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November 02, 2009


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As time go by, it seems that the following observation holds truer and truer still:

Frugality is like diets. Even if someone knows better, that doesn't mean they will always do better.

Even intelligent people do not always diet or act frugal.

Intelligence isn't a measure of how you relate to the world but of your ability to learn and solve problems abstractly. So very intelligent people are no more likely than anyone else to act in a practical, frugal manner than anyone else. Of course if taught how to do so they'll pick it up very quickly, this is why every highschool student should have a mandatory class on personal finance (no school I ever attended even offered such a class, forget making it mandatory).


I think you over-estimate the power of "education"

The problem is not a knowing gap. It's a doing gap. Humans have many characteristics that go far beyond knowledge or intelligence. They are emotional, greedy, selfish, envious, vain, desire pleasure, easily bored, want to impress others, want to be accepted in certain circles, seek immediate gratification, etc.

No amount of education removes those desires and they are powerful. It takes either someone who is already wired to be long term thinking or it takes a personal experience that either witness very deeply or go through themselves to change short term thinking into long term thinking.

I assure you that the sterile, factual, textbook practicality of the education system, will be wholly inadequate to have any meaningful level of impact that can counteract the forces of the human nature that make someone tend towards short term thinking.

There is nothing wrong with giving someone knowledge but this kind of knowledge has so much going against it that giving it out alone without anything more than the facts and some anecdotal scary real life stories that aren't brought home will have zero impact for 99% of those in attendance.

I have commented here before about my brother's experiences training people who were already in financial trouble and who had sought him out for help. He didn't just give them financial advice he personalized it for each one of there situations and showed them how they could fix it. There were over a dozen people he did this for. Zero were willing to take the steps that he could prove to them would fix their problems.

Education alone will never have any meaningful impact on this situation.

I was starting to say that my intelligence is negatively correlated with both my income and my wealth, but that would just be a wisecrack.

Guess I'm just an outlier. Malcolm Gladwell would be so NOT proud of me.

I have always thought the the high schools in the USA are very remiss about having a mandatory class for seniors that covers all aspects of Personal Finance. There are so many important aspects and yet so many graduating seniors leave school knowing next to nothing about managing their finances. You need to understand all about credit cards, debit cards, loans, income taxes, the stockmarket, bank and credit union accounts, home buying, insurance, owning a car, interest rates, debt, saving, renting accomodation, etc. etc. etc.

High schools seem to be infatuated with sports, and having fun and much less about preparing young people to become responsible adults.

@Old Limey

You immigrated here if I recall, correct? It seems that is a common viewpoint among first generation Americans. Perhaps it comes from having to start at the very bottom and work your way up. Many Americans are born into much easier lives than most of the rest of the world even those that are not affluent so to speak. And I can't disagree that there is a pretty big focus on sports (although I do enjoy them myself).

Perhaps in other cultures the things you discuss are taken more seriously. I know I had a high school civics class where they taught us how to fill out taxes. They only showed us the 1040EZ form (we were shown the 1040A (not long form just A mind you) but that was just for looking at, we dare not attempt to fill out such a beast. :) And the amazing thing was how many people fumbled all over the 1040EZ form. Hard to believe that is possible but it happened.

It's a funny thing but I have taked to many people with computer or engineering or math degrees or even some people with business degrees and you start talking about finance and they sit there and soak up what you are saying like they can't believe someone can actually make any sense of the whole topic. Kind of like Economics, no one seems to be able to understand that either but it seemed pretty straight forward to me. I soon learned in college not to tell people I took econ as an elective cause everyone complained about that class and when they found out I took it as an elective and wasn't required to they thought I was nuts. This stuff all seems basic to me but I am always shocked at how many people just can't seem to wrap their heads around it. Like its the plague or something.

