Morgan Housel - The Art of Spending Money (EP.466)

Most bad financial decisions happen when you follow the strategy that is right for somebody else but not for you. You have to view it as an art, not a science. That's why the book is not called The Science of Spending Money.

Thanks for having me. Good to be back.

I've always been a believer that you cannot force creativity. You cannot sit down at your desk and schedule and be like, I'm going to come up with the next great idea. It always hits you in the shower when you're going for a walk and you're like, oh, I got this idea. And I so remember the moment. This was probably 2021 and I was on the treadmill at 8:00 p.m. and it just hit me out of the blue, The Art of Spending Money. And it was very similar with The Psychology of Money. One day I remember just walking down the street in New York, probably had lunch with you that day, and it hit me. I was like, The Psychology of Money, that's, oh, that would be a good... So it always starts with just the title. And the reason that I really liked The Art of Spending Money is because I realized, I think everything I write starts with introspection about my own life. I'm trying to figure out my own problems, my own flaws. And five years ago I realized that I could talk to you for hours and hours and hours about my investing philosophy and why I do it, but then one day I asked myself, I was like, what is my spending philosophy? Which is something that you and I have talked about in my personal life for years. What does my wife and my personal, like, why do we do the things we do? And I couldn't tell you. I couldn't tell myself. I never really thought about it that much. And then it also struck me as I started thinking about this that there are tens of thousands of books written about how to get wealthy. Some of them better than others, but tens of thousands of them. Virtually none written about what to do with it. And I think part of the reason why is because a lot of people's intuition, including probably my own until a couple years ago, was nothing needs to be said about the topic. It's simple. You just spend on what you like and then it's over. Like, that's it. There's nothing to be said about it. But I think if you drill into a lot of people's lives, rich people, poor people, middle class people, it's never that simple. There's always a psychological element of the psychology of envy, the psychology of social aspiration, the psychology of fear and contentment. And so there's nothing in the book that tells you how to spend because you and I are different, as you and I have debated in our personal lives many times about how we spend money. But I think the psychology of those topics, envy, greed, aspiration, contentment, tends to be universal for everybody.

There's a well-known thing in psychology. I forget the name of it, but once you get a nugget in your head, you see it everywhere. And so once I started thinking about the psychology of spending money, I saw it everywhere, including in my own life. And so I would ask, when have I been envious of other people? Why did I envy what they had? They had something I didn't, and that made me feel bad, and I want... like, you start drilling down into it, and then you start seeing it everywhere else. Every book that I would read, you would start connecting the dots of, like, oftentimes it's not even about spending money, but the psychology of contentment, why some people just didn't care what other people thought of them, and, like, what was going through their head, what did they want, what was in their life background that brought them to that point. So it was the classic thing of once I started looking for it, I couldn't stop seeing it. And then for a lot of writing, too, this is true for everything that any writer has ever written, including yourself, you have to tell a good story behind it. When you're writing a book about finance, if you only use finance examples, you put people to sleep in one chapter. You can't do it. So I had to find examples outside of the world of finance and spending. Examples of people and stories of people who are envious, who are very content, and then using those to craft a narrative about what I thought were the most important elements of the psychology of spending.

You need to spend more time looking in the mirror, so to speak, and figuring out who you are individually, rather than what does society tell me I should want and how am I trying to impress other people who aren't even looking. What I want is different from what you want. There is no right answer to do this. There are people who live paycheck to paycheck, and that's right for them. That's the right lifestyle for them to live. There's no one right way to do this. I think this is true in investing, too. Most bad financial decisions happen when you follow the strategy that is right for somebody else but not for you. And it's an easy trap to get into because it is the right advice for other people. And you're like, this worked for him, worked for her. Of course, I should go mimic that. And it's not right for you. And so I dollar-cost average into index funds. If you did that, you'd probably be bored out of your mind. And if I invested like you, I wouldn't be able to sleep at night. We're just different people. There's not right or wrong. And so you have to view it as an art, not a science. That's why the book is not called The Science of Spending Money. Art is individualistic and it's subjective. And you have to keep your desires and your expectations confined to your own roof without being too influenced by other people.

