Speaker 1: Bloomberg Audio Studios, podcasts, radio news, Molle.
Speaker 2: Again buy you. Is there an art to spending your
Speaker 2: own money? We spend a lot of time around these
Speaker 2: parts discussing earning and of course investing money, but how
Speaker 2: often do we really think deeply about spending it. I'm
Speaker 2: Barry Ridholtz, and on today's edition of At the Money,
Speaker 2: we're going to discuss how you should think about spending
Speaker 2: your cash. To help us unpack all of this and
Speaker 2: what it means for you, let's bring in Morgan Housel.
Speaker 2: He's the author of the Psychology of Money. The book
Speaker 2: has received widespread acclaim and has sold over seven million
Speaker 2: copies worldwide. His new book, The Art of Spending Money,
Speaker 2: Simple Choices for a Richer Life, arrives in October. So, Morgan,
Speaker 2: you've covered human behavior and nature. What led you to
Speaker 2: say I want to write about a new book about
Speaker 2: the art of spending money?
Speaker 3: Well, thanks, Barry. The first reason was I didn't call
Speaker 3: this book the science of spending money because I don't
Speaker 3: think that exists. Science implies that there is like a
Speaker 3: one size fits all rule for you and I, and
Speaker 3: that's not the case. I call it the art of
Speaker 3: spending money. Because art is subjective, it is often contradictory,
Speaker 3: it is different from person to person, and that's really
Speaker 3: what spending is. The reason why I wanted to tackle
Speaker 3: this is because you just alluded to this. There is
Speaker 3: so much commentary, so much ink has been spilled. It's
Speaker 3: so much good ink has been spilled on how to invest,
Speaker 3: how to grow your career, how to earn more money,
Speaker 3: very little on spending money. And I think the reason
Speaker 3: why is because it is assumed that everybody knows how
Speaker 3: to do it, which is just spend more and you'll
Speaker 3: be happier, you'll be better off, and doesn't really matter
Speaker 3: what you spend it on. You hear a little bit
Speaker 3: of nuance of spend on experience versus things. But to me,
Speaker 3: there is so much more in the psychology of spending.
Speaker 3: When you dug into the deep mechanics of envy and
Speaker 3: jealousy and getting attention and copying other people, there are
Speaker 3: so many good stories to dig in there that might seem,
Speaker 3: you know, not exactly, not really deep. This is not astrophysics,
Speaker 3: it's just basic psychology, but it tends to be ignored,
Speaker 3: particularly in finance, where all the attention is how do
Speaker 3: you just get more money, and you kind of leave
Speaker 3: it to assumption of what you're going to do with
Speaker 3: the money after you get it.
Speaker 2: So let's talk a little bit about the science behind
Speaker 2: some of the things you're discussing there. There's been a
Speaker 2: lot of academic research does money make you happy or happier?
Speaker 2: At what point does the rule of diminishing returns kick in?
Speaker 2: What does the science of spending look like before we
Speaker 2: get to the art of spending.
Speaker 3: One of the things I think is really interesting is
Speaker 3: that what a lot of the research shows is that
Speaker 3: if you are already a happy person, money can make
Speaker 3: you happier. But if you are a depressed person or
Speaker 3: a miserable person, whatever it might be, that it will not.
Speaker 3: And it's easy to just kind of contextualize this into
Speaker 3: a real person's life of if you are in a
Speaker 3: bad marriage and you hate your career, and you have
Speaker 3: a two hour commute, and just go on down the list,
Speaker 3: you're an alcoholic, you're obese. If you take that person
Speaker 3: and you give them more money, will they be happier?
Speaker 3: And the answer is no, of course not, because all
Speaker 3: of those other aspects of their life are going to
Speaker 3: override whatever money can do.
Speaker 2: For them.
Speaker 3: But if you also take somebody who's in a great marriage,
Speaker 3: loves their career, they're happy, they're healthy, they sleep eight hours,
Speaker 3: they have a good set of friends, and you give
Speaker 3: that person more money, there's a good chance that they're
Speaker 3: going to use that money to just leverage what they're
Speaker 3: already doing, to spend more time with the friends who
Speaker 3: they already love, to spend more time getting healthier and
Speaker 3: eating good food. And so money can really just just
Speaker 3: leverage the person who you already are and the lifestyle
Speaker 3: that you're already living. But I think a lot of
Speaker 3: people go straight with that when they are unhappy and
Speaker 3: they think, if only I had more money, all my
Speaker 3: problems would go away.
Speaker 2: And one of the interesting things in the academic literature
Speaker 2: that I recall seeing a few years ago was when
Speaker 2: they draw these charts of money potentially making people happier.
Speaker 2: Divorce is a giant red flag people in all of
Speaker 2: the divorce or people who have recently been divorced, that
Speaker 2: that's a really challenging road to holl isn't it.
Speaker 3: I think what it comes down to is that having
Speaker 3: more money is so quantifiable that it we use it
Speaker 3: as a crutch for all of our problems. For example,
Speaker 3: if I said I would have a better life if
Speaker 3: I was a ten percent better dad, what does that
Speaker 3: even mean? What does a ten percent better dad mean?
