151 - Book | The Psychology of Money
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Show Notes:
Welcome to the Nancy Ray Book Club, where every month I read a book and then I share my three biggest takeaways from that book with you here. This month, I read the Psychology of Money by Morgan Housel. A book that came really highly recommended to me by a few trusted friends and it did not disappoint. So yes—today we are talking all about money and our relationship with it.
For the full episode, hit play above or read through it below.
Morgan Housel, the author of Psychology of Money got my buy-in in the first few pages as he introduced the premise of his book. Which is simply this—doing well with money isn't necessarily about what you know, or how smart you are. It's about how you behave. Boom. Yes, yes, yes. A hundred percent. Yes.
He goes on to say that money, investing, personal finance, business decisions, anything that has to do with money is typically taught as a math based field. It's all about numbers, it's about equations, formulas, data, how smart you are. And that makes sense, right? Because money has to do with numbers, but that's not where financial decisions are made. They're emotional decisions.
I love this line that says “Real world people don't make financial decisions on a spreadsheet. They make them at the dinner table or in a meeting room where personal history and your own unique view of the world, ego, pride, marketing and odd incentives are scrambled together.” I've never really thought of myself as a money or numbers person. I feel like that's Will’s gifting, and I'm not really that way.
I'm the kind of person who loves beauty. I love dreaming, I'm a true visionary. Will and I've had countless discussions—maybe you can relate, I won't say arguments, but you know, some discussions about form versus function in our household, family, marriage, anything. I am all form, he is all function and like I said, he's the numbers person. So this makes sense.
But guess what? Even though I'm not, or I've said I'm not a money person or a numbers person, I have to be. I have to be a money person because I'm an adult and we all do. We all have to make money decisions, whether we're inclined to math and data and spreadsheets or not—right? Even if that bores us to tears like it does me.
We still have to be that kind of person because money affects all of us as part of our lives. That's what I love about this book. Money is emotional. Money is tied to our real lives, it’s tied to beauty, it’s tied to our dreams, it affect our day-to-day life. Our anxiety, how our time is spent, the things we buy, the things we love and that's why if you're listening and you think you're not going to enjoy a book about money, I encourage you—read this.
Stretch yourself because I'm not a numbers person either, but I really loved it. And it got me thinking so robustly about money, I guess, is a good way to put it. So while there were a few things in the book that felt a little over my head and I did kind of have to skim through some of the pages. Most of the book, the majority of it, was really beautifully written. Filled with stories and application for readers just like you and me.
I love how he intros the book. He says, “What you're holding in your hand is 20 chapters. Each describing what I consider to be the most important and often counterintuitive features of the psychology of money. The chapters revolve around a common theme, but exist on their own and can be read independently. It's not a long book, you're welcome. Most readers don't finish books they begin because most single topics don't require 300 pages of explanation. I'd rather make 20 short points you finish than one long one you give up on, on we go.” I love that “On we go.” And that's how he intros the book. So it's really cleverly written, it's very engaging and very easy to read.
All right, so let's get to my three biggest takeaways from the book.
Number one, stop moving the goalpost.
In his chapter called Never Enough, Morgan tells these stories of very rich people. Crazy rich people, doing crazy things and losing all their money or being put in jail because of it.
Like why, why, why are you doing this? Why? You had so much money, why in the world are you doing a Ponzi scheme to get more? Or risking it all? Or doing insider trading? And all the things, you know, you shouldn't be doing. Why? You already have so much money. Why would you risk all of that wealth and happiness for more?
And the bottom line is, the goalpost keeps moving and that's kind of natural in our culture but I think it's really important to identify in our own lives. We keep moving the goalpost—by goalpost, I mean like our next money goal—I think you're tracking with what I'm saying.
So like maybe your goalpost is to get a house, right? And so you get the house. Well, maybe your next goal post is then to pay off that house? That's great. But when you pay it off, maybe your next goalpost is to get a bigger house? Or maybe your next goalpost is to get a boat? Or maybe a vacation home? Or maybe to earn this much or that much? And it just keeps moving. It's like it just keeps moving.
So he talks about how important it is to define enough. What is your enough number? He outlines this problem of moving the goalpost by pointing to a few key issues in this chapter. I'll tell you a couple of them, I don't have time to go through all of them, but one of them, he says “The hardest financial skill is getting the goalpost to stop moving.”
And you and I both know that's not a financial skill. That is an issue of contentment. That's an issue of the heart. That is an issue of pride or gratitude or envy. It's not a spreadsheet issue, it is an issue of the heart because when we get something in our culture, our expectations just keep rising.
