How to Make the Most of Your Money in the New Year — ft. Morgan Housel

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2:01Welcome to Prof G Markets. Scott is unfortunately out sick today, or that's what he's telling us, so we're going with it. And so today we're speaking with Morgan Housel, the New York Times bestselling author of The Psychology of Money and a partner at the Collaborative Fund. and we speak with Morgan about financial stress around the holidays and how to create impactful financial plans for the new year. This was, I think, an important conversation about the holidays and the stress that we often feel, or at least that I certainly feel. Morgan is an expert on the psychology of money and how money affects our brains.

2:37So I thought this was a really insightful conversation and I hope you enjoy it. Morgan, really great to have you back on Prof G Markets. Thank you very much for joining us. Good to see you, Ed. So we wanted to talk with you today because it is the holidays. And for many, that is a pretty fun and cheerful time, but it's also a very stressful time, largely due to money. So I just want to start off with this one stat, which is that nine in 10 Americans say that the holidays are a cause of significant financial stress. So pretty obvious question. Why is it such a stressful time financially, but more importantly, what can we do about it?

3:17So many people think about Thanksgiving and Christmas. And Thanksgiving, I think, tends to be a happier time for people because it's just good food and family and friends, and that's it. There's no gifts. There's no expectations. It's like, let's eat some good food and tell some good stories and drink some good wine and all have a good time. Christmas becomes, I have to get presents for everybody, and everyone has to get presents for me. And I hope I get you the right thing. I hope you get me the right thing. And one of us is bound to be disappointed. That's always been the case. My mom would always bring up when I was a kid that Christmas was my worst holiday because I was always disappointed.

3:47They got me a nice presents. I had a great childhood, but whatever they got me, I wanted something more. And I was always, it was like the day of the year when I got everything, I got like presents galore, was my unhappiest day of the year because my expectations were so high. I think as an adult, it turns into, if I don't get you the right present, you're not going to like me. I have to be really thoughtful about this. And then as your social circle grows and you have to get presents for 20 people, that's a huge stress. It's a massive stress. Not even the cost of it. Of course, that's a big thing.

4:19If you're putting on your credit cards, whatever it might be, but just the social stress of getting it right, that you don't have that with Halloween, you don't have it with New Year's. Christmas is this one that has a ridiculous amount of social pressure. And I think there is a lot of evidence that mental health tends to bottom around Christmas. It's a tough time for a period. A lot of that is because of their families. Sometimes it can be a reminder of the family that you don't have or broken bonds, whatever it might be. But I'm sure like finance plays a big role in there. Compare how people feel about the 4th of July, which is just like, oh, day off at work and it's sunny and I'm going to go to the beach with my friends.

4:53And Christmas is like a month of financial and emotional trauma for people. So, I mean, there are two things in there that cause the stress you mentioned. It's the family aspect, but it's also mainly gifts. do you think that America places too much emphasis culturally on giving gifts? Do you think our gifting culture might be a bad thing? I think it's generally true overall. This has nothing to do with Christmas, but it's true that it is very easy to assume that if your life is not going well and you're unhappy with who you are, you're unhappy with your career, you're unhappy with your family, it's very easy to assume that if you had more money and if you were spending more money and if you had nicer things, your life would be better.

5:33That's a very easy assumption to make. And by and large, for most people, it is wrong most of the time. It's not that money cannot buy happiness. It can. But it is too easy to assume that if you had more money, all your problems would go away. And particularly for a lot of people, their problems are their health and their relationships, their friendships, their marriages, their relationships with their kids. Those are the core to a lot of the problems. And those are the problems that I think money has plays the lowest role in terms of fixing and happiness. And so I think that's the assumption that we make is like, if I had nicer stuff, then people would love me more.

