The Psychology of Money Chapter 9: Wealth is What You Don't See

Last chapter we explored what happens to us when we see someone else driving a really expensive car. This chapter, let’s talk about the person actually driving the car. Assuming they bought the car (didn’t rent or lease it), there’s still far less information conferred than we might otherwise assume. If you see someone driving a $100,000 car that they bought, you don’t yet know their level of wealth or income. As Housel points out, “the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That’s all you know about them.” Ironically, as the chapter’s title states, wealth is what you don’t see. The person driving that car now has $100,000 worth of options less than they did before. Caveats aside about vehicles generally being a depreciating asset, the ability to resell the car at a later point doesn’t change the fact that for the duration of ownership, it’s a reduction in wealth (i.e. options). Maybe that doesn’t affect them because they have another $10 million to spend. If so, good for them! But if this was their last $100,000, let’s just hope they have really good insurance.

We read in chapter 7 that a primary purpose for wealth is to give us options, flexibility, freedom. A Ferrari might give you the option to drive at 130mph with ease, but given that most of us don’t want to drive that fast anyway, I’ll happily keep my 15-year old CR-V that gives me more options that fit my lifestyle: car seats, room for camping gear, a paid off car with inexpensive insurance, and very importantly, no stress over my children spilling food all over the seats 😉. Being wealthy means having the resources to continue to maintain the freedoms you desire. In this sense “most people, deep down, want to be wealthy. They want freedom and flexibility, which is what financial assets not yet spent can give you.” Every dollar you spend now is a dollar less you have to spend later—I know, profound. We ought not to avoid all expenses, but simply to realize that, as Tim Brockmann often says, “Life is full of choices.”

Success in our personal finances comes down to how we behave. Two behaviors we can practice:

1. When you see someone with something expensive just think (without judgment): Huh, now they have $100,000 less than they would have. What an interesting choice!

2. When you are on the fence about a purchase, whether it’s for $1 or $100,000, ask yourself: what other options or freedom in the future will I not have by spending this now? If that’s a more desirable reality, consider pausing the purchase. If not, spend away!

Until next time, happy reading!