The Psychology of Money

Sometimes when I read a book or listen to a podcast, I get sucked in. I feel connected to the story, I want to set aside whatever I have planned for the day to finish the book or podcast. Something about the story or the content drags you in and you want more. I was listening to Think Like A CEO with Gary Keller and Jay Papasan, who had Morgen Housel on to talk about his book, “The Psychology of Money.” This happened to be one of those podcasts that sucked me in. I could not stop listening to it. So, instead of going to the office, I ran errands for the next 2 hours, so I could finish the podcast.

Once I finished the podcast, I went to the office, got my work done for the day, and reflected on what I had just listened to. The material was so fresh in my mind, I wanted more. I had to do a long drive after work to pick some stuff up, so, I started the podcast over and became encompassed once again. Morgan had so much to say about the psychology behind money and why people act the way they do because of it. Here are some of the key take-aways I had from the podcast.

First, do not get your values from the media. When you think about your vision, your goals in life, what you want to accomplish, the things you want to have, the person you want to be, do not look at the media for help or inspiration. You should not let outside influences, especially fake ones drawn up by the media or social media, influence what or who you want to be. Think about these things on your own terms. What would make you happy and fulfilled in life? If it was just you, no outside influences, what kind of life would you live? What material things would you possess? How would you spend your time and what kind of income would support your lifestyle? Once you have these thoughts in your mind, we can think about the next category.

When is enough, enough? At what point is enough money, enough money? You need to have a cutoff, once you reach a certain income, you will be happy and fulfilled at that amount. This is finding your end zone and we want to reach the end zone and score. This does not mean, once you reach the end zone, you cannot keep making more money. What it means, is, once you have reached the end zone, you no longer have expectations for making more money. You have set your standard of living, that is the living standard you are at, and you will be satisfied with that amount of money. It is a very dangerous game to keep seeking more and more.

Now, we are seeing as we go, money is an emotional thing. We have to think about how much money would satisfy us. Why it would satisfy us, the type of lifestyle we could have, what we feel comfortable with, etc. So… personal finance is often times more personal than finance. You will most likely make financial decisions based on what you feel comfortable or safe with. Which is not a bad thing, as long as you are using your emotions correctly. Let me give you a couple examples of using your emotions correctly and incorrectly.

Correct emotion

  1. You have calculated on a spreadsheet all your expenses and investments. You know exactly how much income you need a month to make your life a reality. However, you will not feel comfortable just breaking even with that income, so you want to make an extra $1,000 a month for a buffer/safety net.
  2. You have saved a safety net for 3 months of expenses, you realized you still do not feel comfortable and want to have a safety net of 6 months.

Incorrect emotion

  1. You are walking through the store, you see a nice jacket you like. You already have a jacket, but you like this one more. You do not care about what your bank balance is or the jacket is more important than your bank balance, investing, or bills. So, you buy the jacket and then you are late on your car payment because you had to have the jacket.
  2. You have your life set up perfectly, where you can live paycheck to paycheck at the standard of living you want. However, you do not have a safety net because you do not think you need one, since you live the lifestyle you want, with the income you have. Then something happens, you lose your job and have to take a pay cut. Now you are unable to make some of your payments from your lavish lifestyle and you are trying to sell your things before collections take them.

As you can see, the examples I was giving had a lot to do with saving. They discussed in the podcast about the importance of saving money. We want to save money for future problems, we cannot foresee. The world is a revolving, recession, depression, boom, pandemic, war, bull market, bear market, etc. So when things are going well, you can count on them going bad and when things are bad, you can bet they will get good again.

You want to invest like an optimist to gain wealth, while saving like a pessimist to protect your wealth.

Wealth most commonly occurs due to exponential growth. It may take a long time to show you are accumulating wealth or money. Then with compounding interest, it exponentially grows. This means, the longer you are in something, the better. If you look at stocks or real estate from 50 years ago, it has gone up in value. If you are able to stay in something for a very long time, it will end up paying off. Warren Buffet started investing at the age of 10. He accumulated 1% of his wealth by 50 years of age, another 2% of his wealth from 50-65 years of age. Then 97% of his wealth has been made from 65 years old into his 90s. This goes to show the main reason Warren Buffet is so wealthy, is because he has been in the stock market for over 80 years. If he would have been like the normal person and invest from his mid 20s to 65 years old, no one would know who he is. He would be a normal guy with a pretty good retirement account. With that being said, you want to be around long enough to be an optimist.

Remember, it does not matter how wealthy you are. You can have 100 dollars or 100 million dollars, you will both enjoy the same views at the beach.

Think about how money affects you and your relationship with money. Figure out your end zone and start working to score.

Your life Tutor

-Shaun Tutor

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