I got that line from my brother-in-law, who's a social worker. He works with very disadvantaged children, many of whom are abused physically and psychologically. They're homeless, their parents abandoned, like the saddest case studies you can think of, he works with. And a lot of those kids, actually, the majority of those kids do not do well in school. They get in fights on the playground. They don't do their homework. They skip school. And it's very often that the teacher or the principal will be like, why are you doing this? How can you possibly think it's okay to behave like you do at school? And my brother-in-law said, they have a phrase in the social system, which is all behavior makes sense with enough information. If this kid who's skipping school and getting into fights, if you saw what he was going through at home and the abuse and the lack of love, you don't condone his behavior, but you're like, I get it. I understand why you would think that's inappropriate or why you would want to lash out like that. And so again, it's not that you say it's fine for you to do that, but you're like, I get why you're doing it. That phrase, all behavior makes sense with enough information, you can apply that to so many avenues of life, including money. What happened in my past? So there was a period of my adult life years ago when my wife and I were very frugal. We've loosened up quite a bit, and you were a big part of trying to prod me in a different direction. But I've often asked, because now we have loosened up a little bit, and now I've asked what caused me to be in that mindset. And I bet if you got me on the therapist's couch and dug a couple layers deep, the answer would be something happened earlier in my life that left me in some aspects with low self-esteem, low self-confidence, and I had this mentality of I need to save everything because this is all going to come crashing down. I bet that's what it was. Like, it's hard for me to actually zero in that specifically, but it's something like that. And so it was very common. This is not a criticism, because you and I had fun conversations about this. They were always respectful, but I think it is common to be like, Morgan, why are you so frugal? Live a little. Live. And the truth was, even for me at that time, all behavior made sense with enough information. That was a product of who I was.

I heard this from Peter Kaufman. He said, there's evidence in neurology that only 10% of your brain function is conscious. The other 90% is processing emotions and feelings that you can't actually think about. They're there, but you don't know them. And so a lot of people, if you think like, oh, am I scarred from my past? Now, yeah, it's a bad experience as a kid, but I'm not scarred from my past. But the truth is, oh, you absolutely are. Things have happened and shaped you in ways that you can't even imagine. And everybody, and that's 90% of what's going on in your brain are feelings and emotions that you can't put your finger on. And so I always found that to be really fascinating as well. So if you ask why do I live this way and why do you live that way, neither of us actually know. And a lot of people, if you spent time with a therapist, a good therapist who can start pulling threads out of your brain, you're like, oh, I didn't even know this was there. I didn't even understand this until we started talking about it, but of course it's been there influencing who I've been. So everyone can have that experience. So I think even the idea that 90% of it is not even conscious means that we can think about this all day but not really understand it. So a big part of this is, yes, I think there are parts, there are puzzle pieces you can put together, but at the end of the day you kind of have to just say, this is who I am for whatever reason, this is who I am. Part of that too, actually a huge part of it, is my growing belief that a lot of our personalities, maybe the majority of our personalities, are forged at conception and there's nothing we can do about it. It's just on the nature-nurture spectrum. There's a lot of nature going on here and people are wired differently. I'm one of three kids, I have two older siblings. We're all so incredibly different. My two kids are so incredibly different. Same parents, same values, same house. Couldn't end up more different. And so, of course, that's just a part of our experiences, but we've just wired differently. Buffett talked about this quite a bit with finance. He's like, some people have the money mind where the first time they learn about compound interest when they're eight years old, they just get it instantly. The first time they hear the principles of value investing, they're like, yeah, done. Got it. DCF, understood. And Munger put it more starkly. He was like, when you teach financial matters to young people, they either understand it instantly or never. You either get it or you don't. You're wired for it or you're not. And I think there's a lot of areas in life that are like that. Music is one of those. Most people, if you're a musician, you either understood it instantly when you're six years old or never. You're never going to be a musician. Dance is like, we want to think that because we're intelligent and educated, we could just go learn a new topic. And to some extent it's true. To a big extent it's not.

