The Psychology of Money Chapter 20: Confessions

In 2011 professor of medicine Ken Murray wrote an article called “How Doctors Die.” He researched how doctors make decisions when they are the patient regarding their own terminal illnesses. He notes, “What’s usual about them is not how much treatment they get compared to most Americans, but how little.” It’s a common theme in professional services that the professionals don’t always take their own advice. All the biases and mix of personal values do not go away just because someone has a head full of technical information.

Morgan Housel has taken us through 19 chapters exploring the psychology of money. In an attempt to show transparency, knowing that he could be prone to the same inconsistencies as doctors and other professionals, he wrote this final chapter to show how he and his family think about their own money. As with all financial plans and recommendations, first we identify goals. Different people want different things at different times for different reasons. For the Housel's, their main financial goal is independence. For the Housel's this means, as he shared in chapter 7, “the ability to do what you want, when you want, with who you want, for as long as you want.” With that goal in mind, their financial practices are very, very simple: keep a large portion of assets in cash, maintain a high savings rate, and invest in low-cost index funds. That’s it.

Early in their relationship, Morgan and his wife were still in school and didn’t have much room for discretionary expenses. As their income has grown, their living expenses have not. It’s common to experience “lifestyle creep”, where someone lives on the edge (or just past) their means, regardless of their income. In Housel’s words “We just got the goalposts to stop moving.” This means that their extra income goes towards savings, which continually increases their savings rate (see chapter 10).

[A comment here on human nature: we often feel as if we’re a slave to our desires, meaning they are what they are and our job is to try to meet them when in fact, we can exhibit a level of control over our desires. Keeping our desires modest i.e. within our means, is most of the battle of living a happy, fulfilled, and financially successful life.]

The Housel's keep about 20% of their financial assets in cash. For a $1,000,000 portfolio, this would mean keeping $200,000 out of market investments. Housel does this because he wants to maintain independence, regardless of if markets drop 20% or 30% or 50%. He has the cash to sustain him for long enough to allow his stocks to recover, which could take years. And for the portion that they invest, despite Morgan starting his career as a professional stock picker, they now only use low-cost index funds. This means there is nobody behind the scenes analyzing businesses or macro-economic trends. He’s decided to follow the index wherever it leads and doesn’t care about outperforming it.

His concern is independence, and he does what he can to optimize for that. For example, even though they had a very low interest rate, they paid off their house quickly rather than sticking with the length of their loan. In Housel’s words “we own our own house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made.” The feeling they have from living without a mortgage is the feeling (and reality) of independence they’re after.

Success in our personal finances comes down to how we behave. So what can we learn from Housel’s personal finances that we might have missed throughout the previous 19 chapters?

• Keep it simple. Your points might be different (mine sure are), but here again is Housel’s simple list: Lots of cash, high savings rate, low cost investments.

• Optimize for getting the most of what’s important to you, not for getting the most wealth.

Let us know

• How have your expenses changed with your income?

• Have you ever made a bad financial decision that was a good money decision?

Next week: concluding our time with Housel’s book, and announcing the next book for Kevin’s Weekly Reading!

Until next time, happy reading!