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When it comes to managing money, almost everyone has doubts as to whether they are doing it right.
So you can breathe a sigh of relief to know that no one is crazy, according to Morgan Housel, author of The Psychology of Money.
That goes for both the person you know who saves every penny for the person who spends like there’s no tomorrow.
“People do all sorts of crazy things with their money,” says Housel.
“There are things I do with my money and there are things you do with your money that make perfect sense to us and that might look crazy to someone else,” he said.
Even two equally smart people cannot agree on how to manage their wealth and what financial plan is best.
The reason depends on where and when each person grew up, how they were brought up and what experiences shaped them from there.
Morgan Housel, author of The Psychology of Money and a partner in the Collaborative Fund, says nobody is crazy when it comes to money. But we all need to update our thinking in important ways in order to build true wealth.
For example, if you grew up in Germany in the 1930s, you will have a different view of inflation and economic collapse than someone who grew up in the US in the 1960s, Housel said.
But regardless of where we come from, we all have blind spots.
“Your experience with money is maybe 0.00000001% of the world’s events, but maybe 80% of your opinion is the world,” writes Housel.
The book that was published in September, Details 20 Topics We Can All Include In Our Lives To Better Manage Our Personal Finances. In an interview with CNBC.com, Housel discussed various takeaways we can all learn from.
You will change, as will your goals
You will want different things when you are in your 20s, 30s, and 60s.
This reality can make long-term financial planning difficult.
A life event, e.g. B. Having children can change your definition of the purpose of your money. If you change, so will your goals.
“Most of the time, it’s not that your financial plan has broken per se,” said Housel. “It’s just that you are a different person than you were 10 years ago.”
To ensure that your financial habits change, it is important to reassess your savings and expenses.
To avoid regrets later, it’s best to avoid extremes like under saving that could force you to take dramatic action later to play catch-up, Housel said.
Spending money is the fastest way to have less
For a period of 20 years after World War II, the distribution between rich and poor was less dramatic than it is today.
As a result, people who were rich and poor lived similar lifestyles. Those who were richer still drove more expensive cars. But everyone had access to the same TVs and saw the same shows and listened to the same radio programs.
“It kind of canceled that idea that people were living roughly the same lifestyle,” said Housel.
That all started to change around the 1980s when wealth inequality began to grow. However, the expectation that people should have the same lifestyle remained largely the same.
That caused people to take on more debt in order to afford the things they wanted – bigger houses, fancier cars, and private schooling for their children.
People’s lifestyle expectations have continued to rise, thanks in part to social media like Instagram.
“The ability to raise expectations is much higher with social media than ever before,” said Housel. “It takes the same cycle that’s been in the game for 60 years and it just puts him on steroids.”
That creates the feeling that everyone is falling behind. But if you spend money to keep up, you are missing out on building true wealth.
Savings can give you freedom
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Most people save money for some reason.
But according to Housel, people really should set aside money to anticipate unexpected events.
Realizing additional savings gives you flexibility and freedom when you need it.
That can mean waiting for the right job if you are unemployed or quitting your career if you want.
“For me that has always been the biggest asset, the highest dividend that money pays, the ability to give you independence,” said Housel.
One way to judge whether you are managing your money the way it is right for you is whether or not you can sleep at night, he said.
Even if you pass this test, ask yourself whether what you are doing financially makes sense to someone else. If not, try to learn from it, suggests Housel.