Money affects almost every aspect of life, yet churches rarely help us think spiritually about how to handle it.

From the pulpit, preachers offer vague financial platitudes.  In Sunday school, many churches outsource the topic to people like Dave Ramsey.  In friendships, Christians typically avoid the topic because of politeness and social norms. 

In this week’s Good Faith podcast, my co-host David French talked to James Choi – professor of Finance at Yale –  about spending, giving, saving, and investing money.

Specifically, we discussed:

• Are Christians being misled about debt?
• Are Christians called to navigate their finances differently from everyone else? 
• Is compound interest really some sort of magic financial bullet?
• Should we really be saving 10%?
• What is the notion of consumption smoothing?
• How should our financial behavior change according to our age?
• Do popular financial advice books infantilize readers?
• How is popular Christian advice different from the advice academics offer about savings and investment?

As a Christian and a behavioral economist, James brings both spiritual and practical wisdom to the area of personal finance and exposes where some of our most popular financial gurus might be leading us astray.

DAVID FRENCH: I’m just so eager to talk to you after reading The Atlantic article last month by one of my favorite writers, Derek Thompson.

The provocative headline is “All the Personal Finance Books are Wrong,” and here’s the subtitle: “They tend to treat their readers like fools without willpower, so you could argue they’re wrong for the right reasons.”

It’s a provocative title and a provocative subtitle, but then the article backs it up, and it’s really relying a lot on your work.

Give us your thesis.

JAMES CHOI: The article by Derek Thompson was based upon my paper called “Popular Personal Financial Advice vs. the Professors.” A few years ago, I started teaching a personal finance class at Yale. And so the natural thing to do is to go look for a textbook.

There are so many books out there that give financial advice, by the “Suze Ormans” and “Dave Ramseys” of the world.  So I took a look at some of these books to see if they’d be suitable for the syllabus of my course. Maybe they’d have some real world perspective that would be a valuable complement to my own “ivory tower” kind of perspective.

So I read a few of them, and I was surprised at some of the advice that was there.

Some of it was just plain factually wrong, and that disturbed me. Then there were things that just weren’t factually wrong, but they were certainly at variance with what economic theory would tell you to do. That was kind of interesting.

But the semester was about to start, and I had to get on with my life and put the course together. So, I picked a book and went ahead and taught the course.

The seed of the idea got planted that, “hey, wouldn’t it be really interesting to do a more systematic survey of what these authors are telling their readers?”

I went back and kind of compiled a list of the 50 most popular personal finance books that are out there, catalog their advice, and then compare it to what economic theory has to say.

Derek Thompson picked up on that resulting paper, and what he really focused on is the savings advice that most of these authors give, which is at variance with what economic theory would tell you to do.

So what is the prudent way to live, according to these authors? And not just these authors?

I think this is pretty widespread common wisdom that you should be saving ten to 15% of your income – no matter what your age is, no matter what your circumstances are, through thick and thin, if you’re struggling, if you’re not – 10% to 15% savings rates.

That’s really quite different from what economists would say you should do.

Economists start with the premise that the fifth slice of pizza that you eat is never as satisfying as the fourth slice of pizza you eat, which is never as satisfying as the third slice of pizza you eat, and so on and so forth.

Basically, they are diminishing returns to spending money on yourself within a given time period. Instead of scrimping and scrounging and struggling one year and then kind of overindulging the next, maybe life would be more pleasant on average if you consumed a similar moderate amount in both periods.

This is the notion of consumption smoothing. What does that mean?

It means that in your 20s, you’re going to try to have a standard of living that’s not too far off from what your standard of living is in your 40s.

Now, for most people, they earn less money in their 20s than in their 40s. Your 40s and 50s are kind of your peak earnings years.

What consumption smoothing implies is that your savings rate should be relatively low in your 20s, but then in your 40s, you’re really going to turn on the savings jets and become a super saver.

This notion of savings rate smoothing, which is what the popular authors are advocating, really does cause you to struggle probably more in your 20s when you have low income and yet you’re still trying to save your ten to 15%.

Then in your 40s, you’re higher income, but you’re still only saving 10% to 15%.

And so you’re kind of having this more luxurious life in your 40s than your 20s, which is a fairly different vision of what the good life is, materially speaking.

CURTIS CHANG: James, I want to pull back in a moment on the higher level intersection between faith and popular finance. But I want to drill back into this particular issue, because what you’re saying makes sense. Except I see in the back of my mind all of these charts that are thrown out there in these popular finance books that tell you if saving this little amount at age 20 will take advantage of the power of compound interest. That’s the common argument for why you need to start saving meaningfully very young because it has an outsized impact.

How do economists respond to that popular logic?

JAMES CHOI: Yeah, the economic models actually take the power of compound interest into account.

If you want to dig into the weeds a little bit more: most economic models wouldn’t say that you should have exactly the same standard of living in your 20s and your 40s. You should defer some gratification.

And so you should live a little bit better in your 40s than your 20s to take into account that kind of power of compound interest.

But it’s not going to become as drastic of a change over time as you would have if you were just saving 10% to 15% of your income consistently over time.

So yeah, that’s all kind of taken into account in the economic models.

DAVID FRENCH: Well, I’m just feeling vindicated because all I know is when I was in my 20s, that 10% savings thing was a no go for me. It stood in the way of things like a ski trip.

[This excerpt was lightly edited for clarity.]

HOSTS: Curtis Chang and David French

PRODUCER: Kris Carter

The Good Faith podcast comes out every Saturday. Listen and subscribe here or wherever you listen to podcasts.

Curtis Chang is the founder of Redeeming Babel.

Photo by Josh Appel on Unsplash