There’s More to Money

I’ve spent a lot of time in the personal finance section of the library, since it’s a subject that I am interested in and professionally involved in. Most of the books fall into one of two categories, and I can sum them each up in a single sentence. The first group say: do what I did (whether it’s flip houses, trade options or gamble in Vegas) and you’ll be rich! This may or may not be helpful for others, since a person can’t always choose their environment or circumstances. The second group say: follow the traditional approach of budget, save, invest, wait. You can’t really go wrong giving that type of conservative advice. It will usually be successful, but there’s nothing ground-breaking, much less worth dozens of books, to be said.

But there’s a lot more to money than money. The way we think about money affects what we do with it. It follows, then, that the change the way we manage our money, we have to change the way we think about it and relate to it. There are issues of self-worth, ideas about skill versus luck and your own goals or dreams for the future.

My mother gave my wife and I a book called The Five Love Languages. I didn’t read it, but it makes about people’s emotional needs. Some people, in order to feel valuable, feel a need to spend money, or have others spend money on them. If my wife fit this description (which is not the case), she would most feel loved when I buy her gifts. The more expensive the gifts, the more loved she would feel. People who feel this way about money will tend to save and not spend, in order to maximize their feelings of self-worth. Asking them to stop spending and start saving, with addressing the underlying issues, will be ineffective. If they do save and invest, their feelings of worth will probably fluctuate with the market value of their investments. This is what causes people to buy on the way up, and sell during a crash. I don’t believe you can change these people. They need to change their own self-perception, either alone or through counseling.

Some people, myself included, see themselves as intelligent and capable. No matter what problem they are faced with, they can solve it by using their intelligence and initiative. If an undertaking is successful, it’s because I did a good job. If it’s unsuccessful, I failed and I’d rather not talk about it. My spending is always successful. I do research, find the product I want, find the best price and proceed. Saving and investing is more difficult. When my investments are up, I feel smart. When they go down, I feel embarrassed and dumb. For many people, this has the same result in investing as mentioned above: buying on the way up (while they’re feeling smart) and selling at the bottom (when they feel embarrassed). It also causes people to hold losing investments rather than sell, hoping they can break even and feel smart again. Reading Fooled by Randomness or even The Black Swan by Nassim Taleb helped me see what a huge role luck plays. Learn to look at investments as: making the best decision we can, given the information currently available, and expecting outcomes within a certain (wide) range.

Finally, I’ve realised that many people have no goals or dreams about the future. Many of my friends seem to be of the mindset: I’ll keep doing what I’m doing for the next 30 years. I’m happy now, I’ll be happy for the next three decades. To those people, I say, budget, save, invest, wait. You’ll be fine. But if your dreams are out of the ordinary, those dreams can really motivate you to take action. If you dream of flying around the world each year, you’ll save the money it takes to buy the plane tickets. You’ll probably also learn a lot about traveling with just one carry on bag. If you dream of retiring early, you’ll probably work long hours and save a large portion of each paycheque. Your dreams will not only influence what decisions you make, but motivate you to make the difficult choices.

Beyond the clean, dry numbers involved in choices about money, there are intangibles such as emotion, luck and dreams. A large dose of self-knowledge will help anyone make more realistic and rewarding choices with their financial resources.