I have always thought I would love to help people with their finances. Teach them how to handle money and debt etc. I have just seen too much evidence of the futility of it all to attempt it on any mass scale. My personal successes with helping other people have only come when I have worked with them one-on-one, poored myself into them, developed a relationship, trust, repoire, and then they started to view me as a mentor and began to slowly adopt things I talked about and even then not always with the success I would hope.

Since FMF talks about religious issue on here, it's interesting to note that Jesus did it exactly the same way. He poured his life into 12 men and that personal relationship lasted long after he left.

Mass training doesn't seem to have much impact in most cases and if it does it has to be something the trainee desires to participate in. I am pretty sure mandatory personal finance class in a U.S. high school is going to have more people thinking about football than finance. If I could think of a way to make it work I would love to see it succeed.

Having a high intelligence will help you get a high income.

To become wealthy you need to cultivate some habits:

1. The habit to spend much less than you earn
2. The habit to be frugal- getting value for money and comparing purchases.

Habits are neither good nor bad, they just are. But cultivating good habits are the key to building wealth.


Why do you assume that everyone wants or needs to be extremely wealthy?

For example, intelligent people are most likely to come from fairly well-off families (intelligence tests are well known to correlate with family income). Thus, these people are more likely to have parental financial safety nets that offset their need to acquire great wealth themselves. For example, they have no school loans, their own kids' college education is probably coming from the same place, their home purchase was likely subsidized by their parents providing the down payment, and their retirement is largely assured already by the fact that they know they'll inherit their parent/grandparent's money eventually.

If you have all this taken care of already , why would you need to acquire great wealth?

A second reason intelligent people may not acquire great wealth--perhaps they don't need it due to having a secure and lucrative income stream? If you are a medical doctor or a law partner for example, you are assured of a very secure high-paying job and income as long as you want it even far past normal retirement. If you were assured of $300K+ per year every year until you are 80 years old, and you can "retire" and still work part time as a consultant after that, why do you need to save?

MC --

"Why do you assume that everyone wants or needs to be extremely wealthy?"

I don't. But since this is a site about growing your net worth, it's kind of what I write about.

Can you provide sources for your claims in paragraph #2? I'd be interested in reading them.

As far as the "I make a high income so why do I need wealth?" question, what happens to the guy who becomes 81, has spent all of his $300k per year, and now has nothing? In other words, you can't acquire a "secure and lucrative income stream" without saving at some point and this saving would of course grow your net worth.

In addition, I think many of your assumptions about "the wealthy" are off base. You should be interested in the series of posts I have coming up on Dr. Stanley's new book that tells who "the wealthy" really are.

You are correct in that I am a 1st generation American and the first in my family to receive a college degree. My education in England also never covered the topic of Finance so they are as much at fault as the high schools here. Growing up though I must admit that I was surrounded by great role models in my extended family. I didn't know anything about divorce for example until I emigrated, and credit wasn't used in my family. Home ownership was also pretty rare in my family. My grandfather was always lecturing us about not buying on what was then called, "The Never, Never", it was always save your money and then buy with cash.

Managing one's finances is not so much about learning what to do, it's much more about having the discipline to carry it out, week after week, month after month, and year after year until it becomes so ingrained that it's automatic.
Sometimes I see a really nice automobile that's newer and racier than the black, classic, '91 Mercedes 560SEL that I drive and I get tempted, but then my ingrained common sense kicks in and I rationalize that why would I want to get rid of a car that was paid for years ago, has low mileage, hasn't given me any problems and still looks as great as it did 13 years ago when I bought it used. I think the answer is that I don't feel the need to impress neighbors, friends, or the opposite sex.

When you feel comfortable in your own skin, can look in the mirror and are content with what you see, then you don't have the desire to keep accumulating the latest 'goodies' in order to build up your self esteem.
More important areas where you have to constantly strive to do the very best you possibly can are keeping your close personal relationships strong, happy and healthy, and then doing the same with your personal health and fitness.

