Why Everything You Know About Saving Money is Wrong

You too can be a millionaire!

Everyone knows all it takes is a little disciplined saving and some shrewd investment, and your retirement will take care of itself. Just skip your daily latte, invest those savings, and let the miracle of compound interest do the rest. Right?

Not so fast, says journalist Helaine Olen, whose new book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry argues that the financial services industry has long been selling what, for many, is an impossible dream. 

Olen took a few minutes last week to answer some questions about her book and her take on personal finance. Her answers might just change the way you think about and handle your finances.

Q: Let’s jump right in: What is the basic argument you make in Pound Foolish?

"The basic argument is that personal finance is something of a misnomer.

For 30 years we’ve been dealing with stagnating income -- income inequality, plunging net worth. The role of personal finance has been to tell us that we can save and invest our way out of it: We will be financially virtuous, we will cut back on luxuries, we will save our money, we will invest properly and we will be OK. As it turns out, life does not work that way.

Healthcare costs, education, housing are going up well beyond inflation. We've been responsible for more and more of our safety net. Costs are going up and up and at the same time jobs are insecure -- that's a formula for disaster, not for financial empowerment."

Q: Can you give us a little historical perspective? How has the personal finance field grown into the force it is today?

"It starts almost by accident in the heart of the Great Depression, when a young woman by the name of Sylvia Porter starts writing freelance for the New York Post. She’s got this sort of signature breezy style. Over time she kind of develops what we now call personal finance as a regular beat. She sees her mission very much as someone who is going to educate people so the Great Depression can never happen again. Over time, she develops this genre. She has the beat to herself for many, many years."

Q: How did it grow from there, from just one woman to being everywhere?

"There’s the pressure of the consumer movement of the 1960s, Ralph Nader and such. The newspapers at a certain point turned to personal finance as a way to not upset their advertisers. Nader is very much (angering) car dealers and department stores and such, and these are people who used to advertise quite a bit. 

At the same time our need for financial advice is growing. All of a sudden in the mid-1970s this just takes off. Brokerage houses become deregulated, women get the right to their own credit cards, retirement accounts kick in, first the IRA, then the 401(k). Mortgages as we know them become more convoluted. There is this exponential need for financial advice."

Q: What, from your research, are the forces making it harder to successfully save for retirement?

"First, there’s the point that a lot of us can’t really afford to save for retirement. Half the population is living paycheck to paycheck. I refuse to believe that the entire country went on a collective bender. The costs of education, health care, housing keeps going up. 

The other part: The financial services industry is taking a chunk of our savings. If you do have a 401(k), before 2012 you had no right to know how much it cost you to have that 401(k). There is money being siphoned off for various fees. This is all a huge problem."

Q: What are some particularly pernicious ideas or myths that the personal finance industry pushes?

"A lot. 

Obviously, this whole idea that your luxury spending is responsible for your financial problems is a huge, huge issue. It’s just not true. 

The other myth they’re pushing is this idea that we can all save for our retirement and it's all going to be fine.  A lot of people just can’t afford to do it. That's a real problem and it's not a problem that anyone in the industry is wrestling with in any real way."

Q: What does this all mean for individuals planning for their retirements? What should we do?

"There are a lot of things you can be doing.

First, obviously, try to educate yourself as much as possible. The financial services industry is counting on the fact that you are not educating yourself. If you are getting financial advice, find out if the person you're talking to has a fiduciary duty to you (a legal obligation to act in your best interest). If not, you should really wonder why you're there.

We also need to start talking about our issues. We have a powerful cultural shame in the is country around money. Maybe we all have a problem and we need to discuss this. I don’t think we are going to get anywhere in solving this unless we acknowledge that this is a problem in the collective sense. Most of us are going down together, we just don’t know it.

My third point, conversely, is: Try to relax a little bit. People ask me if this book has changed how I think about money. I think about it more in terms of what I really want. I don’t spend any less, but what I spend I enjoy more."

Q: What are the implications for society at large? For public policy?

The Obama administration is admirably, through both the Department of Labor and the SEC, trying to get the fiduciary standard to apply to all financial advisors. This has been stymied by Congress for years. That would be a huge help, it really would.

And an open discussion about whether the 401(k) system even works and what could replace it would be very welcome. We have to acknowledge that this system does not work, and then come up with alternate plans.

Even if you're just starting out in your career, you need to think about the future. It's difficult to save for retirement if you don't negotiate a fair salary. Luckily, Salary.com can help.

The first thing you should do is research, so you're able to come to the table armed with the knowledge of what your job is worth. Use our free Salary Wizard below to find out what's a fair salary for your position. You can enter your location, education level, years of experience and more to find out an appropriate salary range before you negotiate.

Good luck.