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The Psychology of Money

I’ve been a fan of Morgan Housel’s writing for years and frequently share his blog posts in our monthly newsletter. In my opinion, he has joined Jason Zweig as an absolute must-read for all investors. So when his new book, The Psychology of Money, came out last fall, I couldn’t wait to read it. While it’s a book about money, it won’t bore you with details about stocks and bonds or insurance and taxes. Instead, Morgan focuses on what drives our behavior around money and how you should think about money to have a successful financial life. As he puts it, “The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.”

If you are finally heading off on a much-needed vacation this summer, I highly recommend you add his book to your reading list. Here were some of my favorite quotes and lessons from the book.

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.” and “Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”

This applies to more than just money but it’s an important concept. It’s easy to forget how much everyone’s experiences in life are vastly different from our own and how those experiences mold our worldviews.

“I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.”

This was Morgan’s advice to his kids but it’s an excellent reminder for all of us. Yes, it’s important to work hard, but luck can have an outsize impact on our results.

“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan”

As a financial planner, this is a tough one for me to accept but it’s absolutely true. This is exactly why we always have to include a margin of safety in our planning, which he covers in the next quote.

“Room for error—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline—anything that lets you live happily with a range of outcomes.”

There are too many unknowns in the future to live life with no margin of safety. 

“Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.” and “Saving money is the gap between your ego and your income, and wealth is what you don’t see.”

In the social media era we live in, we are inundated with images of nice cars, fancy clothes, and exotic vacations. These are meant to signify wealth and that the person posting the image has it. But true wealth is what you can’t see. We don’t post pictures of our 401(k) statement or our monthly savings rate because that won’t get any “likes”. But it will get you freedom and happiness.

“Investing is not a hard science. It’s a massive group of people making imperfect decisions with limited information about things that will have a massive impact on their wellbeing, which can make even smart people nervous, greedy and paranoid.”

Morgan is comparing investing to NASA engineers planning a trip to outer space here. The precision of those engineers is incredible, but the behavior of thousands of people doesn’t impact their calculations. There is no way to make investing decisions so precise because human beings are unpredictable.

“I can’t tell you what to do with your money, because I don’t know you. I don’t know what you want. I don’t know when you want it. I don’t know why you want it. So I’m not going to tell you what to do with your money. I don’t want to treat you like a dentist treated Clarence Hughes. But doctors and dentists aren’t useless, obviously. They have knowledge. They know the odds. They know what tends to work, even if patients come to different conclusions about what kind of treatment is right for them. Financial advisors are the same. There are universal truths in money, even if people come to different conclusions about how they want to apply those truths to their own finances.”

Clients come to us for answers to their financial questions but sometimes there is no definitive answer. Our job is to help you think through your options and consider all the potential implications of your decision. We might have two people who have the same question but the right answer is different for each of them. We have a wealth of knowledge and experience and we use that knowledge to help you make difficult decisions.

This is just a small sampling from an excellent book. If you don’t have time to read the whole thing, you can always wait for the movie!

-Chris Benson, CPA, PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures for more information.