How the book “The psychology of money” changed by financial goals.
I have added the excellent book by Morgan Housel as a recommendation via the book club and I wanted to expand on the recommendation based on my personal experience and how it changed my view on money, finance and financial goals. You maybe asking “ How is this linked to Travel, art or nature ?”. I personally think your financial goals provide the financial freedom and flexibility to enjoy more time travelling locally and abroad and exploring local art galleries and spending time in nature.
My personal review and how I have implemented the changes in my financial goals and planning.
The meaning of wealth
Morgan shares the story of Ronald James Read who made the headlines in the USA, he was a janitor, gas station attendant and personal investor. He lived a happy but basic life and when he passed away in 2014 at the age of 92, he left $2 million to his step kids and more than $6 million to his local library and hospital. All his friends, family and neighbors were shocked but there was no secret lottery win or inheritance. Ronald saved what little he could and invested in blue chip securities in the USA and he waited for decades for his investments to compound to more than $8 million. Morgan compares the story of Ronald with Richard Fuscone a Merrill Lynch executive. Richard made so much money as an executive that he retired at the age of 40 but in the mid-2000s Fuscone borrowed heavily to expand his home to include 11 bedrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain. Then the 2008 financial crash hit and due to his high debt, he became bankrupt.
I really liked the comparison of the two stories and for me it shows the power of greed and the importance of patience and growing your savings and investments overtime.
The above example illustrates how wealth can be invisible and implementing the correct and sometimes boring strategy over a long period can increase your wealth. I have managed teams for over 26 years and I have witnessed first hand how people can get into large debts as they strive for a materialistic life of flash cars, designers clothes and other trappings of a rich life.
focus on your own goals
Housel describes the psychology of “keeping up with Joneses”, we are constantly trying to compare and compete with our peer group. Instead, we should really focus on our own goals and objectives and not compare with the friends and family members. Unfortunately, with the growth of social media and reality television and media we are bombarded with images of luxury items and “get rich schemes”. I believe we should have our own goals and aspirations for our family, career, wealth generation and happiness but please remember a high percentage of rich people are what I call “False rich” as it is based on debt and like Richard Fuscone it can disappear overnight.
3. Long term vision and setting savings goals.
For me this was a key takeaway to set some short term and long term goals. Try to think and vision the future you would like for you and your family.
Short term goals for me, I created a simple budget tool to look at my income and expenditure on a monthly basis and especially with the cost of living crisis. How could I reduce my monthly expenditure and save money for an emergency fund and retirement goals. My family constantly ridicule me as they listen to my telephone conversations with energy, insurance or mobile phone providers as I threaten to leave if they can not match provider B.
The power of compounding
This a a very important concept in the book and please research the subject but basically if we start to save early and invest in assets that align to our risk profile, our wealth will compound overtime. Compounding is a process of growing, for example when you roll a snowball in the garden with the kids and the ball gets bigger and bigger to make the base of your snowman. This is how the compound interest works, as each year you earn interest and your previous years savings and interest. I will use a simple example to illustrate, if you deposit £100 a year for 3 years and the account pays 5% interest, how much will you have after 3 years?
Year one: An initial deposit of £100, earns 5% interest of £5 and end balance is £105.
·Year two: You start with £105 and earn 5% interest and you earn £5.25 interest and new balance is £110.25.
Year three: Your balance of £110.25 earns 5% interest and you earn £5.51, and you balance is now £115.76.
As you can see from the above example, in year 2 you earn interest on your deposit of £100 and the interest of £5 and slowly your money grows.
Just like a snowball, your money is growing/ compounding each year and growing with interest and the longer you invest the bigger the impact of compounding will be for your savings.
Create an emergency fund
This is one of the key goals that I have personally implemented and it provides us with a buffer if we receive an unexpected bill or other financial outlay. I also recommend making it automatic and set up a direct debit to your emergency fund bank account every month and you would be surprised how quickly it will grow/compound.
educate yourself on financial investment vehicles
Invest time in researching investment products such as stock and shares ISAs and different financial products to make your money work over a long period of time. I would also recommend asking your friends and family for recommendations on a financial advisor who is qualified to review your financial goals and recommend products that align to your short term and long terms goals.