It's different for everybody. Some people like houses, some people like cars, some people like travel, but everyone's different. Virtually everybody, I would actually say everybody likes freedom, likes independence, doing whatever you want to do on your own terms, whatever that might be. And what you want to do might be different from what I do, but we're doing it on our own terms, being our own individual. That is universal. And so my definition of freedom is different for everybody. And also independence exists on a spectrum. When I say independent, I don't necessarily mean you don't need to work anymore, like pure financial independence. Independence is always a spectrum, and every dollar of wealth that you have is one more claim check of your own future that you own versus somebody else owns. And so it's always on a spectrum of that. And very few people will get to a point outside of retirement where they don't need to work anymore. They're completely free to do what they want, when they want, with whom they want. But the idea of, for average ordinary people, if you can have the independence to choose where you live and have a shorter commute, that's enormous independence. If you can be laid off without frantically having to look for a new job the next morning, that's independence. If you or your family can get sick without it massively devouring your net worth, that's a level of independence. It's just the ability to withstand all the normal, natural, inevitable ups and downs in life. And some people will get to a point where they can withstand virtually any economic disaster, when they can live off interest and dividends and they're all set. There's that level. But I always view, this is how I view debt too. I view it as the more debt you have, the narrower the range of outcomes you can endure in life. Very simple, very elementary in that sense. But that's how I think about wealth. The more wealth you have, the higher the channel, the wider the channel becomes of the range of outcomes that you can endure, good, bad, ups and downs, all of it. I never viewed it as saving money or building wealth. I viewed it as purchasing independence. From when I was a teenager, every dollar that I saved felt like a little bit more independence that I had. And a lot of that back too was low self-esteem. This is all going to come crashing down. I don't know if anyone's going to hire me ever again. I need to save for the apocalypse. That was probably my mentality. Maybe still is my mentality. But viewing it as not saving money, as idle money, as not delayed gratification, but viewing it as purchasing independence that I gain pleasure from today. Like it's not delayed gratification. If I save money, I benefit from that right now because I have a higher sense in my body of being more independent than I was before. That's always how I viewed it.

One of the biggest things is that I think a lot of the problem people get into trouble with, if only I had more money, then I'd be happy, is they're chasing the wrong emotion. Happiness is always a five-minute emotion. Happiness never hits you for more than a couple minutes at a time. I think it's very similar to humor. If I told you the funniest joke in the world, you laugh for five minutes, maybe. You don't laugh for ten years. And if I told you that joke every day, you're like, stop. Stop. It's not funny anymore. Stop. Happiness is very similar. And so when people have brief moments of like, ah, this is so great, but not for ten years. It's fleeting. And so when people daydream about having the nice house, the plane, the car, whatever it might be, and realizing how great that would be, by and large, what you're doing is you're imagining yourself in that house being content with it. Not being happy with it. You imagine yourself in that house being like, I'm good. I don't need anything else. I don't care that my neighbor's house is bigger. This is great. I'm totally content with this. Contentment can be a lasting, enduring emotion. Happiness never is. And so I think that's where people get into trouble. I think what you want to chase in life is contentment. You want to get to a level where, like, I want to live a good life. I want to be able to enjoy the material abundance of this world, but I also want to get to a point where I'm like, I'm good. That's all I need. And so I talked about my late grandmother-in-law in the book. She lived for thirty years on nothing but eighteen hundred bucks a month in Social Security. No assets, no pension, nothing. Eighteen hundred bucks a month, nothing else. Happiest woman you'll ever meet. Happier than any of the billionaires I've ever met. One of the few people who probably did wake up smiling every morning. Found all of her joy working in her garden, going for walks, bird watching with her friends, totally content. She had no financial wealth and she had unlimited psychological wealth. She had nothing and she wanted nothing more. And you and I know some very wealthy people, billionaires, who want the world and wake up every morning saying this ain't enough. And by the way, I want to live in a world where most people wake up and say this isn't enough because that's where progress comes from. That's the seed of all innovation is people waking up and saying not enough. We need bigger, better, more. That's great. But at the individual level, it puts you on a hamster wheel forever. And so I think if you do want to chase that, unless you are so type A that you know you want to work one hundred hours a week till the day you die, what you want to seek is contentment. And look, when I say contentment, I want to be content with my house. I don't want to be content with how good I am as a writer or a father or a husband. I never want to drop my standards for that. I always want to do better. I'm never going to be satisfied with how well I'm doing there. But I absolutely want to be content with the physical life that I live because if you're not, you're always going to drive yourself crazy.

