Morgan Housel has presented to our team several times. We recommend his podcast The Art of Spending[i] which delves into the psychology of why each of us spends money.
The most impactful variable in any person’s long-term plan is typically what they spend. If your spending is towards the reckless end of the spectrum, it can add years to the timeline before you can afford to no longer work. Morgan has identified several insightful anecdotes on how and why people spend money, which we have summarised below.
Family background – your family background and past experiences heavily influence your spending preferences. A person who grew up financially comfortable may find the purchase of a Ferrari outlandish, whereas the person who grew up with nothing, and was heckled for it, may see buying the Ferrari as fulfilling a deep-seated psychological need to heal some pain from their childhood and feel good about themselves.
Entrapped by spending – it is easy to become a prisoner to your spending. One billionaire whose spending almost sent him bankrupt said you devote yourself to expense regardless of pleasure. This comes from the belief spending makes you happier, which is known to not be true.
Frugality inertia – when you spend a lifetime saving money to get ahead, it can be hard to transition into a spending phase. The goal is to have enough wealth so you don’t have to think about money, but the comfort of seeing your net wealth grow over time becomes engrained in your personality. We do see this often with clients – we call it the Accumulator personality, where you struggle to switch gears from saving to spending because seeing your portfolio compound over time provides comfort. You spend well below your means. But by not switching gears, all you do is leave more money for the next generation to enjoy. Sometimes you need to accept your goals have been achieved and it’s time to enjoy your spending.
Joy of spending diminishes as income rises as less sacrifice and sweat is required to get ahead. Pleasure ends where economy becomes unnecessary. If you can buy what you want, you don’t always value what you buy.
When Richard Nixon was interviewed by David Frost, he made this famous quote,
“To me, the unhappiest people in the world are those in the watering places, the international watering places like…uhm…the south coast of France and Newport and Palm Springs and Palm Beach; going to parties every night, playing golf every afternoon, then bridge. Drinking too much, talking too much, thinking too little. Retired. No purpose.
And so, well I know those who will totally disagree with this and say ‘Gee, boy, if I could just be a millionaire that would be the most wonderful thing; if I could just not have to work every day, if I could just be out fishing or hunting, or playing golf, or travelling, that would be the most wonderful life in the world’ …they don’t know life, because what makes life mean something is purpose. A goal. The battle. The struggle. Even if you don’t win it…”
Asking $3 questions when $30,000 questions are all that matters – the law of triviality suggests the amount of attention any problem gets is inverse to its importance. Smaller problems are often easier to tackle and less daunting. Over the years we have seen many people who need advice to ensure they achieve what matters most to them but prefer to ignore the problem in the forlorn hope it goes away.
Social aspirational spending – there is no objective level of what makes someone wealthy. Like most things, wealth is relative to something, or someone, else. When people look around, we are calibrated to compare what we drive and where we live to other people. I recall 25 years ago when I was in investment banking there was a checklist to a successful life – a house with a water view in the east or lower north shore of Sydney, a Mercedes S450, a boat, and a weekender in the Southern Highlands. Your aspirations become calibrated to people around you – I certainly found myself coming to believe these things mattered and I too should aspire to having them. People like to mimic those we think are living better lives, but if you can run your own race, you may find greater joy.
Underappreciation of the long-term cost of purchases, with too much emphasis on the initial sales price. If you purchased the median house in Sydney 30 years ago, you paid $221,770. Today, that house is likely worth the current median of $1.25 million. Feels like an outstanding investment, yes? But in percentage terms, the annual return is 5.76%, and this is before holding and maintenance costs which are typically 1% to 3% of the value each year. Price is easy to calculate, but what they cost – the holding costs – add up fast. Just ask anyone who owns a yacht or vintage Italian sports car (though these costs can bring joy too!).
No one is as impressed with your possessions as much as you are – when you see a Ferrari driver, you never think the driver is cool, rather you may think if I had that car, people would think I am cool. Recognise no one thinks about you as much as you do.
Frugality is choosing what you want to spend extravagantly on and what things don’t really matter to you – many people don’t know what kind of spending will make them happy. The most expensive thing does not always bring you the most joy. Find a system that works for you. If buying expensive shoes really does bring you joy, go for it!
Social signaling aspect of money – people don’t communicate on social media – they perform for one another. Whose opinion are you trying to influence through your spending, why, and are those people even paying any attention to you?
Social hierarchy of spending – remember the tale of the two hikers who come across a bear, so one starts putting on his running shoes. When the other hiker says you cannot possibly outrun the bear, the hiker replies I only need to be faster than you. All success is simply relative to someone else, normally someone around you. For some, money can be less of an asset and more a social liability – they become indebted to a status chasing life that normally leaves them miserable.
The quote by Montesquieu goes:
If one only wished to be happy, this could be easily accomplished; but we wish to be happier than other people, and this is always difficult, for we believe others to be happier than they are.
Spending can be a representation of how hard you work and how much stress went into earning your pay cheque. The goal is to compensate yourself for the misery of how a pay cheque was earned. From experience, this is a high-risk spending outcome for professionals in stressful environments, like lawyers – the urge to prove to yourself the long hours were worth it. People who enjoy their work and love what they do are less likely to look for gratification through their spending. There is less urge to compensate for hard work with heavy spending.
If any of these anecdotes resonated with you, perhaps there is an opportunity to reflect on how you may wish to spend your money going forward. Spending less – or more for those who experience frugality inertia – may bring you more joy.
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