Morgan says “Life isn't any fun without a sense of enough.” Isn't that the truth? Another point he makes in this chapter is one on social comparison and it's something that we can't escape. Social comparison is everywhere and it doesn't matter where you are, what social circle you're in, there's always going to be someone ahead of you and there's always going to be someone behind you.
He gave an example of a rookie baseball player making $500,000 a year, $500,000. That's pretty good, right? But then he says, compared to his teammate who has a 12 year, $430 million contract, that rookie feels broke. But then that teammate with that contract could compare his income to the top 10 hedge fund managers who make $340 million a year.
Then they might compare themselves to Warren buffet whose income increased by $3.5 billion in one year, and on and on and on. You can just keep going up. You can always find someone making more money. The social comparison never ends and the more we realize that, the faster we can jump ship and decide what is enough for our household.
Like I said, he shares a few more really great points in that chapter but instead of sharing those points, I just wanted to steal something from the very last chapter of the book. Which hit home for me and the author talks about in this last chapter, Chapter 20, I love this. He talks about his own finances, he said, “Here's my relationship with money. These are the things that we have chosen as a family.” I love that chapter and how personal it was.
And he said, “If there's a part of our household financial plan I'm proud of, it's that we got the goalpost of lifestyle desires to stop moving at a young age. Our savings rate is fairly high, but we rarely feel like we're repressively frugal because our aspirations from our stuff haven't moved much. It's not that our aspirations are non-existent. We like nice stuff. We live comfortably. We just got the goalpost to stop moving. This would not work for everyone and it only works for us because we both agree to it equally. Neither of us are compromising for the other, most of what we get pleasure from; going on walks, reading, listening to podcasts costs little so we rarely feel like we're missing out.”
Isn't that beautiful and isn’t that the truth too? The best things in life really are free or very inexpensive. So if we can just step back and ask ourselves, what's enough for us? What's that number? When is the goalpost going to stop moving for me and my family? I feel like we would be winning at life, but also for sure at money.
My second takeaway is, wealth is what you don't see.
The book starts out with a story about this guy named Ronald Reed. He fixed cars at a gas station for 25 years, and he swept the floors at JCPenney for 17 years. He bought a two bedroom house at age 38, and he lived there for the rest of his life.
He was widowed at age 50 and he never remarried. Reed died in 2014 at age 92, which was when this humble, rural janitor made international headlines. In his will, the former janitor left $2 million to his step-kids and more than $6 million to his local hospital and library. Listen, this guy had $8 million and nobody knew it. I mean, I love this story.
Opening the book with this was like, yes, I love you Ronald Reed, this is amazing. The headlines were wondering, where did this guy get all his money? Did he win the lottery? What was it? And they found out there was no secret to it. He saved what little he could and he invested in stocks and then he waited for decades and decades and decades as tiny savings compounded into more than $8 million.
Wealth has more to do with your habits, your diligence, your contentment, the things you cannot see, than it does the amount of money that you make. I love this. I underlined this part of the book and starred it. It was so good. It says “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.” Isn’t that so good? Wealth is what you don't see. A lot of times we can't see the bank accounts, they're accumulating and the compound interest but you can't see.
We think the wealthy people are the ones with all the stuff, right? No, wealth is saving money diligently, no matter your income. Wealth is not caring what others think about you. It's contentment. Wealth is desiring less and not keeping up with the Joneses.
I love the book, maybe you've heard of it, it's called The Millionaire Next Door. It's another great money book because it outlines stories and so many people just like Ronald Reed who are all millionaires, but you would never know it. Fun side note about this book—they do all kinds of studies on the common millionaire. They're more common than you think believe it or not, and they don't like steak dinners or fancy things. They realize they like subs and sandwiches, like club sandwiches and things that are just Average Joe kind of stuff.
It's not the really swanky stuff they like. They're just normal people and the reason is because most millionaires, you can't see it. You cannot see it by their lifestyle, it's all in their accounts.
Alright, number three.
My third takeaway. time freedom is the greatest form of wealth.
There's a chapter in the book titled Freedom and it starts like this, “The highest form of wealth is the ability to wake up every morning and say, ‘Ah, I can do whatever I want today.’” He says, “People want to become wealthier to make them happier, but happiness is complicated because it's different for everyone. But there's a common denominator in happiness, a universal fuel of joy, and that's that people want to control their lives. The ability to do what you want when you want with who you want for as long as you want is priceless. It is the highest dividend that money pays.”
