The Problem with Mainstream Personal Finance Gurus (and the 10% Rule)

A while back, I was in a job interview for a different role at my present employer. The interviewer, who knew of my personal finance writing background, concluded his round of questioning with this:

“So, what do you think about Dave Ramsey?”

The question caught me off guard and the clock was ticking for my response. In milliseconds, the following questions dashed through my head:

“Is he a Dave Ramsey fan?”

“Did Dave change his life for the better?”

“Has he read my Dave Ramsey Baby Steps improvements article or some of my previous thoughts on Dave?”

“Is he going to take it personally if I don’t praise Dave?”

“It’s a trap!!”

Less than a second later, I answered with the following:

“Well, I think Dave Ramsey is good for a lot of people as a starting point, but can only take you so far.”

Phew. OK, stayed true to my beliefs, but avoided offending a possible fan of Dave Ramsey. Success. Or so I thought… I didn’t get the job.

Rewind the clock 10 or so years earlier…

My first foray into the personal finance topic came in the form of a gifted book – The Wealthy Barber: The Common Sense Guide to Successful Financial Planning – which I promptly devoured in one day. The book, written by a David Chilton (a Canadian with universal health coverage, a good pension plan, and other social insurance upgrades) was revealed to be a fictional story about a wealthy barber who teaches his customers some dead simple rules for becoming rich. The primary takeaway of the book is “Invest ten percent of all you make for long term growth. Save 30 dollars a month from age 18 to age 65 at 15% annual return, and you’ll end up with 2 million dollars.” This 10% saving solution was lifted from another all-time personal finance best seller, The Richest Man in Babylon. 10% to $2 million?! Yeah, I can do that. We all could, with a little effort, right?

The book was first published in 1989 when 15% annual returns were considered commonplace. And 15% returns, on $30 monthly savings, wouldn’t have much of an impact until after the 40th year of compounding them… but never mind that! The book went on to sell over 2 million copies.

These days, just about everywhere you look, the mainstream personal finance gurus all uniformly recommend a 10% personal savings rate (Ramsey is at 15%), to the point where it has become a self-fulfilling prophecy. To recommend or save anything more than 10-15% would be considered “extreme”, in part, because it has become the standard. Everyone has something to sell, and when the average personal savings rate is 5%, 10% sells to the mainstream because it is attainable and convenient to present habits.

That’s all fine and dandy, BUT… 10% will never result in life changing money.

You may or may not (likely) be able to achieve a comfortable retirement at age 65 at 10%. There are a lot of other factors at play:

  1. when you start saving
  2. your investing discipline
  3. the expense ratios of your investment options
  4. any extended length of unemployment
  5. market returns
  6. how much you spend in retirement
  7. etc.

10% might get you there if all of the following happens:

  1. you start saving at age 22 and don’t stop
  2. you always leave your investments in the market and don’t sell in panics
  3. you invest in passive funds with low expense ratios
  4. you don’t suffer unemployment for any extended length of time (or other financial setbacks)
  5. market returns average 10%+ over those 40+ years
  6. you spend notably less in retirement than you did in your wage earning years
  7. etc. stuff doesn’t happen

In other words, it leaves you with zero room for error, risk, and setbacks. Zero room to breath or let life happen to you.

In fact, if you simply put your savings in to a conservative bond that matches the inflation rate, you are only saving up one year of income for every 10 years you work. A 40-year career could result in just 4 years of income saved.

The only guarantee with the 10% plan is this: at most income levels, your savings will never result in life changing wealth.

You will be at high risk or huge setbacks. You will be dependent on Social Security. You will not be able to retire early or maybe at all. When you retire might not be your choice. You will not be able to take career risks or pauses. And your money won’t start showing the power of compound returns until the final few years prior to official retirement age.

Mainstream financial gurus don’t exist to guide you to taking life-changing actions, they exist to sell easily digestible cookie-cutter solutions to a huge audience that is close to universally awful at all things personal finance. 10% results in sold books, 12-step financial seminars, and convenient promises, but it won’t get you to where I believe most people want to go.

And it’s not just your personal savings rate – it’s everything! 3-6 months emergency savings, excessive life insurance, 2 used luxury cars, only 1-2 expensive international vacations per year. Mainstream personal finance gurus sell you what you want to hear – not what you need to hear. The second they go in to non-mainstream, uncharted advice territory, they are labeled as extremists and pushed out of the mainstream.

Time for an attempt at an analogy that hopefully doesn’t fall flat on its face…

mainstream personal finance gurus 10 percent ruleIf your personal finance level is akin to a toddler on a tricycle, mainstream personal finance gurus and their 10% rule can get you to 5-year old on a 16-inch Huffy w/training wheels, but they won’t get you to finely tuned long-distance cyclist on a carbon-framed Specialized road bike levels (or even single-speed granny cruiser levels for that matter).

So… I’ll let this question hang…

What do you want? The convenient mainstream path, at the same or marginally faster speeds, for the rest of your adult life? Or, path-changing, life-changing actions?

Mainstream may not get you there.

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