The Psychology of Money

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. So equally smart people can disagree about how and why recessions happen, how you should invest your money, what you should prioritize, how much risk you should take, and so on.

We need to believe we live in a predictable, controllable world, so we turn to authoritative-sounding people who promise to satisfy that need.”

Satisfying that need is a great way to put it. Wanting to believe we are in control is an emotional itch that needs to be scratched, rather than an analytical problem to be calculated and solved. The illusion of control is more persuasive than the reality of uncertainty. So we cling to stories about outcomes being in our control.

1. The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true

As for the top one percent, the really well-to-do and the rich, whom we might classify very roughly indeed as the $16,000-and-over group, their share of the total national income, after taxes, had come down by 1945 from 13 percent to 7 percent

They are surely wrong: the outcome of a start-up depends as much on the achievements of its competitors and on changes in the market as on its own efforts.

doing well with money has a little to do with how smart you are and a lot to do with how you behave

Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.

That flexibility and control over your time is an unseen return on wealth.

What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry?

I’d say it’s incalculable.

It’s incalculable in two ways. It’s so large and important that we can’t put a price on it. But it’s also literally incalculable—we can’t measure it like we can measure interest rates—and what we can’t measure we tend to overlook.

When you don’t have control over your time, you’re forced to accept whatever bad luck is thrown your way. But if you have flexibility you have the time to wait for no-brainer opportunities to fall in your lap. This is a hidden return on your savings.

Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.

But spending beyond a pretty low level of materialism is mostly a reflection of ego approaching income, a way to spend money to show people that you have (or had) money.

Think of it like this, and one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. It’s a daily struggle against instincts to extend your peacock feathers to their outermost limits and keep up with others doing the same.

People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a damn what others think about them.

So people’s ability to save is more in their control than they might think.

Investor Bill Mann once wrote: “There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have

I learned that as a valet, when I began thinking about all the people driving up to the hotel in their Ferraris, watching me gawk. People must gawk everywhere they went, and I’m sure they loved it. I’m sure they felt admired.

But did they know I did not care about them, or even notice them? Did they know I was only gawking at the car, and imagining myself in the driver’s seat?

Did they buy a Ferrari thinking it would bring them admiration without realizing that I—and likely most others—who are impressed with the car didn’t actually give them, the driver, a moment’s thought?

Does this same idea apply to those living in big homes? Almost certainly.

Jewelry and clothes? Yep.

My point here is not to abandon the pursuit of wealth. Or even fancy cars. I like both.

It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.