Psychological Barriers to Wealth
This is a key concept of the book and challenges us to look at our experience and emotions towards money, saving and wealth creation. For example, when I first started working after University and lived at home, I would enjoy spending money and socializing with friends and work colleagues and at 22 years of age a pension or saving for a house deposit was not on my radar. I had a great work mentor, who sat me down and explained that I should take this opportunity to be living at home to save money for a deposit for a property and also to sign up to the work pension scheme as it was “free money”. Why is it free money ?, the company at the time would pay 6% into your pension and would also match your contributions tax free up to another 6%. Also, the contributions are tax free as they come out of your gross salary!. Why don’t we get taught this basic financial education/planning at school ?.
I personally think we need to set some personal goals and try to ignore or compare/compete with our friends and family.
Building financial habits
There is that work again “Habits”, just like our fitness and health goals, our financial success and goals is linked to our financial habits. This book we help you build a strategy to build financial habits but you can also be a mentor to your children and grandchildren. A simple habit, could be to set up a monthly direct debit to your savings account for your emergency fund. Speak to your employer to see if they offer a matching scheme on pension contributions, review and create a plan to reduce your credit card debt. The “habits” that we incorporate into our health and fitness plans can also be applied to your financial goals.
The pursuit of happiness and freedom
This is a really interesting concept and marketing companies really target this emotion. For example, if you are under stress and you have just been paid, does that justify a large expense on some new clothes ?
This chapter, really helps us set our happiness goals and a focus on money and financial management can help us achieve these goals. For example, you may be inspired by some of the articles in the magazine and you can set a personal goal for a weekend by the coast, a cabin in the forest or explore a new city in the UK or further abroad.
Chapter 7 in “The Psychology of Money”, by Morgan Housel called “Freedom” really resonated with me and I think it is a key objective of this project.
“Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness – a universal fuel of joy – it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”
This is an extract from Housel’s book and as discussed it really resonated with me, the idea of freedom for our children and Grandchildren and to provide a foundation for their happy future. Psychology studies on happiness in adults have shown that more than salary, career, size of your car or size of your house. Control over doing what you want, when you want to, with the people you want to be the lifestyle variable that makes people happy.
Just take a few minutes to think of your own life as you transitioned into adulthood, did you have any regrets in missing out on opportunities? do you wish you went to university? do you wish you travelled the world when you were younger, did you miss out on a business opportunity? I am sure most people would be able to recall a missed opportunity and saving and investing for our children can provide that future freedom.
My biggest regret is really thinking of the freedom that savings can provide rather than thinking short term. Savings and money buy us time in the future and long term provide more value and happiness than luxuries and materialistic purchases.
Rich or wealthy?
This is a really interesting question and in my view with the development or social media we as a culture are obsessed with rich people and possessions. Rich is really a view of your current situation, like Richard Fuscone the ex-banker with the large house, swimming pool, multiple sports cars and designer clothes he was rich.
Rich people like to share their stories and images of wealth but like Fuscone it is a display of the current situation. During my career I have managed many teams in the UK and globally and I pride myself as being a good listener and an empathetic manager and a good listener. I think listening and having empathy with your team is a critical skill for successful leader. I remember an ex-colleague reacting really angrily in a performance review when he received no pay rise or performance bonus for the year. He reacted very angrily and then started to shake and then dropped his head into his hands to try and hide his crying. Once he calmed down, he explained that he was relying on a pay rise and bonus to clear his debts and pay his bills as he was over leveraged. From the outside he seemed “Rich”, he always wore designer clothes, designer watch, nice house etc. but he confessed that it was all store credit cards, credit cards and loans and he was £32,000 in debt. This was such a shock to me as he was a top performing member of the team and always very happy and positive. Luckily, the company we worked provide counselling support and financial mentoring and he was provided support to set a plan to restructure his debt and manage his money. This is just an example of rich, reflects a moment of time and we never really understand how the purchases have been financed.
Wealth is different, it is hidden, and it reflects income that has not been spent and provides a future option to buy something later. Wealth is a value to provide future options, flexibility and growth. It is hard to see wealth, we do not know how much people have in their savings accounts, investment accounts or pension funds but they all provide a future value and freedom. I know from personal experience it is very difficult to look at your financial freedom from a young age. When you start your first job, and you are encouraged to save for your pension, but you cannot access the money for 45 years! I think this is the mindset that we need to change and is one of the key objectives in relation to the psychology of money. We need to be mindful with our expenditure and start thinking of our future vision and freedom.
