In the world of personal finance, many of the lessons we are taught are touted as historical. Experts say that since time immemorial, financially successful people have lived within their means, saved diligently, and spent and invested carefully.
Joseph Moore, a historian and author of How to Get Rich in American History, published in April, saw this event and wondered if Americans had been receiving, following, and prospering the same advice over the past few centuries. What he found surprised him.
“Is there some timeless money wisdom that we should all follow, from Ben Franklin to today? The answer is no,” Moore says. “As it turns out, what has always worked is always changing.”
Common financial principles that seem old are recent phenomena, Moore says, and some situations that seem new are actually very common throughout history.
In either case, knowing your history helps. After all, if previous generations thrived without up-to-date advice, current wisdom may not be as valuable as we think. Conversely, you may not need to find creative solutions to problems that are actually not that new.
Here are three misconceptions Moore identifies from the history of American personal finance and what we can learn from them.
Housing shortages are not new.
High mortgage rates and rising home prices have left Americans struggling to afford housing. But Moore says this is not a unique historical problem.
“We are definitely in a housing crisis with a lack of housing,” he says. “It’s not the first or the worst.”
Moore points to 1948 as the worst culprit, when the ratio of prospective home buyers to available home buyers was about twice what it is today. It was no picnic in 1981, either, when the median new mortgage cost consumed more than half of median household income, he says.
That doesn’t mean the current shortage isn’t real or that we should suck it up just because others have it worse, Moore said.
But it’s worth considering how people have historically solved this problem personally rather than politically. And when it comes to housing shortages, Moore’s answer is less appealing.
One historical solution was to move more often. The housing market is currently worse in some areas than in others. Moore said people used to be more likely to go and pick up where there was more opportunity. He said that for most of this country’s history, between one in three and one in five Americans immigrated each year, pointing to research by historian and journalist Yoni Appelbaum. Today, it’s closer to 1 in 13, Moore points out.
Another common solution to unaffordable housing is housing shares. In 19th-century America, it was not at all uncommon for homeowners to rent out rooms in their homes to help pay for their mortgages, Moore said. The same logic applies to modern renters who split space with roommates to keep costs down, he says.
“We’re running out of space, so we need to monetize space,” Moore says.
Diversification and compound interest have not historically been the path to wealth.
Investors are often told that the path to long-term wealth is easy. It’s about investing consistently in a low-cost, broadly diversified portfolio of stocks. Need proof? Consider the upward trajectory of the S&P 500 since before the 1929 crash, and consider all the compound interest you could have earned over that period if you had invested.
“The really new thing that we’re acting like it’s really old is that compound interest builds wealth,” Moore says. “For most of American history, no one ever got rich from compound interest, and if they did, they were usually already rich.”
Think about it. There were no index funds or fractional shares. If you want to own all the stocks in the index, you’ll need money to buy each stock, as well as fees to your broker.
“For most of American history, fewer than 10 percent of Americans owned any stocks. That didn’t make people rich,” Moore said. “They became wealthy by focusing most of their efforts on small businesses, careers, real estate, and work tools. Few people built wealth through compound interest until the Greatest Generation and the Baby Boomers, when the internet introduced technology that allowed them to take advantage of compound interest.”
Investors should continue to take advantage of the innovations that have made diversified, low-cost portfolios widely available, Moore said. Remember, there is more than one way to build wealth.
Once upon a time, people made budgeting simple.
One tried-and-true financial advice is to create a budget and stick to it. How else can you avoid overspending and stay on track toward your financial goals?
But Moore says household expense spreadsheets are a relatively new phenomenon.
“In the 1800s, no one budgeted the way we talk about budgeting,” he says. “These categories of forward-looking spending are probably completely off the table for anyone.”
For most of American history, people instead looked at their money in big buckets. For example, he says, a married couple might split things based on the husband and wife’s income. Or, to simplify things even more, they divided their income into what they needed to survive and what they had left over.
More complex budgeting was popular in the early 20th century, Moore said, when economic guides touted how much money you could save by cutting back on alcohol, cigarettes and things like lattes and avocado toast back then.
There is no one right way to manage your money. But if Moore argues that budgeting is a pain, he echoes generations of Americans who have simplified things by practicing what we now call reverse budgeting.