I mean, so much of this is, I think, be careful who you socialize with because they will absolutely, indisputably set your expectations. I grew up in the woods outside of Lake Tahoe, and this was before San Francisco tech money invaded. So when I grew up in Tahoe, it was a poor little mountain town. And by my childhood expectations, normal people drove old pickup trucks and rich people drove new pickup trucks. That was the stratification of wealth. Like, if you had a new F-150, you're like, that guy's rich. And then I went to college in Los Angeles. And Los Angeles is the opposite. Wealth, like the definition of wealth, is sky's the limit. And there are people in LA who were like, oh, my Bentley's two years old, so I'm poor, kind of thing. Like that felt like the mentality in LA. And I think honestly, if I think about it, people were way more content in Tahoe because they were socializing with people where the stratification of wealth was so much narrower that if you were a middle manager in Tahoe, you're like, great, you're doing awesome and you're raising your kid, like everything's great. Whereas in LA, it was like, oh, you're not a billionaire. Like why? What happened to you? So I always say, be careful who you socialize with. Be careful where you live because that is absolutely going to set your expectations. One example of this, the minimum wage in professional baseball, by any definition on the national stage and definitely the world stage, that's rich. Seven hundred fifty thousand a year, you're in the tippity top, particularly on global standards. Nobody in the MLB earning the minimum wage feels rich. They all feel like they're scraping by because there are people on their team in the locker right next to them making fifteen million a year, twenty-five million a year. And so seven hundred fifty thousand is absolutely a joke. There's a great Buffett quote, too. He says, success in life is when the people who you want to love you do love you. And everyone's different. In my own life, I'm like, I want my wife, kids, parents, and two or three of my friends to love me. And I desperately want them to love me and pretty much nobody else. And so I want to use my wealth and my time and my energy to help my life within the context of those six or seven people. So being careful who you socialize with and being careful whose attention and admiration you desire is really important.

If I go back to when I was in my early twenties, my material desires were off the charts. I wanted to be the guy in the yellow Ferrari with the Gucci. Like, my material aspirations were so high, and they're really not that much anymore. And I think the reason why is because when I was twenty-one, I had nothing to offer the world. I had no intelligence. I had no job skills. I didn't know how to love. I didn't know how to be a good friend. I had nothing to offer. And so I think intuitively a lot of people, including me in that situation, are like, no one's going to admire me for any of those skills. Maybe they'll admire me for my car. That I think was the easy... And then I think a lot of people go through this as, I'm like, oh, now I want to gain my admiration from my family and my ability as an author. And so my desire to show off my car drops because I want people to admire me for other things than that. And so I think that can be really true. So part of the equation as you're thinking about incremental wealth is, again, whose love, respect, and admiration do you want? Who do you want it from? And if you want it from strangers, then you can try to get it through your material wealth. And that's not even a criticism. I think it's a natural thing in the world. Like, status is not always a bad thing. You're trying to fit into other groups and cooperate with other groups. Status is not always a terrible thing. But if you want to use that money in what I think is a more durable manner, then you have to answer the question, who are the five or so people whose love and attention I really admire and how can I use this money to leverage that? And so I use the example in the book of, like, will a big house make you happy? It might. If having that big house makes it easier to host your friends, but the realization is the friends are making you happy. The house doesn't make any difference. But if it's a conduit to having more meaningful relationships, awesome, fantastic. And an enormous house, a super expensive house might mean that everyone wants to come over and hang out with you. Awesome. Your social life is great now. But it's not the house. It's the lubricant into better relationships. And so I think it's answering that very simple question. Whose attention and admiration and company do I want and how can I use my money to get me there?