Then he goes on, continues to talk about a lot of different careers, some really high paying careers that take up so many hours and are so stressfu, they work you so hard it’s really just not worth it. Or the lower paying careers that are flexible, but give you so much more life.
And in the last chapter, again, going back to that chapter where the author tells about his own finances, he says, “Independence is our top goal.” I love that, independence is our top goal. Not the most amazing house or cars or, you know, material things, just independence. And he also says independence to me doesn't mean that you'll stop working, it means that you only do the work that you like, with people you like, at the times you like, for as long as you want.
Isn’t that the truth? I thought that was so clarifying just to have the time to do what we want with who we want for as long as we want. And you know, y'all know I love work. I mean, if you go all the way back to episode one of work and play with Nancy Ray, work is good.
God gave us work in the garden. I mean, work is good, but it makes all the difference when we get to choose the work that we're doing. When we get to choose the work that we're doing, and how much time we're giving to that work, and who we're working with, and how long do we want to work?
I mean, I think that's really profound and amazing and I think it just helped me clarify that the time freedom is the greatest form of wealth when reading this book. I also always want to think about money from a kingdom perspective, with a kingdom mindset. Meaning, as a Christian, how can I use my money and my time and my gifts for God's kingdom?
Because there's a bigger story that we're a part of. How can I use my money to share the gospel with others? To me, that's what it's all about, is using my time and my money and my gifts to bless other people. To be financially free so we can give that money away and give away our time and give away our gifts to causes that matter and to share the gospel with those who need it.
So all these takeaways, these top three takeaways, and so many more from the book, have gotten me thinking so much about money, about my relationship with money. Like what is our goalpost? What is Will and Nancy ‘s goalpost for our family? What is enough for us? Where are we at in that? Do we keep moving the financial goalpost for ourselves?
Am I focused more on looking like I have everything I want? Caring about what others think of me? Or am I content? Am I good? Am I doing life for what God thinks of me? And in what Will and I want? Or are we building wealth in ways that people cannot see? How close are we to having true time freedom? And when we get there, how am I going to spend that time?
I think all of these questions are so good. And I just love money books that can speak to my heart, which just is crazy to me and I applaud any author who can take a book about money and really speak to my heart. But that goes back to the premise that money is tied to our emotions and it's not about numbers and data and spreadsheets. It's about who we are as people.
Now, there are a lot of other parts of the book I loved and they did not get mentioned in my top three takeaways, but they're gonna get honorable mentions here. I just can't help myself. I have to share a little bit more of some of the good stuff in this book.
I loved how he talked about the incredible nature of compounding. Compounding, compounding—that just sounded weird when I said it, sorry. I love how he talked about the incredible nature of compounding and how Warren Buffet's secret to wealth was not that he's the greatest investor of all time, but then he has been investing since he was 10 years old.
That blew my mind. I did not know that, and he's just lived a really long time so, there you go. Compounding.
He talks about being reasonable is greater than being rational, meaning sometimes you don't make money decisions based on what makes the most sense on paper, but you make money decisions based on what helps you sleep at night. What gives you the most peace?
He gave the example that they're debt free, including their house. They paid off their mortgage and he said, “Any financial person can look at that and say, this return isn't great, like I could be making money by investing this mortgage.” But he said, “That's not the point, I sleep better at night because my house has paid off.”
And of course I totally relate to that. You can go back and listen to Episode 1 24, where Will and I talk about how we paid off our house for the second time. Hear a little bit more about our story there. But that's exactly why we did it too, it doesn't necessarily make the most sense on paper, but it helps us sleep better at night. It was a goal that helped us get excited to do something great with our money.
He ends the book with a fascinating brief history of why the US consumer thinks the way they do. How we built up consumer debt, how the war influenced that and a lot of different factors did, and how we got so comfortable with having so much debt and how our houses increased in size, and how we're way more materialistic now than we used to be. And he just goes into detail about how that came about through the years. It helps you get a really clean perspective on our culture today and why we are the way that we are.
So I definitely recommend The Psychology of Money, it was a fascinating, very good read. I'm adding it to my Amazon affiliate store, where you can find all my recommendations for books and things that I've mentioned on this podcast at nancyray.com/cornerstore.
And since it is an affiliate site, I do make a small commission off anything you purchase there, but that helps me continue to bring this podcast to you every week. So I always appreciate it when you buy books that you hear, things that I mentioned from nancyray.com/cornerstore.
I'm going to close with words from the Psychology of Money, love this quote.
“When most people say they want to be a millionaire, what they might actually mean is I'd like to spend a million dollars and that is literally the opposite of being a millionaire.”
Thanks for listening and I'll catch you next time.
