Numbers offer an illusion of certainty: how many people say they will come to a party, the time of your doctor’s appointment, past investment returns.
What we know from experience is that few things go as planned. Party attendees both cancel and bring uninvited guests. The doctor’s office is always backed up. Past investment performance does not guarantee future results.
Enter the great finance writer Morgan Housel and his latest book, The Psychology of Money (2020). Unlike many financial advice books, this short work is kind and nonjudgmental, asserting that we’re all probably doing the best we can.
“People do some crazy things with their money. But no one is crazy.”
A spreadsheet shouldn’t be our only personal finance tool – we also must strive for consensus with our loved ones, and pay attention to our gut feelings. We make money decisions at the kitchen table in the here and now, Housel writes, using our experiences as a guide.
As a financial planner who finds comfort in certainty, I tried to reduce my recent home refinance to a math decision, charting a 15-year note against a 30-year one.
Ultimately, I asked my husband to choose what made him most comfortable. His thinking was straightforward: Why would we want a mortgage in our 70s?
So true.
“What’s often overlooked in finance is that something can be technically true but contextually nonsense,” Housel writes of such “math” dilemmas.
For its primary nugget of financial wisdom, The Psychology of Money revisits our wild history on this planet, little of which could have been predicted.
Save, Housel urges. And then save some more. Set aside money not just for cars, college, and retirement, but save for a world with unknown risks and scattershot rewards.
Just look at the last 100 years, in which the world suffered Hitler, Stalin, and the terrorist attacks of September 11. During that time we also were liberated from many ills by antibiotics, vaccines, and the advent of the personal computer.
In 1930, the economist John Maynard Keynes forecast that technology improvements could lead to a widely enjoyed 15-hour workweek.[i]
L.O.L.
Good financial plans acknowledge that irritating truism that “life happens.”
“Room for error is underappreciated,” Housel explains. “Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds…fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound.”
In a final “Confessions” chapter, the still-not-40 writer admits conservative leanings like keeping a heavy cash allocation and paying off his home early because those moves feel right for his family.
Here at Corner Post Financial Planning, we stress over margin of error all the time. The clients we worry about the most are those who must adhere to tight budgets in order for their retirement or other goals to work out even on paper. Sadly, there’s no space for life to happen.
Normally, personal finance books leave me feeling a little stressed, because I skipped step 3 of The Plan, or because my husband and I don’t have Monthly Money Dates. But in The Psychology of Money, there are no Six Steps to Financial Freedom, no wild assertions that everyone needs $5 million to retire.
For a change there’s lots of grace, which we all need. Actually achieving financial freedom is more important than how, exactly, one goes about it.
Beth Henary Watson is a Certified Financial PlannerTM at Corner Post Financial Planning.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Neither Corner Post Financial Planning nor LPL Financial provides legal or tax advice.
[i] “Economic Possibilities for our Grandchildren,” from John Maynard Keynes, Essays in Persuasion, New York: W.W.Norton & Co., 1963, pp. 358-373.