6:05And if I bought you a big present, you might love me more. And I think those are very easy financial assumptions to make. But then you realize that the core of what you're getting at is so much more complex than money. It's a social endeavor. And my wife and I, we've been together for almost two decades. And many, many years ago, we were like, we stopped buying each other gifts. We have everything we need. And it doesn't make any difference to me. I love you. You love me. And so what my wife started doing, she does this for several years. For my birthday, she does this. She writes me a poem and she's so absurdly talented at this.

6:37It'll be a poem of like something that happened in my life. She's so good at it. They're always funny. They always rhyme. And it's something that like a big thing that happened to me that year. That is a million times more meaningful to me than if my wife bought me a sweater or something. I don't mean nothing to me. Like this is not my expertise in the slightest, but the thoughtfulness of that makes me so happy. And I think at the core of it, it's because she's buying me something that money cannot buy. Like she's showing me a level of thoughtfulness and love that you cannot get with a price tag and a credit card.

7:09Yeah, Scott and I recently had a conversation about gifts. And our conclusion was that there isn't really like a social or cultural code on who's supposed to get gifts and also how much money you're supposed to be spending on those gifts. It sounds like you have established some of your own code around gifting with your wife. Are there any other rules or recommendations on how people can go about gifting during the holidays? No, I think it's different for everyone. I think how my wife do it too, a lot of people would disagree with that. And they would say that the gifts they get their spouse bring so much pleasure and joy.

7:43So this is not black and white. Everybody is different. I've often noticed too, for a lot of my friends, some of whom send Christmas presents, but what I absolutely love about them is once in a while, they'll text me and be like, hey, haven't caught up with you in a while. How are you doing? Let's jump on the phone and just catch up with you. So if I compare, I have one friend, I will not name him. Every year he sends me a case of wine for Christmas, which I love and appreciate. And about once in a quarter, he texts me and says, hey, how you doing? Let's catch up and talk about life. I appreciate the wine he sends me, but I love our quarterly phone calls a hundred times more, a hundred times more.

8:18And I think a lot of people fall into that category of like, yes, I appreciate your gifts. I like your gifts. Your gifts was very thoughtful, but what I actually want is your friendship. And that's what means the most to me. I think this is especially true when you have a little bit more money and you're like, look, when you're a kid and you have nothing, I'm like, if I want that toy, like Christmas is my only shot. That's my only shot at getting it. As you become an adult and you have your own money and by and large, for a lot of people listening to this podcast, they roughly have everything that they need and most of what they want.

8:47That's true for probably the majority of people listening to this. And then so you turn to the things that money can't buy, like genuine friendship and whatnot. And I think if you are counting on Christmas to like accentuate that, it's going to lead to some disappointment. What about with your kids? I'm sure they would not accept a token of friendship for a Christmas gift. I should try that this year. See how that goes over. I think it's normal when you're a kid, A, because you don't have your own money. Look, I myself, as an adult, if I want something, I usually go and get it. I have to wait till Christmas.

9:17Kids usually have to wait till Christmas or their allowance or whatever. So there is so much more pent-up demand for physical things that kids have. But I think it's also true that kids, it's easier for them to make friendships. My kids just started at a new school. Day two, 48 hours in, they had five new best friends. Whereas for me, I'm like, I have to know you for seven years before I let you into my friendship circle. This is easier for kids to make friendships. So for adults, I think those genuine friendships, because they're so rare, just so much more meaningful than it is for a kid that just wants a new toy.

9:48When I was a kid, this is not black and white. I'm going to grossly exaggerate this, but I roughly got no presents throughout the year. And then Christmas was a bonanza. Like not actually, but it was close to that. And I feel like my kids get more presents throughout the year. And then Christmas is like, cool, it's fun, but it's more mediocre than it was. I don't know which one of those is better. Because as I said earlier, Christmas for me as a kid, it was the only, it was the one day per year that I got presents. It was a bonanza. It was a huge day. And according to my mom, I was always pissed off.