Speaker 3: There's no way to quantify it. But if I said
Speaker 3: I would have a better life if my salary went
Speaker 3: up by ten percent, you can easily quantify that, wrap
Speaker 3: your head around it. So we chase that, and we
Speaker 3: assume that that's going to be the solution to all
Speaker 3: of our ills. Even if becoming a better dad might
Speaker 3: make me a happier, better person. But since it's impossible
Speaker 3: to quantify, I just ignore it and pretended that it
Speaker 3: doesn't exist.
Speaker 2: You alluded to impressing others. How should people avoid spending
Speaker 2: money for status and symbolism as opposed to bringing themselves
Speaker 2: satisfaction and happiness.
Speaker 3: I'm the first to say I love nice things. I
Speaker 3: like a nice house, I like a nice car, I
Speaker 3: like nice clothes, I like nice vacations, I travel well,
Speaker 3: et cetera, et cetera. I'm not saying live like a
Speaker 3: monk by any means. But what is true is that
Speaker 3: a lot of spending is for social signaling. You just
Speaker 3: want to show other people who you are and how
Speaker 3: successful you are to me. The next layer below that is, well,
Speaker 3: who are you trying to impress and are they even
Speaker 3: paying any attention to you? And this is different for
Speaker 3: every person, but for me, the people in my life
Speaker 3: who I want to love me are my wife, my kids,
Speaker 3: my parents, and maybe two or three friends. And I
Speaker 3: really want their love and affection and admiration, and I
Speaker 3: want to do things, including with my money, to help
Speaker 3: them and to give them a better life so that
Speaker 3: they will love me back. That's the truth. But after
Speaker 3: that small set of you know, seven people or whatever,
Speaker 3: it falls very quickly from there. And then there's another
Speaker 3: layer below that of like work associates who I love
Speaker 3: having a good time with and having a nice dinner with.
Speaker 3: But then it really collapses from there, and I could
Speaker 3: not care less what ninety nine point nine percent of
Speaker 3: the world thinks of my house or my car or
Speaker 3: my clothes, because they're not paying any attention. It is
Speaker 3: so easy to overestimate how much other people are looking
Speaker 3: at your stuff, your house, your cars. They're not paying
Speaker 3: any attention. They're busy worrying about themselves and thinking about themselves.
Speaker 3: And so when you frame it like that, it's not
Speaker 3: to say don't use your money to gain attention. It's
Speaker 3: use it to gain attention from the very small core
Speaker 3: group of people who you want to love you. There's
Speaker 3: a great quote from Warren Buffett where he says, the
Speaker 3: definition of success in life is when the people who
Speaker 3: you want to love you do love you. And I
Speaker 3: think you can twist that into thinking how you spend
Speaker 3: your money as well.
Speaker 2: So in the modern era of social media and TikTok
Speaker 2: and Instagram, there's a lot of influenzer flexing and they're
Speaker 2: trying to show off their lifestyle. I recall being on
Speaker 2: vacation at a place in Puerto Rico and two lounges
Speaker 2: over was this woman who, instead of just lying there
Speaker 2: and enjoying the beautiful son and surf, read a book whatever,
Speaker 2: she was just constantly taking selfie's doing. And so I
Speaker 2: finally had to say, hey, what are you doing? So? Oh,
Speaker 2: I'm an Instagram influencer, and so you're not just gonna
Speaker 2: kick back and enjoy this, so, oh no, this is work.
Speaker 2: You and I had a conversation a couple of years
Speaker 2: ago that's so related to this. Let's see if you
Speaker 2: recall this, you know, the person driving down the street
Speaker 2: in the loud Lamborghini, or the person around the corner
Speaker 2: from you with the giant house. You're only seeing one
Speaker 2: half of the balance sheet. You're only seeing their assets.
Speaker 2: We talked about, well, did they pay cash for that
Speaker 2: or did they go deep into hawk in order to
Speaker 2: buy a house or a car to show off for
Speaker 2: the neighbors. Talk about that a little bit.
Speaker 3: Yeah, wealth is what you don't see. Wealth is the
Speaker 3: cars that you didn't purchase and the giant house that
Speaker 3: you didn't buy. That's what wealth is. It is money
Speaker 3: that you didn't spend that you can now say for
Speaker 3: either for future consumption or for independence today. That's what
Speaker 3: wealth is. And so I can see your car, I
Speaker 3: can see your house, I can see your watch in
Speaker 3: your clothes. I cannot see your bank account or your
Speaker 3: brokerage statement. So the most important part of wealth, literally,
Speaker 3: in my view, the definition of wealth is invisible to everybody.
Speaker 3: And that is so unique in life because if you
Speaker 3: take like physical fitness, you can see somebody's physique. It's
Speaker 3: right there, and so you know kind of who to
Speaker 3: admire and who to chase. Oh, that person's in great shape.
Speaker 3: I should ask them what they do, I should ask
Speaker 3: them their diet and try to mimic what they do.
