Life Lately: The Psychology of Money

Chilling with my first personal finance coach

If I close my eyes and think hard enough, I can still conjure up vivid images of my mom’s budget sheets from my childhood. While I prefer to think of her as a miracle worker, I know those sheets played a huge role in stretching the family finances as far as possible. After I started my first job, my dad sent me notes from a teaching he did on personal finance in the early 90s. These all formed the basics of my approach to managing money: budget and spend less than you earn, invest your savings wisely, block lifestyle inflation, know what journey you’re on and don’t be swayed by people on a different journey...

I’ve just finished what I think is the second-best personal finance book I’ve ever read – and I’ve read quite a few. The Psychology of Money by Morgan Housel is a great book and I thoroughly enjoyed reading it over the past few days.

A core thesis of the book is that doing well with money is more about how you behave than it is about what you know. There are ordinary people who have built million-dollar fortunes (e.g. Grace Groner) and there are highly educated finance professionals (e.g. Richard Fuscone) who end up bankrupt. The book contains 20 short points about how we think about money and how we can behave differently. It was originally a blog post, which is free to read here, and there’s a good video summary here. I’m also going to share some of my favourite takeaways below.

First, wealth is what you don’t see. We tend to judge how well people are doing by what we see – because, well, that’s all we can go on. Problem is, there are many ways for people to “fake it”. One of the flashiest guys I knew is in jail for advance fee fraud – it turns out all that bling was bought with stolen money; another is neck-deep in credit card debt and requires frequent bailouts. “The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency. Keep this in mind when quickly judging others’ success and setting your own goals”.

Second, save money. I’ll start by acknowledging there are people who really can’t save (e.g., someone who earns less than they genuinely need to provide for themselves and their loved ones). So, this is for those who earn more than they need but don’t set money aside. For most people (i.e., who were not born into wealth, will not launch million-dollar companies, or become Nigerian politicians), building wealth will require unspent income to be invested and compounded over lots of time. Investment returns are not within your control, but your savings rate (how much of your income you don’t spend) is. One more thing: you don’t need a specific reason to save. The world is unpredictable and savings without a spending goal gives you a hedge against that unpredictability. And fight lifestyle inflation if you can. Don’t let your expenses grow in step with your income.

Third, manage your money in a way that helps you sleep at night. “That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.” I generally tend to optimize for “peace of mind”. While I often help friends model out financial decisions they’re facing, I make it clear to them that I don’t always follow the math. 

In closing, I wanted to share this quote from the book. This is how I think about money, but I’ve never been able to articulate it this cleanly.

“Independence has always been my personal financial goal. Chasing the highest returns or leveraging my assets to live the most luxurious life has little interest to me. Both look like games people do to impress their friends, and both have hidden risks. I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal… Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want. And achieving some level of independence does not rely on earning a high income. It’s mostly a matter of keeping your expectations in check and living below your means. Independence, at any income level, is driven by your savings rate. And past a certain level of income your savings rate is driven by your ability to keep your lifestyle expectations from running away.”

*****

There! That was much longer than I’d planned. Oh, and the best personal finance book I’ve ever read is George Clason’s 1926 classic – The Richest Man in Babylon. I think it offers a solid foundation and the Psychology of Money builds on top of it. Dan Ariely’s Dollars and Sense is also good, but it’s much denser and more academic than these two.

Have you got any personal finance tips that work great for you? I’d like to hear them.

Thanks for sticking around till the end and have a nice week!

Koye.