Welcome back.
Nice to see you.
Thanks again for being here.
Something I've always found interesting, and that has had a big impact on my career,
is that most of the interest and research in behavioral finance centers around investing,
like how people make decisions around greed and fear and risk and opportunity, what I've
called the psychology of money, really centers around making investing decisions.
I think there's some background to that that makes sense.
I think most of this came out of academia, and a lot of the pioneers on this were interested
in investing.
They were investing minds who kind of gravitated towards psychology, and a lot of the great
investors who have mastered psychology work investors themselves make sense that most
of the behavioral finance literature, so to speak, is around investing decisions.
But what's interesting to me is that that of course applies to only a small percentage
of the population.
Just over half of Americans own stocks, it's not a minority, most Americans own stocks,
but for most people it's not the center of their lives.
They have a 401k, they're saving for retirement, but day-to-day spending decisions that impacts
everybody.
From the poorest person to the decabillionaire, everyone is impacted by the psychology
of spending money, more so than they're impacted by the psychology of investing their money.
That's my first book, The Psychology of Money, was really that.
It was centered mostly, probably 70% of the book.
It has to do with the psychology of investing your money.
And I think that's an important topic.
It's an interesting topic to me.
But in the last couple years, I've gravitated towards the psychology of spending money.
And I think about it in my own household, how my wife and I think about it, how we've
evolved and adapted over time, what it means for our family.
And very similar, I think, to the early days of behavioral finance in investing.
So much of what comes out of this study of the psychology of spending money seems so
obvious, yet is so ignored and so easy to ignore.
But when you dig into it, you're like, yes, of course that's what impacts me and everybody
else.
But why have I never heard this before?
Why are we talking more about this?
And I'm actually working on a book on this topic right now.
But don't tell anybody, it's still secret.
And so I've been thinking a lot about these topics, just from a high level.
Like what are the principles in my mind and the art of spending money, the psychology of
spending money when we are figuring out at the household level, you and your family,
your spouse or even just you as an individual, not necessarily the science of spending
money, which I would define as how to make a budget, how to find a good deal.
That's the science of spending money.
But just like in investing, I think it's way more important to focus on just what's going
through your head when you're trying to make these decisions.
What are the weird, quirky psychological flaws that happen in your head when you are making
decisions with what to spend your money on?
So let me just go through a couple of these ideas when it comes to spending money.
Number one, there are two ways to use money.
One is as a tool to live a better life.
The other is as a yardstick of status to measure yourself against other people.
Many of us aspire for the former, but get caught up chasing the latter.
Number two, money is a tool that you can use.
But if you are not careful, it will use you.
Sometimes the stuff that you spend money on has so much influence over your autonomy and
your sanity, that it's not clear whether you own things or whether the things own you.
Number three, everyone can spend money in a way that will make them happier.
But there is no universal formula on how to do it.
The nice stuff that makes me happy might seem crazy to you and vice versa.
Like many things in finance, debates over what kind of lifestyle you should live are often
just people with different personalities talking over to each other.
Number four, how you spend your money can be a reflection of what you've experienced
in life.
Does somebody who grew up snubbed by poverty and embarrassed by poverty, owning a fancy
car later in your life might be the ultimate symbol of what you have overcome.
While at the same time to an old money family who was not snubbed by poverty, that fancy
car might be the ultimate symbol of ego and insecurity because what they want to avoid.
People don't just spend money on things that they find fun or useful.
Their decisions of what they spend money on often reflect the psychological wounds of
their life experiences.
Number five, spending money can buy happiness.
But it's often an indirect path.
The big, nice house might make you happier.
It might actually make you happier.
But mostly that is because a big house makes it easier to spend time with friends and
family.
And the friends and family are actually what are making you happy.
Number six, unspent money by something intangible, but very valuable, which is freedom and independence
and autonomy and control over your time, every dollar of savings buys something.
It buys a claim check on the future that you can use any way you want.
Number seven, and this one's related.
At the same time, some wealthy people struggle to spend money on things that would actually
make them happy.
Because the idea of I'm a saver becomes such an ingrained part of their identity.
And what you intended to be a strategy to achieve a better life by being a saver turns into
an ideology that you are beholden to and you become a victim to.
Number what do we own?
Eight.
There are cases when people desire to show off fancy stuff is because it's the only
way to gain respect and admiration in life.
Everyone wants respect and admiration, just a feeling that they matter and they are needed
in the world.
And I think there are some people who feel like they aren't getting respect for their intelligence
or their humor or their wisdom or their ability to love.
And they therefore then resort to trying to get their respect by impressing you with
their car or their house or their clothes.
And this is not universal.
There are some people who are very well respected and loved who have nice cars and homes and
clothes.
But I think for some people, the material things that you buy are trying to fill a hole
in your life.
And that hole would otherwise be filled with gaining your respect from this other areas
of life.
That for whatever reason you feel are not being fulfilled.
Number nine.
Everything is as desired as a thing that you want but can't have.
Material goods that play hard to get mess with our minds the same way that people do when
they play hard to get.
When something you like is just out of reach, you could almost afford it but not quite
yet.
It takes on a mystique and exaggerates the dreams that you have about how much having
that thing will make you happy and solve your problems.
I think it does us in a way that once you finally gain those things and buy those things,
you become a little bit disappointed in what did not change in your life.
All right.
And aspirations trickle down.
Kevin Kelly once made this point that if you want to know what lower income groups of
people will aspire to spend their money on in the future, look at what higher income
groups are spending their money on today.
European vacations used to be the exclusive playground of the rich.
Then it trickle down to lower income groups.
Same thing happened with going to college, investing in the stock market, two car households,
walk in closets.
All of these things that used to be the luxuries of the rich became the standards of the masses.
This next one is a very related point.
There is no such thing as an objective level of wealth.
Everything is just relative to what other people have.
People just look around and they say, what kind of car is that person driving?
What kind of home are they living in?
What kind of clothes are they wearing?
And their aspirations and their definition of wealth are calibrated accordingly.
Next, there is a difference between nice stuff and fancy stuff.
One provides tangible utility and the other offers social utility.
One actually makes your life better.
It makes your life more efficient, more comfortable.
The other is mostly just status and bragging rights.
Using money to buy nice stuff is great.
Make your life better.
Using money to buy fancy stuff is a different and far more complicated animal.
Alright, last one.
The more money you have, the harder it becomes to know how to spend that money in a way
that will actually make you happy.
An act of fusion sets in at a fairly low level of income.
Another Luke Burgess once wrote, quote, after meeting our basic needs, we enter into the
universe of desire.
And knowing what to want is much harder than knowing what to need.
In those I think are kind of the core of what I would consider the art, the psychology
of spending money.
Very different topic than the greed and fear that we study when we're studying the
psychology of investing your money.
But these I think are the much more interesting and probably useful and practical areas of
behavioral finance that I and maybe you will spend some more time thinking about.
Thanks again for listening.
We'll see you next time.