Speaker 3: But if you see somebody with a mansion or a
Speaker 3: or a Ferrari or whatever it is, you don't know
Speaker 3: that they got that by success. That may be the
Speaker 3: picture of a leverage and it's possible that they haven't
Speaker 3: slept into because they're wondering how they're going to make
Speaker 3: their next Ferrari lease payment. And so we have kind
Speaker 3: of like a fake view of who we're chasing and
Speaker 3: what we should do because wealth that we're chasing is invisible.
Speaker 2: So this comes back to the concept of spending as
Speaker 2: an art and in one of the sections of the book,
Speaker 2: you talk about self awareness over spreadsheets. How self aware
Speaker 2: do we need to be in order to be more
Speaker 2: artful spenders towards happiness and life satisfaction.
Speaker 3: I think every big, big financial decision, spending decision, is
Speaker 3: two parts head and heart. It is yes, like if
Speaker 3: you're buying a house, of course, it's not just a spreadsheet.
Speaker 3: I tell the story that when my wife and I
Speaker 3: bought our first house nine years ago, we found the
Speaker 3: listing on Zilo and we're like, Oh, that looks great,
Speaker 3: let's go check it out. But this is just information gathering.
Speaker 3: This is just we're just going to go look at it.
Speaker 3: But we're not making any decisions here. And we pulled
Speaker 3: into the driveway and as soon as we pulled in
Speaker 3: the drive my wife gasped and she said, I love it.
Speaker 3: And at that point, forget the spreadsheets, forget the like,
Speaker 3: the like, the valuation comps. That is all hard at
Speaker 3: that point. But here's the thing. We don't regret that
Speaker 3: in the slightest it was. It was a great house.
Speaker 3: And we had Christmas mornings with our kids. Both of
Speaker 3: our kids were you know, we're born not in that house,
Speaker 3: but we brought them home as newborns in that house.
Speaker 3: So many amazing memories that you could not track on
Speaker 3: a spreadsheet.
Speaker 2: I'm laughing because the very first house my wife and
Speaker 2: I bought, I don't know, twenty nine years ago, we
Speaker 2: pulled into the driveway. I looked at her face and
Speaker 2: I just said, uh oh, And that was the first
Speaker 2: house we bought, the house I'm in for the past
Speaker 2: almost fifteen years. We pulled up the driveway and same
Speaker 2: as your wife, She's like wow, and I'm like, uh oh,
Speaker 2: here we go again.
Speaker 3: Real estate's an interesting one too, because does buying a big,
Speaker 3: fancy house make you happier? If you phrase it like that,
Speaker 3: the answer is no. Spending more time with your spouse,
Speaker 3: your kids, your friends, your neighbors does that make you happier? Absolutely?
Speaker 3: And can a big house make it easier to have
Speaker 3: your friends over like yes, So there's an indirect path
Speaker 3: to which, yes, spending money on a great house can
Speaker 3: make you happier, but it's not because of the house.
Speaker 3: It's because it makes it easier to spend time with
Speaker 3: people that you admire and love.
Speaker 2: So let's bring this back to a theme that I
Speaker 2: have seen in all of your writings, all of your books.
Speaker 2: I've known you for how many years? Of fifteen years?
Speaker 2: Just about sounds right. Going back to Vancouver peace of
Speaker 2: mind as the ultimate spending return tell us about that.
Speaker 3: I think it's different for every person there are. There
Speaker 3: are certainly people out there that would go crazy if
Speaker 3: they were not stressed out and if they were not
Speaker 3: pushing themselves to the max every day. But the vast
Speaker 3: majority of people, including myself, what I want out of
Speaker 3: money is a simple life. Now, simple doesn't mean cheap
Speaker 3: or frugal. Simple can be extravagant. But it's simple in
Speaker 3: the sense that you are using money as a tool.
Speaker 3: It's not using you. It's not conducting your behavior or
Speaker 3: your activities. I want to use money as a tool
Speaker 3: in my life to be to leverage who I want
Speaker 3: to be and for me then I think you and
Speaker 3: many other people. That is like like doing the best
Speaker 3: work that I can, but having full control over my schedule,
Speaker 3: doing a lot of reading, working when I want, with
Speaker 3: whom I want for as long as I want, being
Speaker 3: in control over my time. That's what I want out
Speaker 3: of money, using it as a tool rather than it
Speaker 3: using me. To say, Morgan, this is how you should
Speaker 3: spend your money. You should get these people's attention. That
Speaker 3: guy's car is faster than your years, so you need
Speaker 3: to upgrade. That is when money is using you rather
Speaker 3: than you're using it.
Speaker 2: Perfect way to sum this up and to end, Morgan
Speaker 2: Housel's new book, The Art of Spending Money, Simple Choices
Speaker 2: for Richer Life, arrives in October. To wrap up, spending
Speaker 2: money can bring you happiness if you go about it
Speaker 2: the right way, if you're not just flexing and showing off,
Speaker 2: if you're spending time with friends and family and loved ones.
Speaker 2: If you're using money as a tool to achieve certain aims, well,
Speaker 2: then have at it. Go out and spend money, just
Speaker 2: don't post everything you do on Instagram. I'm Barry Ridolts.
Speaker 2: You're listening to Boombergs at the Money