The personal finance advice business—the books, podcasts, etc. telling people how to manage their money—is, on the whole, a force for good in the world. The financial system is incredibly complicated, there are plenty of good-sounding ideas that aren't that good after all, and there are also plenty of non-obvious traps. It's a fair trade for many people to have slightly suboptimal assumptions about markets if it means that fewer people are continuously making the minimum payment on high-interest credit cards, or putting their retirement savings into an investment vehicle that charges high fees for what amounts to an index fund spiced up with tracking error.

This kind of advice necessarily oversimplifies things, and moralizes a bit, both of which are pretty good approaches for fields where there are risks—in general, if someone's publicly offering advice about some potentially dangerous practice, they ought to err on the side of making sure the people who listen to them don't make catastrophic mistakes. One of the best illustrations of this is this paper pointing out that young people should substantially lever up their retirement savings, which is theoretically true but which was, unfortunately, published in the summer of 2008.

But there is one quirk of personal finance advice that actively confuses people who listen to it, even if that confusion is for a good cause. And that quirk is to talk about the total non-discounted amount of interest paid for some purchase. For example, someone might illustrate the dangers of credit cards by pointing out that if you borrow $1,000 using a credit card with a 24% APR, and you make a minimum payment of $25 each month, it takes almost seven years to pay off the debt and you end up spending a total of $1,032 on interest. All of which is true, but the total sum paid on interest is not what makes this a bad deal, and it doesn't illustrate the tradeoff at work. The actual tradeoff is closer to: is it worth paying 27% interest to have this purchase sooner, or not? Save the same $25/month and you'll be able to afford that $1,000 purchase in a little over three years. The real question is whether the return on having that purchase earlier is about 27%. And that's a better question to ask, because it really does help you make intelligent decisions: plenty of pure consumption goods can be deferred in favor of cheaper temporary substitutes, but the ROI on getting your car fixed if losing it means losing your job is probably high enough to make that cost of capital worth it.

And we can illustrate the irrelevance of total interest paid by tweaking the loan. Suppose you get a weird credit card with 4% interest and a $1 minimum payment. Making that minimum payment means you spend about 45 years paying the loan, and your total interest payments are now even higher, at $1,154. But this is also an incredibly good deal! If you had a credit card like this, you'd want to use it for every possible expense—you'd be paying a lower rate than the US government, and for a longer term! Obviously if there's a framework where you'd rather borrow at the same rate as the median Capital One customer instead of borrowing at the same rate as the US government, it's not a good deal.

And this kind of thinking ends up complicating otherwise straightforward calculations. For example, here's a page from the wildly popular Dave Ramsey on why you should prefer a 15-year to a 30-year mortgage. This page has some genuinely good advice: don't buy a bigger house than you can afford, and consider the interest rate on what you're buying. But it also omits the opportunity cost: if you use a short-term mortgage, you're putting more money into amortizing it, which, at a constant rate of savings, means that you're making your portfolio more weighted to local single-family real estate and less weighted to asset classes like equities that offer more diversification and higher long-term returns. The interest rate on the shorter-term mortgage is lower, but that lower rate is partly pricing in lower risk to the lender that you'll be able to refinance early. The piece also recommends making extra payments on the mortgage, but for the typical mortgage borrower today, that basically means buying fixed income at a massive premium—if you pay down a mortgage that has a 4% interest rate when prevailing rates are 7%, you're buying something whose fair value is about 80 cents on the dollar for 100 cents on the dollar. If you have this instinct, it's far better to invest in somebody else's mortgage at the current market price, which you can do through a mortgage ETF like MBB.¹

The job of a financial guru is to dumb things down, and that has to be true because overall financial complexity increases to whatever limit the smartest people in finance can handle, and given how lucrative the job is and how fun some of the problems are, a lot of smart people are looking for ways to complicate things in useful ways. A personal finance influencer who tried to be direct about this kind of thing would probably cost people a lot of money: sure, you can monetize the embedded rates option in your mortgage by hedging it out with treasury futures, but there's a very good chance that people who do this will blow up at some point. But it's also important that they dumb things down in the right way: clarifying what you're really doing when you borrow money is good, and teaching people that long-term low-cost funding is bad because they'll be paying more nominal dollars decades from now in exchange for having more current dollars to invest in better alternatives today does them a disservice, and means that getting more financially sophisticated means unlearning one set of lessons while retaining another.

In The Diff, we’ve often looked at the question of cost of capital, as well as how individual borrowers ought to and actually do behave. For example:

• We’ve profiled Affirm, which illustrates the fuzzy gap between lending and payment systems ($).

• The better underwriting gets, the dodgier the next loan is ($).

• Mortgages are a big deal because they’re how central banks perform their real function of turning land into collateral ($).

• Finance is hard to decentralize because of counterparty problems.

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1  Ironically, overthinking financing from a capital market professional perspective can lead to weird edge cases: there's a sense in which paying down any debt that costs more than you earn on cash is an infinite-sharpe strategy, but in practice the way you optimize a portfolio is to look at asset selection separately from leverage. And even though it's infinite sharpe at the level of that one transaction, the resulting portfolio does not exactly generate the kind of alpha that leads to big bonuses or even continued employment.