10:19I was always disappointed. I think it was so emotionally overwhelming that I just could not handle what was happening to it. Whereas I've noticed that my kids actually seem to do better and are happier during Christmas than I was when I was a kid. And maybe that's because it's more spaced out and it's not just this emotional just dumpster at the end of the year just being dropped on you. Yeah, I think the other interesting thing about this time of year is it's sort of like a summary of what has happened in the previous year. And I think when you're giving gifts, especially with your family, I feel like for a lot of people, it's sort of a reflection of like, this is how we're doing right now.

10:53And I think if you've had a tough 2024, you know, the holidays seem to sort of exaggerate that. And on the flip side, if you had a really great year, it might exaggerate that too. But for people who have had kind of like a tough year, and they're feeling that financial stress, what are some like tools and strategies that you can employ to deal with that and to come back stronger next year? I think you're absolutely right. And when I was a kid, I've written about this before, spoken about it, but the first 10 years of my childhood, my parents were extremely poor. They were students. We were poverty by any level.

11:30And then my dad became a doctor when I was 12. And then things like very abruptly shifted. It was not we were not rich by any standards. He was an ER doctor, but it was it was a very stark. It happened in one year. And I remember that year. I think it was 1993 or something like that, where it was like, everything changed. But what I think is true, when I look back to my poverty years, let's say that, my parents loved me just as much. I was just as happy. I had just as much fun with my friends. The things that actually were core to my identity and feeling loved really did not change that much from my poverty years to my better years.

12:06And so I think if you view money as the panacea to all your problems, either your problems or your ability for other people to admire you. That's the problem. Like money can be an incredible tool to live a better life. Spending money can make you happy. Like this is not to say money can't make you happy, but if you view it as the sole source of your comfort and your admiration from others, you are almost certainly going to be disappointed. How do you make that shift? I mean, I agree with you rationally. It's like, yeah, this isn't the source of, you know, this can't be the source of all of my happiness.

12:37But I feel like it's very hard on a day-to-day basis to really practice that and to really embrace that in your daily life? Like it's just money just sort of permeates around everything you do. So how do you kind of practice that and really employ that in your everyday life? You are absolutely right that it's easier said than done. And I think it is true that there are some people who are just much better naturally at it than others. If you're the kind of person who has had any kind of financial windfall or if you know somebody who has, I think a lot of those people would say, were you or that person materially happier, better off after the windfall?

13:17The answer might be yes, because money can make you happier. But did it feed your soul to the extent that you thought it would? I think that's the answer, is probably no. So I think it's probably one of those things that you cannot actually work on until you've experienced yourself or watched somebody else experience it. And I've noticed this with myself, having had a couple of good years in my career, that it has pushed me more towards my wife, my kids, my five good friends. It's pushed me more towards that because I have seen, yes, I've seen what money can do. More starkly, I've seen what it cannot do.

13:53And that has made me be like, oh, you know what's actually going to make me happier? Spending time with my kids. And it's done that in a way that I did not understand five years ago when I was doing less well in my career. And I think I'm grateful for that. So I think that's a roundabout way to answer your question. I think there's no way to actually put it into practice until you've experienced it firsthand. A lot of things with money are like that. We'll be right back. And if you're enjoying the show so far, hit follow and leave us a review on Prof G Markets. Stay with us.

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16:42We're back with Profit G Markets. Speaking of windfalls, one thing that I wanted to touch on is that around this time of year, a lot of people, probably a lot of people listening this podcast may be getting bonuses, end of year bonuses. Just from a psychological perspective, I've always found bonuses very interesting because it's like, on the one hand, it's sort of framed as a gift. I mean, it is bonus to the base. Many other people would say that, no, this is just like regular income. That was sort of factored in from the beginning. As it is bonus season right now, I'd just love to get your perspective on how you think about bonuses.

17:23What would be your advice to someone who's receiving a bonus and maybe doesn't know what to do with that money? You're right that most people do not think of it as a bonus, like by the definition of that word, they think of it as deferred compensation. Like they are owed that money. It is part of their compensation. This happened to get all of it in December. I remember many years ago, I was speaking with a guy who was at the time, I think he was the head of HR at Google. It was maybe 10 or 15 years ago. And he said the way that they think about it at Google is people live off their salary, play with their bonus and retire on their stock.

