Our relationship with money
Last week, I devoured Morgan Housel’s book ‘Psychology of Money’.
Shout out: Thank you, my wife, for this lovely first gift after our wedding!
Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He effortlessly covers the extremely complex topic of our relationship with money in this book.
I have struggled to communicate many of the same ideas to my friends and family because I constantly feel such ideas need more context and lived experiences to make any sense. However, Morgan brilliantly solves that right in the first chapter when he says “No one’s crazy”. Each of us has a unique relationship with money. Some decisions that seem strange or crazy to others may make perfect sense to us.
Before I get to my takeaways from the book that I agree most with, it’s important to clarify how I think about money and establish my context. After all, each person is playing a different game based on their unique lives and no one’s crazy.
My relationship with money
There are 3 key moments that have shaped how I think about money.
1. Patience
Growing up in a middle-class household, at some point, I stopped asking for things that other kids around me had. This happened gradually and blunted out any craving for things that others would flash around - the latest Play Station, latest pair of Nike shoes, latest phones, latest bikes, etc. There are many things that I still got second hand or as a hand-me-down. I went to a good school, studied well, played many sports, and made good friends. Yes, I was slightly jealous of some kids, but I didn’t find strong enough reasons to rebel hard at home.
I know this sounds weird for a 14-year-old, but I think I accepted delayed gratification without knowing what it meant or questioning it too much.
2. Discipline
Another key moment that shaped my relationship with money was when I was 19 and I received my first salary. My mom worked in a bank. She advised me to set aside Rs 2k every month via a recurring deposit. It helped that the things that were out of my reach when I was not earning did not turn into desires that I would ‘solve’ when I had money. 2k was a good chunk from my internship’s stipend. But, saving first was the tacit rule of managing money at home. I assumed everyone lived with what’s left after investing for their retirement.
This habit of investing before spending helped me taste the power of compounding in a couple of years. Spending on things I didn’t need was less fun than saving more and watching my corpus grow. I increased my monthly investments steadily and spread it across equity and debt. It became a fun game to maximize my monthly savings without compromising on leading a comfortable life.
When I say comfortable life, a caveat: I am not super frugal or zen-like with my money. What expenditures make sense to me may not make sense to you, and vice versa. I have my indulgences and irrational spends. I try to be mindful when this happens and avoid guilt or attachment.
3. Save for the future
While the previous two moments happened over time without excessive planning with numbers, the third one happened a few years ago when I worked with a fee-only financial advisor. He asked me to articulate my goals. While my corpus of money was growing every month, I cheekily said I wanted it to reach a level where the monthly returns exceeded my lifestyle needs. In short, a life without worrying about inflation or the next month’s salary. I thought he’d come back with a recommendation to get my head checked. Instead, he came back with a number that didn’t seem out of whack. I can get there!
Important Caveat: Getting to the above number should only serve as a start. Understand why the stock markets need long time horizons to battle volatility and how inflation eats into your returns.
The last few years of medical emergencies at home and the pandemic have taught me that no amount of financial planning on an Excel can fully protect you against the inevitable uncertainties of life. Saving for the future and building a larger corpus without perfectly mapping to a specific goal is still a good idea.
You cannot buy happiness with money, but knowing how much is enough can give you independence, time, and options. You may find happiness through how you use this independence.
Takeaways from the book
Here are my 3 main takeaways from Housel’s writing, coupled with my own reflections and experiences.
1. Play your game
Don’t be swayed by another person’s goals and outlook to spend/invest/save. It’s futile to criticize or praise another person’s relationship with money because you’ll never have the full context of their decisions. Understand what matters to you and be clear about your own relationship with money.
Be humble when things go right and compassionate when they go wrong.
Reflection:
I don’t need to buy things for society’s validation or a prospective career boost. There are others who may need to do that. I need my money to grow over the next 30 years at a rate faster than my withdrawal rate. It must provide a comfortable life for me and family.
Save even if you don’t have a specific reason to save because life is a continuous chain of surprises. By investing in the stock market, I am betting on the global economic growth that I expect will continue.
Compounding wealth is the secret to surviving life’s inevitable challenges.
2. Be Smart yet Humble
Compounding drives growth, and this always takes time. Meanwhile, single points of failure, which can happen in an instant, drive destruction. Be willing to pay the price of success - volatility and loss amid the long backdrop of growth. This is the admission fee to play the game.
It’s not possible to have perfect information about everything. As Carl Richard writes: “Risk is what’s left over when you think you’ve thought of everything.”
Risk is the flip-side of luck.
Reflection:
I know a lot less about how the world works than I think I do, but I form a narrative to fill in the gaps. We all do that to make sense of our day to day.
My investing strategy currently doesn’t rely on picking the right stocks or funds at the right time. I get it broadly right with Systematic Investment Plans (SIP) into a large cap, multi cap, and index fund and also balancing between equity and debt. I’m not actively trying to beat the market or make quick returns. I would rather spend my energy and effort monitoring expenses, being disciplined about budgets, improving my savings rate, remaining patient, and believing that the global economy will create value in the coming decades.
Cheat code to long-term wealth: high savings rate, discipline, and patience.
3. Money can provide freedom
Wealth is the ability to do what I’d like to do with my time and having options, rather than seeking external validation with my material possessions. It is suppressing what you could buy today to have more stuff or options in the future. It is often what others can’t see - rate of compounding, my freedom, my options, my time.
Wealth is what others can’t see.
Reflection:
I want the freedom to do whatever I’d like to do with my time. I love to play and I like to build products and organizations and work with smart people who like to win as a team. Some of these endeavors may add more income, but that’s only a by-product of how I choose to spend my time.
Money helps me build a life that I don’t need to escape from.
Work on leading the balanced life I strive for by knowing what is enough. It’s easy to get sucked into wanting more and more. Saying “that’s enough” and not moving the goalposts is harder. But it helps you sleep better at night.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.