Plenty of books have been written on investing but as Morgan Housel says investing only partially captures our relationship with money. How we spend is perhaps equally important if not more. Housel’s book ‘The Psychology of Money’ is a highly recommended read on the subject. In this blog, he addresses the art and science of spending money. He talks about 13 different aspects of spending money, we feature three of them here:

“Frugality inertia: a lifetime of good savings habits can’t be transitioned to a spending phase.
I think what many people really want from money is the ability to stop thinking about money. To have enough money that they can stop thinking about it and focus on other stuff.

But that ultimate goal can break down when your relationship with money becomes an ingrained part of your personality. You struggle to break away from focusing on money because the focus itself is a big part of who you are.

If you develop an early system of savings and living well below your means – congratulations, you’ve won. But if you can never break away from that system, and insist on a heavy savings regimen well into your retirement years … what is that? Is it still winning?

A lot of financial planners I’ve talked to say one of their biggest challenges is getting clients to spend money in retirement. Even an appropriate, conservative amount of money. Frugality and savings become such a big part of some people’s identity that they can’t ever switch gears.

I think for some people that’s actually fine. Watching money compound gives them more pleasure than they would get spending it.

But those whose ultimate goal is to stop thinking about money are stuck. Refusing to recognize that you’ve met your goal can be as bad as never meeting the goal to begin with.

Asking $3 questions when $30,000 questions are all that matter.
There’s a saying: Save a little bit of money each month, and at the end of the year you’ll be surprised at how little you still have.

Author Ramit Sethi says too many people ask $3 questions (can I afford this latte?) when all that matters to financial success are $30,000 questions (what college should I go to?)

Historian Cyril Parkinson coined a thing called Parkinson’s Law of Triviality. It states: “The amount of attention a problem gets is the inverse of its importance.”
Parkinson described a fictional finance committee with three tasks: approval of a $10 million nuclear reactor, $400 for an employee bike shed, and $20 for employee refreshments in the break room.

The committee approves the $10 million nuclear reactor immediately, because the number is too big to contextualize, alternatives are too daunting to consider, and no one on the committee is an expert in nuclear power.

The bike shed gets considerably more debate. Committee members argue whether a bike rack would suffice and whether a shed should be wood or aluminum, because they have some experience working with those materials at home.

Employee refreshments take up two-thirds of the debate, because everyone has a strong opinion on what’s the best coffee, the best cookies, the best chips, etc.
Many households operate the same.

No one is impressed with your possessions as much as you are.
When you see someone driving a nice car, you rarely think, “Wow, the guy driving that car is cool.” Instead, you think, “Wow, if I had that car people would think I’m cool.” Subconsciously or not, this is how people think.

There is a paradox here: people tend to want wealth to signal to others that they should be liked and admired. But in reality those other people often bypass admiring you, not because they don’t think wealth is admirable, but because they use your wealth as a benchmark for their own desire to be liked and admired.

I wrote a letter to my son the day he was born. It says, in part:
You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does – especially from the people you want to respect and admire you.

Now, I like nice homes and nice cars as much as anyone. The point here is not to shoo you away from nice things.

It’s just a recognition that no one is as impressed with your stuff as much as you are. Or even that no one is thinking about you as much as you are. They’re busy thinking about themselves!

People generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.”

It is worth reading this insightful piece in its entirety.

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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