The Psychology of Money | Simple Money Rules That Will Make You Rich with Morgan Housel

24:20And you realize that people will pretend to be your friends and they look at you different and whatnot. I had this amazing experience a couple of years ago where I was doing some consulting with a group of young NBA athletes. They were like NBA rookies. And the idea was, hey, go talk to them to try to prevent them from going bankrupt, which the majority of professional athletes do. And one of these athletes, he was an NBA rookie. I think he was 20 or 21. And he said something I thought was so profound. He was like, the reason professional athletes go broke is not because they bought themselves five mansions and a bouncing car.

24:54The reason they go broke is because they bought their fifth cousin, who they barely know, a modest house. And they had so much social pressure to take care of their family. A lot of these athletes come from inner city poverty. And once they start making$10 million a year, they cannot tell their cousin and their grandma and their barber back at home, screw you guys. I got my money. Best of luck to you. They have so much social pressure to take care of their family. And that's wonderful. Of course, taking care of your family is a wonderful thing, but that is what I define as social debt. It is once you make money, the social pressures that you have to spend it a certain way and to spend it on others explode massively.

25:31And if you talk to any level of billionaires, it will tell you this. The number of letters that they get from very well-meaning people. A single mother who has a five-year-old daughter with cancer, and the mother says, please, I just need a hundred grand to save my daughter's life. You get those letters all day long. And of course, they're good people who want to do well in the world, but that's a downside. Now, I think we should all be lucky enough to have that challenge in life, but let's not pretend that it's not a challenge. Well, by the way, I think you make a great point there. It's a correlated point.

26:02You described the scenarios that are likely to happen to your life, a job interruption, a wayward child. But one of the other things that a lot of you don't realize is that your parents may need you at some point. Some of you are in a generation where you are going to get to an age where you're going to be taking care of your children and need to help your parents at the same time. And so for a lot of you, you won't save money for you. You won't. But you might, I might be able to get you today to start saving money because you love your family so much. And there will be times in your life, I'm 54 this month, where the people you love truly do need you.

26:40I'm not talking about the fifth cousin who you barely know. And by the way, I've had a lot of those come out of the woodwork in my life. I'm talking about your parents, your children, your grandchildren, your brothers or sisters. And if you want to be there in their life, ask yourself, is that purse really worth it right now? Are these pair of shoes really worth it? Is that watch really worth it? Or is your mom worth it? Is your daughter worth it? Do you want to be able to take advantage of opportunities when they come because you have a little bit of cash? So what do you think about all of those things?

27:09And there's just incidences in our lives that teach us money lessons. In the book, Morgan, you talk about sort of a tragic incident that taught you one of your most valuable lessons about money. If you don't mind sharing that with everybody, I think it's something people will remember. Yeah, I grew up as a competitive ski racer in Lake Tahoe, California. And I had this event and it happened to me when I was 17 years old. Myself and my two best friends at the time were skiing out of bounds, which is illegal. You're not, you know, you duck under the ropes that say do not cross. And that's where you get the amazing skiing.

27:41And it was awesome. And I'll tell the shorter version of the story. I skied this run out of bounds with my two friends and it was awesome. And we get to the bottom, we would hitchhike back because it's out of bounds. There's no chairlift. And they wanted to do it again. And I said, hey, rather than hitchhiking back, why don't you two go do it and I'll pick you up so you don't have to hitchhike. I'll drive around the mountain and pick you up in my truck. They went and did it. And the short version of the story to get to the point was they were killed in a massive avalanche during this period. And, of course, I always have to make the point that I'm not unique in the sense that I've lost people close to me.

28:20Virtually everybody has that. But this was my version of it. And one of the things that it taught me early on was, I mean, two points about risk that I think have much broader meanings. One is that my decision to not go with them on that run was the most important decision I've ever made in my life. Nothing matters more. 100 % chance I would have died with them if I went with them. And so it's this reminder and indication of how ridiculously fragile life can be. that a decision that you make that is a complete no, like you're not thinking of it whatsoever. You're not making a list of pros and cons and whatnot.

28:58It's just a brainless decision that you make can completely transform your life. Sometimes that's positive, sometimes that's negative. But it's this reminder to be a little bit humble about how ridiculously fragile life is. The other that it taught me was, we knew that skiing out of bounds was dangerous. We knew it was wrong. but we thought the consequences of that risk might meant that like we would get yelled at by our coaches or we would have our season passes revote never in a million years do we think the consequences of the risk that we took meant that we die like never like we're 17 year old boys we didn't think like that but but once you start thinking about the worst case scenario for a lot of these things you can't see it in any other light and maybe i think that did rub off on me financially that I have no desire to take massive risks to get rich quickly overnight because I want to avoid catastrophes at all costs.