We can apply the same vision for our children, and my personal view is the world is getting smaller with advances in digital technology, advances in travel and the growth of global companies. I have noticed that my young work colleagues want more control over their time and options, and it is becoming the most valuable currency in the world. I have seen colleagues travel to another country for an opportunity to experience a new culture, resign to start a business and move to an exciting startup company for less money but greater opportunity and happiness.
The world if full of people that seem to live a modest life, but they are wealthy as they are saving and investing for a future of freedom. A few years ago, I attended a work colleagues retirement party, he was only 45 but he was retiring to move back to India to expand his family’s organic farm. I was not very close to him, but I was intrigued to understand how he managed to retire at 45. He was very open with me and explained that he had been saving for his dream since he graduated at the age of 24. He consistently saved 35% of his salary for the last 21 years, every bonus was invested, and his expenditure kept to a minimum. For example, “This suit I am wearing, I have owned for 15 years, these shoes have been repaired 10 times and I have owned the same car for 12 years”. He was too proud to tell me how much he had saved over the period but based on his calculations he could retire to India, expand his organic farm, enjoy his passion for organic food and live off his investments for another 50 years. This is a really extreme example but his dedicated, goal setting and determination has paid off and I am really happy for him and wish him great future success. There is actually a global movement called FIRE (Financial independence, Retire early). I have a read a number of blogs and success stories and the objective is to save or invest for a passive income that means you can retire and live off your passive income from savings, investments, property investment etc.
For me personally I admire their determination and it provides them with the freedom of time, but they make significant sacrifices. Please read some of the articles because we can learn some great money saving tips and take some of their ideas and apply to our own savings and goals.
During our life we will have an experience, change in situation or an unexpected event that will change our own relationship with money or change in our financial goals.
Another significant change is a bit personal, but I thought I would share as the story might resonate with the readers, especially parents and Grandparents. In 2014, my dad passed away from health complications after a major stroke but 2 years previously he had a minor stroke during the night. Over a few pints of Guinness in our favorite pub, Prospect of Whitby in Wapping beside the river Thames. (Highly recommend). He shared the experience and even now it is very emotional writing this section, he told me that he woke during the night but lost all sensation on the left-hand side of his body and most of his speech. He frantically tried to roll over and nudge my mum sleeping beside him to raise the alarm. Luckily, my mum woke and phoned the ambulance and they arrived within 6 minutes, and he was in hospital within 15 minutes. The amazing ambulance service and NHS doctors and nurses were able to treat him immediately and he made a full recovery within 6 weeks. In my view the amazing NHS and the fact that he was able to wake my mum (That was a miracle as she is a very deep sleeper) provided us with an extra few years with our dad and Grandparent. But for me what was life changing was when he told me “All I can really remember of the experience is lying in bed trying to wake your mum but suddenly all these lovely memories came flooding into my mind. It was like a film that was constantly flicking from one scene to another. Playing in the field as a child in Ireland, family holidays, holding the grandchildren when they were born, laughing at a party, wedding day, watching a graduation show, crabbing with the Grandchildren on holidays. There was no logical order but just quick and random beautiful memories and providing the motivation to keep fighting”. This is a very personal story, but all his memories were experiences, family memories, laughter, happiness, pride and quality time with family and Grandchildren. I am glad he shared that experience with me, and I ensure now that I spend my time with my family to build up our shared experiences, have fun and laughter and grow my memories for future reflection that materialistic purchase cannot provide.
I wanted to share this story as my own personal ethos is that we should not get too obsessed with building wealth but ensure we have a balance of enjoying time with friends and family, spending money on experiences and holidays and live in the moment. For example, we could apply the 70/30 rule (Or you own personal allocation) but think about your goals and align to your budget planner. After paying your taxes, learn to live with 70% of your income for your necessities and luxuries and experiences with friends and family. The remaining 30% can be split into your savings goals, investments and pensions. I have read so many articles on the 70/30 rule and it can seem very aggressive but over a period of 5 to 10 years you will really see the difference due to the compound impact. This is a rule that wealth managers use for their millionaire clients but why can’t we apply it to our own family finances?
The above is a brief summary of how I personally changed by financial goals and as I turned 50, I really focused on my financial goals for my family and for my retirement and a concept of “freedom”.
I found that having a strategy and plan and constantly reviewing expenditure really helped with financial stress and anxiety, especially in the current cost of living crisis.
Lastly, I would highly recommend arranging a visit with a registered and qualified financial advisor/planner and they can help with reviewing your current goals and future vision.