Let me give you an example of a guy who I profiled a little bit in the book, Chuck Feeney, who is a multi-billionaire, started Duty Free Shoppers where you can buy like a gallon of vodka in every international airport, made a fortune, made ten billion dollars from the business. The very well-known part of Chuck Feeney's story is that he lived like a miser. He lived, I think the statistic was literally he took out two million dollars with an M from his ten billion dollar fortune to live on. He lived in a tiny little apartment, flew coach, and that's the well-known part of his story. He gave everything away. The less well-known part of his story is that when he became wealthy in the 1980s, when he first became a billionaire, he lived like a billionaire. He had multiple mansions. He had a private jet. He had a yacht. He lived like quintessential billionaire. And he didn't like it. It just wasn't for him. Here's a quote that I love. He said, I realized one day that I was happy when I was giving money away and I was not happy when I wasn't giving money away. And so he chose to live like a completely normal, ordinary middle-class person and gave everything away. What I love about that is not that he lived so frugally, like, but that was his choice. Great. What I love about it is that he chose it. He did not say, because I'm a billionaire, I have to live this lifestyle. He was like, I don't care what anyone tells me what I should live. That's not what I want to do. I want to live like this. It's my choice. And so I love that he just made the decision for himself. He was not influenced by anyone else's expectations, any societal influences. A lot of people thought he was completely crazy that this guy's worth ten billion dollars flying coach in a one-bedroom apartment. But it was his decision. It's very rare in life that you see true independence. Someone whose truly their aspirations do not leave the roof of their house and they're not influenced by anyone else's desires. It's very rare that you come across it. He was one of them. And it's a beautiful thing.

Of course they're wired differently. And the wiring that is different for most people is completely and utterly, they are an internal benchmark thinker. And the external benchmark of comparing themselves to others doesn't measure whatsoever. I think it's more often that you see the opposite of somebody who is entirely external benchmark focused and probably doesn't have a very stable internal scorecard of how they're doing. Their measure of success is net worth, social media followers, attention, and going to bed at night asking the question, am I doing the right thing? Am I doing the moral thing? Am I doing something that makes me happy? Would never cross their mind. I think that's actually way more common.

