In a recent episode of Dr. Oz, he had financial experts advising on how to get debt free once and for all. The segment opened with the question “how much would you have at the end of 30 days if you double a penny each day for those 30 days”. The expert captivated the audience by telling them that they would end up with about $5,000,000 at the end of the month (he may have said $10 million). If we do the math we see it is in fact $5,000,000. It is a beautiful example to show the power of compounding. The presentation, however, did not make it clear that it was just a demonstration of a concept. It made for a sensational sound bite “pennies can earn you millions”. Then he goes on to rattle off something about a 10% interest rate growth and mutual funds and EFTs. The implication was that if one buys mutual funds or ETFs they can just watch their money grow. These were the “simple” steps.
What he failed to mention was that his explanation was ALL theoretical. He forgot to mention that for a 10% return one would most likely to be invested in equities and this means that we have to expect volatility and losses. Anyone following the markets recently would need a strong constitution to hold their ground with the current level of uncertainty and volatility that exists.
The expert neglected the most important factor in overcoming and remaining debt free and that is one has to address the behavior that caused the problem in the first place. If that behavior is not corrected, the chances of one relapsing into debt are very high. The audience would have benefited more from understanding that there is no quick solution and that saving is important and the earlier you start and the longer you do it, the better off you will be. How and where to save, is very specific to one’s life circumstances. These points are not very sensational or attention grabbing. If anything they sound like a lot of work. The reality is that that dramatic headlines are just that, drama. There is no getting around fundamentals.
The other piece of advice was given by a second expert and I think its best to call this whack-a-mole financial advice. Let me explain. Dr. Oz has a 30 debt credit card challenge to get your debt in order “once and for all!” With this challenge you are not allowed to use your credit card for 30 days. You can only use cash and you are only allowed to use your debit card once and a week. Now, on the one hand it is phenomenal to get people to stop using their credit card and realize that it is possible to live without them. Dr. Oz has a large following, so kudos to him if he helps people get off their credit cards, even if it’s for just a month. The problem with this is that it does not address the fundamental issue of what caused the problem in the first place. This advice is akin to a crash diet.
The advice was to literally freeze your credit card so you don’t use it! Ever tried to suppress a buoy underwater, you can do so for a bit, but once you let it go, you’re going to get smacked in the face if you don’t get out of the way! Freezing your credit card does not fix the problem of why you overspend in the first place. It may help you in the moment, but the backlash of that would be substantial because it is not getting you any closer to addressing fundamental spending habits and traits.
The reason people have credit card debt is because there are core financial behaviors that need to be modified. This whack-a-mole approach is only taking care of the symptoms and does not get to the root of the problem. What is needed is for one to learn how to stop the moles from popping up in the first place. In the beginning the whack a mole approach may work because one has the time and energy. As time passes however, the moles pop up faster and faster and then both time and energy become a problem. It would be easier to find a way to stop the moles from popping up rather than find clever ways to whack them down.
This segment may have given the viewers the erroneous idea that one can effortlessly get out of debt. The advice was not explained properly nor was it put into perspective. Rattling off a few catch phrases and taking a whack a mole approach to personal finance does not do service to anyone. Many people need real financial counselling and a five minute segment on Dr. Oz will not solve a systemic problem.
I will leave you with a few points to remember about wealth accumulation. The first is that you can accumulate wealth over a reasonable amount of time with a well-diversified portfolio that includes among other things both stocks and bonds. Secondly, if you want to know how long it would take for you to double your money use the rule of 72. All you have to do is divide 72 by the investment’s rate of return. The rates of return on investments are, on average, between 5-6.5% for both the US and Canada. Given these rates, it would take somewhere between 11 (72/6.5=11.1) to 15 (72/5=14.4) years to double your money. Finally, one’s ability to accumulate wealth has less to do with the numbers and everything to do with one’s values and lifestyle.