The Biggest Myths in Personal Finance

There are some persistent myths in personal finance that lead people to make objectively bad financial decisions. For example, you should save as much as possible when you're young to benefit from compounding. It's almost foundational advice in personal finance, but it's wrong or at least it's

incomplete. I'm going to explain why and debunk nine more myths like this one to help you make better financial decisions. I'm Ben Felix, chief investment officer at PWL Capital, and I'm going to tell you about the biggest myths in personal finance.

You should save as much as you can when you're young to benefit from compounding is taken as an absolute truth in personal finance. It sounds sensible enough and like many myths does have elements of truth. A longer time horizon makes compound interest more powerful and to be sure compounding is an

important tool for building wealth at long horizons. But this strategy neglects an even more important consideration. When you're young, your income is in the vast majority of cases at its lowest point and will likely steadily rise over time as your career progresses before tapering off as you

approach retirement. Similarly, when you're young, it's likely that your standard of living will be at its lowest point when compared to your peak earning years and retirement. At this stage, the marginal utility, that's like the amount of additional satisfaction you can generate of every dollar you spend on

improving your standard of living is at its highest. An additional $5,000 or whatever spent at age 25 may mean living in a safer area, eating better food, getting a better education, driving more reliable car, or forming core memories and experiences that you will carry with you forever. At age 45, that $5,000,

even when you account for the potential investment growth in the interim, yields a much smaller increase to your standard of living. That means if you're saving as much as you possibly can when your income and standard of living are comparatively low, you're sacrificing more of what matters when

you can least afford it. You're effectively robbing from the poor, your current low-income self, relatively low-income self, and giving to the rich, your future higher income self. Another way to think about this is that money is not the only thing that compounds over time. Skills, experiences, and health

compound, too. Focusing only on wealth accumulation, miss is the bigger picture. This idea comes from one of the best supported models in economics called the life cycle model or life cycle hypothesis. The fundamental premise of the life cycle model is that people want to maintain a consistent

standard of living throughout their lives. That consistent standard of living is really the key to the model.

The life cycle model suggests that you should aim to roughly even out your standard of living across high and low income years. This is called consumption smoothing. Since income typically starts low when you're young and rises throughout your career, your saving strategy should match that pattern. Save

what you can early on without sacrificing quality of life or strategically use leverage if your risk profile allows, I'll come back to that later, then increase your savings as your income grows. There's a lot more to unpack here like risk management and habit formation, but getting deeper into