Accumulating money provides a feeling of great security and the ability to weather storms that may come along in your life, and can be a large factor in maintaining a comfortable lifestyle right through to the end.

My discipline to save is high, I just with I could add along the discipline to diet once again.

It is nice to know that you can accumulate a high net worth without having to earn such a high income.

Discipline will only get you so far if you don't know the basics of finance. Old Limey seems to be one of the lucky ones who grasped it easily.

Not everyone does, that's why kids need a class on personal finance, filling out taxes, etc. My early 20s would have been so much easier if I'd known some things I had to learn the hard way, I probably would have started my business a few years earlier. I'm good at math so I understood compounding interest at a mathematical level and avoided credit cards but plenty of kids out of highschool don't. I don't expect every kid to apply what they learn in a finance class anymore than other classes, but sending them out into the world without basic knowledge sets them up for a lot of trouble.

FMF, I realize that wealth accumulation is the topic of this blog. It's also something I personally am interested in since I do not come from a wealthy family myself.

However, as your post indicates, wealth accumulation is clearly not the primarily focus of many people, even many people you'd call "intelligent". I was offering one possible explanation for your data, based on my experiences as an educator and also on personal anecdote.

"Intelligence" as commonly defined is measured by standardized test scores (MCAT, LSAT, GRE, SAT, IQ tests etc) and also by school grades. This type of intelligence correlates strongly with the income of an individual's extended family, mainly because these tests measure educational and cultural advantages. This is a huge problem very familiar to educators because this fact makes these tests discriminate against intelligent and gifted but economically-disadvantaged individuals (typically those in particular minority groups) by making them less likely to get into top schools, etc. Numerous studies demonstrate a high correlation between intelligence/ability (as assessed by our western society) and educational attainment and income. One seminal study is available online at

Anecdotally I have also noticed that about 50% of the medical doctors at the medical center where I work come from significant family money. These are highly intelligent people and they also have high incomes, but due to their family money (which is not included in their own "net worth" until their parents die), they are not encumbered by education loans or worries about their children's college costs, housing, or their own retirement. I know a lot of these people, and they spend at will on expensive houses, vacations, and cars even though they are still relatively young. Thanks to the AMA limiting the production of doctors, their jobs are also very secure and what they do is always in high demand. But the other 50% here are in the same boat as myself--making a high income but being very careful with money because there isn't going to be any large inheritance in our future. We don't drive beemers or McMansions--we can't afford it.

I am willing to bet that in another occupation peopled by individuals who possess less education/lower grades/lower scores on the SAT you won't find such a high proportion of people with this "family money" cushion.

So I don't think it's fair to regard *all* high income people who don't save as shortsighted, stupid, or greedy. Because if they have family money backing them up they obviously aren't. They live in a different economic universe and their actions make sense within their own world. They are never going to be at risk for a foreclosure even if they do spend everything they make.

Anecdotally, I know many people who came from lower class to lower middle class families and now possess high incomes and high net worths. I myself am among this group. In addition, this appears to be more typical of the "wealthy" in the US based on information found in both Jean Chatzky's book "The Difference" (linked above) as well as Thomas Stanley's book "Stop Acting Rich" (which I'll start posting on in a couple weeks.)

"I don't think it's fair to regard *all* high income people who don't save as shortsighted, stupid, or greedy."

It's not fair to regard all people as anything -- there are always exceptions. And I don't think this post did that, did it? Looks like to me the terms "on average" are used.

So if you're saying that there are exceptions to the rule, then I'd agree. There are almost always exceptions. But if you're saying that intelligence and net worth (wealth) are linked, then I (and the study above) disagree.

I know plenty of not so intelligent people who don't do so well, while others do better. But that is just anecdotal evidence. Nevertheless, I think the old adage holds true, "It is more important whom you know than what you know."

@Old Limey,

Well said and I agree with everything you said.

If we could find a way to teach the mindset you are talking about and make it stick, now that would be revolutionary.

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