed!

In personal finance, we often do something similar: We spend and save inefficiently. We follow rules of thumb or just what we saw our parents do. Sometimes, this works out for us. Other times, it doesn’t (or causes undue stress along the way). 

This even shows up in personal finance education. As I delved deeper into the world of personal finance, I began to see holes. Holes that no one seemed to be able to answer with more than a generalization. 

How should I measure the impact of different decisions on my personal finances? 

How should we balance spending and savings at this point in our lives versus in the future? (when we make more money, kids will be older, etc.)

How much will we need in retirement?

How much life insurance do we need?

So, I went searching and found some economists filling these holes with research and insights not found in pop-finance books. 

Laurence Kotlikoff is one of these economists, and he wrote a book, Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life, which is an excellent introduction to his work and the work of others he draws on. 

Money Magic walks through a number of personal finance topics, from career choice to housing decisions to social security, with an economic lens. There are no acronyms or feel-good ways to think about budgeting. At times, it feels a bit in the weeds and comes off as a bit crass, but it filled the gaps in my education and understanding. It left me thinking differently about risk, spending, and long-term planning. It put a name on concepts I had a cursory knowledge of but never showed up in my personal finance textbooks or readings (human capital, living standard, consumption smoothing). It bolstered the argument for some fundamentals while questioning things that so many sell as fundamentals. All with case studies to illustrate. 

Here are a few of my takeaways (in no particular order):

• Taking a mortgage and investing while at it is the same as borrowing money to put in the stock market. Depending on your mortgage rate, it may be a ‘good deal,’ but it's still placing a bet. 

• You should probably financially plan to your maximum age, not your life expectancy. After all, people don't drop dead when they hit their life expectancy, and you need money for your life even after you're 77.5. 

• No one questions the employer match, diversification (of investments), or taking advantage of tax-sheltered accounts. 

• Sometimes, spending your savings (and potentially) even your investments when you’re young makes economic sense. 

Though I ardently disagree that the best researchers are the best teachers (teaching is a skill unto itself that researchers often do not cultivate in my experience), and it’s tough to put a price on marriage or divorce (but he does), I found great value at looking at personal finance through the eyes a of an economist. The book is rich with resources to do your own research and even dovetails into a piece of software created by the author, which I promptly bought and am excited to start testing its capabilities.

I have also enjoyed learning about economic-based financial planning from the Personal Finance Economics Substack and textbook. Robert Puelz shares many of these same economic concepts that too many are missing.