Tuesday, September 11, 2018

10 Ways to Stay Broke Forever

One starting point for improving your personal finances is to look at what doesn’t work. This is the approach Laura J. McDonald and Susan L. Misner take in their book 10 Ways to Stay Broke Forever. The authors offer many suggestions for changing negative spending habits, but the book also contains a number of parts that make me question the authors’ numeracy.

Financial education “tends to be technical, overly complex and written in obscure, jargon-filled prose. As a result, it often fails to reach the very people for whom it is designed.” This book is quite easy to read. However, some attempts to lighten the subject matter seem forced, such as starting an explanation of liquid assets with “This always makes us think of the bottle of PatrĂ³n Gold tequila stashed in our freezer.”

Positive aspects of the book include discussions about cars. Rather than leasing, if you save up before you need a car “you could go buy that sweet ride outright, with cash.” Another section has some creative ideas for carless alternatives.

If we’re having financial troubles, the authors recommend a “personal finance reboot” to “shift us from a bad pattern into a better one.” One step is to “Check your bank balance online every day to gain awareness of your cash flow levels at all times.” Another is to “Give the plastic a rest and use cold hard cash for awhile.”

On dining out, some tips for saving money include having “a long, leisurely weekday brunch or lunch rather than a dinner,” and “eat dinner at home and then head [out] for dessert and a glass of wine.”

One piece of advice I don’t agree with is to “Buy instead of rent” your home. Too many young people are digging themselves big holes and would be better off renting until home prices are more affordable.

In one baffling section, the authors steer readers to investing “with your friendly neighbourhood bank.” “The personal financial representatives at the bank are trained to help beginner savers and investors understand their options through the use of plain language and straightforward advice.” Either that or they’re heavily-pressured salespeople steering their customers into ridiculously expensive mutual funds.

There were several parts of the book that had me questioning the authors’ numeracy. They claim that Total Debt Service Ratio (TDSR) is also known as “Debt-to-Income Ratio.” It isn’t. TDSR is the payments you have to make on your debt divided by your income, not debt divided by income. Typically, to get a mortgage, your TDSR must be below about 40%. Knowing this “it might shock and appall you to learn that the average Canadian household’s debt-to-income ratio is a whopping 163 per cent. So, yeah, this is a problem.” Because these are different measures, comparing the 40% TDSR limit to the 163% debt-to-income ratio is meaningless.

A survey “found that 61 per cent of Canadians believe they have less debt than the average Canadian. Since that is statistically impossible, it seems we might have just found our common national characteristic: debt denial.” It’s not statistically impossible. In fact, their next paragraph includes “the average credit card debt is $3277.33. Forty-one per cent of Canadians have credit card debt of more than $3,000.” So, 59% have credit card debt under $3000, and even more have credit card debt under the average amount ($3277.33). It’s important to understand the difference between average and median.

In a list of the components of the purchase prices of a car, the first entry was “Price of your car ÷ monthly payments.” This formula gives some number of months, which obviously isn’t part of the purchase price of a car. Perhaps they meant “payments times number of months.” It’s bad enough that someone wrote this, but apparently all the book’s proofreaders either didn’t see it was wrong or just glossed over anything that looked mathematical.

A “BMO report found that 43 per cent of Canadians sometimes spend more in a month than they earn.” That sounds bad until you try to figure out what it means. I sometimes spend more in a month than I earn. Over the years, I’ve paid for a pool, a deck, new windows, new flooring, a new fence, and other big-ticket items. In each case I spent more that month than I earned. I’m willing to bet that 43% should actually be over 99%. So what was this statistic actually measuring? Your guess is as good as mine.

These innumeracy problems may not affect the bulk of the book that is intended to give people practical ideas for breaking out of self-destructive spending patterns. However, when I see authors get things like this so wrong, it makes me doubt other parts of the book. Many things I already knew, but how much trust should I put in the parts I didn’t already know? I can’t recommend this book.


  1. I usually accumulate between 1 or 2 thousand a month on one cash back credit card then pay it off 100% every month. Do they consider that as part of that $3277.00 monthly average? I wonder how they calculate that in the mix?

    I wonder if those authors actually "part time" as book writers, but actually work full time at a bank?

    1. @Paul: My best guess is that credit card debt refers to balances that don't get paid every month. If I'm right, you would count as having no credit card debt.

      One of the authors spent over 20 years as an investment advisor.

    2. Mike, how would you then differential between what Paul (and others do) verses those that do not pay off their balance in full each month?

      You cannot make that differentiation.

      That is why I place not a huge weight on "outstanding credit card debt" because I may carry an average of $2K balance per month but it gets paid well before the deadline. But by then, I've also accumulated at least another $1K in CC Debt... which makes it a never-ending cycle.

    3. @R: I do the same thing you do. Even when I pay my bill I've bought a few more things that I won't pay until the next bill comes in. I think you and I count as not having any credit card debt. My guess is that only balances that attract interest count in these average credit card balance statistics.

    4. @R: At least what I said above was true the only time I ever saw methodology information associated with credit card statistics. I guess you can't tell when no methodology information is available.