17:52This is like a rough framework for how to do it. And I think that there's actually some wisdom in there that if you are counting on your bonus to live off of that, by definition, it's not a bonus. That's just part of your deferred salary, but it's probably not. So many companies, banker, people in finance realize this very starkly when you have a year in 2008, your bonus falls 80 % or whatever it might be, or maybe it was zero. And if you are counting on that bonus to live off of, that's trouble. And so I don't know if I have much advice other than everything in finance is about expectations. And if you expect your bonus, it's not a bonus, and you're almost certainly going to be disappointed someday.

18:28And so any kind of non-standard windfall that I've had in my career, I've invested. And I think the reason that I invested is because I know that if I spend this, it's going to become part of my expectations that I also need to spend this next month and the month after and the month after, and it's not going to be there. And you can make a ton of money and be disappointed if you expect all of it. If the gap between your expectations and your circumstances breaks, it doesn't matter how much money you make, you're going to become disappointed. And I think it is the most fraught and the most troublesome when your bonus becomes your expectation.

18:59So how much of that money do you think, or just in terms of spending, I know you're writing a book about this, should be the money that we play with? And I love that term you said, bonuses of playing with. But you said, when you had a big windfall, you've invested it. How do you think about play money? To what extent should we be spending on frivolous things? I will paraphrase Scott Galloway, who I think has said this many times, where I'm paraphrasing him. I don't want to put words in his mouth, but he's like, once he hit his number, he spent money frivolously and gave a lot of money away. He said it much more eloquently than that.

19:37But I think what's important to that is that he waited until he hit his number. How I've always thought about it for my whole career is always having this calculation I have in my head of if I get laid off or if everything collapses from here, how long can I support this current lifestyle that I have if things get real nasty? That's always been really important to me. And for a lot of people, that answer is zero. That if they got laid off next month, they'd be in deep shit. And I think that's like bonus season is a good time to reevaluate that. Because if you are in that situation, then the answer is how much of your bonus should you play with?

20:07The answer is probably none of it. You should probably save it. That's always been really important to me because every single one of you, me, you, everyone listening to this at some point in their career will come across a big unexpected problem in their career, in their health, in their marriage, in the economy, whatever it might be. And your ability to endure that is going to be completely based off your ability to endure financially, at least, is completely based off of your ability to defer your previous compensation. And so if you don't have any of that cushion and that calculation of if things get bad, how long can I last?

20:40If your answer to that question is not good, then the answer to what you should do with your bonus is probably save it. And also, it seems like building in that habit is a really important thing, like just the habit of knowing that every year when I get this amount of money, I'm just going to put it away and I'm going to put it in the stock market. It's also true that you can overdose on that mentality. And if you talk to a lot of financial advisors, they will tell you that one of the biggest problems that they face with clients is you have clients who have saved up a ton of money for retirement.

21:09They've won. They won the game. They saved up millions of dollars for retirement. And now they're 70 years old and they cannot spend it. They can't even spend a very reasonable amount of it because saving money and watching their net worth go up became corded their identity. And they cannot break away from that. That's a problem too. And so if you can use money as a tool to give yourself independence and to live a great life and spend money on things that make you happy, on you and your family and friends, but never let it become part of your identity so much that it is controlling you more than you use it as a tool.

21:36That's the spot you want to get to. Yeah, we just did a big episode talking about spending money, and we spent maybe an hour trying to figure out what it means to be a good spender. What does spending your money well mean to you? To me, it means that it is always within my control, that I am not saying, God, I want to buy this, but I can't afford it. At that point, money is controlling me. Or if I say, this thing doesn't give me any joy, but I'm still going to buy it anyways. That is money controlling me too. The extent that I can be like, money is a tool in my life toolbox that I use. And I use it every day.