I'll tell you what, one of the things that got me going on this topic of the psychology of spending was I used to live in Washington, D.C. and I used to go down to the Library of Congress where they have this really cool section where they have every newspaper going back to sometimes the late 1700s. So you can go read like the Washington Post from 1871. And I used to love just going through and reading these things. And one day I was reading the Washington Post from 1929, obviously the peak of the Roaring Twenties before the Great Depression. And I stumbled across this headline that I thought was so profound. The headline was, the more you are snubbed while poor, the more you will enjoy displaying being rich. So many people, if they have a very high propensity to show off their wealth, a lot of times it's because they are trying to fill an emotional wound that they had from earlier in their life, of some time in their life when they were snubbed in some way, and either for other people or even internally for themselves, they want to show people or show themselves that they overcame that scar. I think everyone has some version of that. My view of the world, my spending desires, and yours and everyone are a product of the experiences that we've had in life. Some of which were good, some of which were bad, some of which left some emotional scars on all of us. I have a family member who grew up extremely poor. He was homeless for much of his childhood, in and out of the foster system, then became a very successful businessman later in his life. And when his daughter was going to college, he told her, please pick the most expensive school that you get into. And it was almost like the higher the tuition, the better. And the reason was the idea that he was sending his daughter to an expensive school meant so much to him within the context of what he overcame. And I think that's an extreme example, but I think so many of us have some kind of emotional wound like that. And wound might be the wrong word because sometimes they're positive experiences. You grew up a super popular kid, loved by your family. You might not have very much desire to go out and prove yourself. You just have an innate amount of self-confidence from that experience. So I think the idea, to answer your question, the idea that we are products of our own experiences, most of which are out of our control, I think is a good realization because it means my desires, your desires, our own view of the entire world, how we view the economy and politics are completely different from person to person. What you've experienced, Ted, is different from what I've experienced. And people in different generations, different countries, everyone's a little bit different. So part of that for me was giving myself a little bit of grace of saying, look, if I do have quirky money habits, and of course I do, it's not because I'm not thinking this through necessarily, even though sometimes that might be the case. Something happened in my past that makes me believe this. And that's true for not just money. That can be true for political beliefs, all kinds of social beliefs. Rather than looking at other people and saying, why do you believe that? Why are you doing that? A way better question is, what have you experienced in life that makes you believe that? An even better question is, if I experienced that same thing, would I believe what you do? And a lot of times the answer is yes. And so to the calibration question, I think it's less about like, oh, do I have flawed thinking and I need to push myself in this direction versus kind of embracing who you are and embracing that there is no right answer to this question. There's no right way to spend money. There's no right way to save and invest money. I dollar-cost average into index funds. I know a lot of people watching this show don't do that or might even look down upon it. That's okay. The point is there is no right way to do it. And I think it bothers people in finance because finance, particularly in...

The last century has been proposed as a math-based field, like it's a cousin of physics, and 2 plus 2 equals 4 for everybody, for you and I. There is one right answer, and we want to assume it's like that for money, that for how we save, invest, and spend, there should be a right way to do it. And I think the reason that finance can be such a tense topic and subject of so much debate, in a way that like meteorology is not, in finance there's an infinite number of right answers for different people. And I think that bothers a lot of people. And so I think the idea of embracing who you are and also being less judgmental of others, because I don't think it's ever appropriate to say, 'I value spending my money on this and therefore other people should as well,' or 'I don't value this and therefore nobody else should as well.' It's just not how the world works.

The author James Clear, he's unbelievably—he's the most successful non-fiction writer of the generation or maybe several generations. Book has sold over 25 million copies. Unbelievable. Dramatically more successful than I am as a non-fiction writer, and we're about the same age, somewhat similar topics. I do not have one single molecule of envy in my body for James because he is so likable. He is the nicest guy you will ever come across. You will never meet someone as successful and humble as he is. You will never meet someone who wants to help other people more than he does. He's just an awesome guy. And so it's impossible for me to envy him. He inspires me. I want to do more like he does, but I don't envy him. And I think it hit me that if occasionally—this is a character flaw of mine—if there are other authors who I envy, it's because I don't like them personally. They have a quirk of their personality that rubs me the wrong way. So I think so much of—there's a difference between being inspired by someone's success and being envious about what they have. And usually, if you are struck with a bout of envy, as all of us will be from time to time, it's usually because you say that person has something that I don't and they didn't deserve it. That's usually about where it comes from. And I bring that up because it's so common now in the age of social media. If you see someone with a nicer house, nicer car, a nicer plane, clothes, whatever it might be, than you have, you can either be inspired by their success if you admire them, or if you think they didn't deserve it, it's very common to fall into the trap of envy. And so I think we're always making judgments about not only what people have, but whether they deserve that success to begin with. So back to the James Clear example, I am inspired by what he wants to do, by what he has accomplished. I want to be a better writer because of him, and it makes me feel good about it. When you are caught in envy, then it's trying to chase what they have just because you feel like you're falling behind them and they didn't deserve it. You might be chasing something material that is not necessarily going to make you happy. Your neighbor who you don't like very much has a bigger house, so you have to have a bigger house, not because it's going to make you happy, but just because you feel like they are in an unjustified manner above you on the social pecking order, and that doesn't make you feel good.