Lending Club Blog

Following Generalized Advice

One of the main problems with financial advice is that it is often incomplete or too generic for our own personal situation. Learning to recognize that information may be missing from financial advice can help us to get more value from what is provided.

Following directions reminds me of a lesson used to teach young children about how to program a computer. The teacher, acting as a computer, asks the children how to make a peanut butter and jelly sandwich. After the typical response to put peanut butter on the bread, the teacher places the jar of peanut butter on the bag of bread, much to the chagrin of the students. In time, they learn that to successfully program a computer they must make clear, unambiguous, and sequential instructions.

Without trying to negatively correlate the human mind to that “dumb” computer, we can still take something from the lesson. A piece of financial advice is only as good as its completeness and applicability to our situation. Expanding and customizing generalized advice is the best way to take value from it.

Taking an example that is often cited throughout the personal finance realm, including here on the Lending Club blog, let’s consider the advice to consolidate credit card debt. Those four words are powerful, but without taking many steps, they will not be effective. While it can safely be assumed that some readers understand all of the necessary steps, many may not. Expanding on the idea might yield a more accurate plan:

  1. Determine the interest rates that you are currently paying.
  2. Calculate the total amount of debt that you are trying to consolidate.
  3. Obtain a loan for a lower interest rate than you are paying in the amount of your total debt.
  4. Use the proceeds of the loan to pay off all of your debt.
  5. Do not use the credit available on the debt that you have paid off.
  6. Pay off your consolidation loan on time.

As you can imagine, listing all of those steps every time someone wanted to tout the virtues of consolidation would be cumbersome. Still, the four-word summary, consolidate credit card debt, may cause certain steps to be forgotten. I could probably expand my list to be even more specific. What you realize is that omitting one of the implied steps, such as not using the credit available on the debt you have paid off, can make sound financial advice rather poor.

With the wide array of people’s potential financial situations, no generalized advice is going to be applicable to every situation. Understanding that limitation, modifying advice as appropriate, and filling in the gaps will allow us to maximize the value of the advice we encounter.

Saturday, June 14th, 2008 at 12:05 pm

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