29:50It's like playing Russian roulette. There is no amount of winnings in Russian roulette that would be worth it because everybody understands the downside. The downside is you die. And I think there are versions of that in finance. There is no gain that would be worth it for me if the downside is bankruptcy for my family and my kids. There's nothing that would be worth it like that. So once you see the world in a worst case scenario lens, again, I'm an optimistic person. I'm optimistic about the world, et cetera, et cetera. But you avoid catastrophe at all costs and put endurance as like the highest goal that you have financially.

30:25Also, wow, that's a crazy story, by the way. That is a crazy story. What a metaphor too. You know, I think about people who make good decisions in their life until they don't. My book, The Power of One More, I say you're one decision away from changing your life. And people always assume that means a good one. That, you know, if you make one decision, you can shift your life. It's also true to the negative. Oh, yeah. Like that day, the decision you made not to go and not that they made the wrong decision. It just ended up being that decision. I just had someone who was driving me in an Uber and wonderful woman.

31:05We started talking about her children and she had a wonderful child, 23 years old. He made one decision one night to drink and drive. And that night he hit somebody and killed them. And he's now in prison for 25 years and he took a life. But that one decision changed his life. And I make this point to lead to hear everybody. Some of you will get on track today. Let me tell you what I've observed and I'll let Morgan talk to it. And you do start the right habits and psychology with money. You do start saving. You take advantage of compounding. You live below your means. You allow risk mitigation to kick in until.

31:46Until the one temptation. So you get a stack of money. Finally, you get 50 grand or 100 grand. And then I find once people do that, then they can't risk the temptation of blowing that on something. So they go five, six, seven, eight years, do the right things. And then in a weak moment or an immediate gratification moment, they blow their stack of paper on something and then they're broke. I have more friends, as you say in your book, that used to be wealthy than currently are. So talk about the consistency in resisting the temptation as the temptation gets bigger Because the temptation to blow 80 bucks now is far different than 80 grand later.

32:25It's a bigger temptation Yeah, two things come to mind here. One is the idea this is true for all areas of life that Good news tends to be very slow and bad news happens very quick So good news is like slow compounding over 10 or 20 years where you look back individually or at the economy or at the world, you're like, man, over the last 30 years, we've made a lot of progress. Bad news is not like that. Bad news is very quick. It's 9-11, COVID, Lehman Brothers goes bankrupt. Bad news happens in an instant. And there's no equivalent of 9-11 for good news. There's no equivalent where the world gets way better in 30 minutes.

33:02It happens on the downside, but not the good side. And so one thing that goes from that too, is that in investing, you do not need to make a lot of good decisions over time to do very well. You just have to avoid not screwing up. If you could just make a series of okay average decisions and never screw up, the odds that you're going to do well are extraordinary over time, particularly for investing in the stock market. And most people have the opposite approach. Their view is like, how can I be a genius every day? And in doing so, they increase the odds that they're going to make a catastrophic mistake that they can never recover from.

33:39And it's so incredibly common. I think you see this kind of in the Robinhood investing mentality, which is geared around trading. There's almost no investing mentality that goes on in the Robinhood app. It's all quick trading. And that is enticing to people because of the idea that to do well, you need to be a genius. You need to make a lot of brilliant decisions when it's almost the exact opposite. You just have to be okay and never screw up. I mean, that's true for relationships as well. I remember reading this study in psychology that was like, most good marriages that endure and have a lot of happiness, not because the partners are making tons of great loving, constantly reminding their partner how much they love them.

34:21It's because there's a lack of screw ups. It's a lack of mistakes. It's not the good moments that they have. It's the avoidance of fights that leads to a great marriage. I think there are so many analogies with that with money. It's not the brilliant decisions. It's the lack of screw-ups. Speaking of that, I'm just curious as to your opinion. This is a timely thing. I had not had it in my notes, but when you said it, it made me think about it. Just because of the time of this recording, it's starting to have some impact on the world. So this is a broader financial question. Nothing in your book.

34:49Just want to know your thoughts on it. How do you feel about this whole tariff thing that's taking place? Because it is now having impacts on the market. And could that be one of those really bad decisions in your mind or really good decisions in your mind for the economy? Just curious as your thought on it. Yeah, what's interesting is that the economics profession does not agree on that much because it's a very political profession. It's hard to separate, you know, being, you're talking about the economy from politics. So it's a very contentious profession. If there is one single topic that virtually every academic economist agrees on, it's that tariffs suck.

35:29There's virtually no debate about that among professional economic circles. I think what's interesting is that almost every economic crisis and recession happens from an outside event that policymakers and Congress can't control. 9-11, the housing bubble, it's like you got hit by an asteroid and there's nothing you can do about it. this is a situation, I think, where there's effectively a button on the president's desk that says, do you want to cause some turmoil? And the button got pushed. Now, that does not have to be a partisan thing because there's a long history of tariffs in the 1920s, in the 1960s and 70s.

36:07This is not the first time we've done this by any means. So it's not to say that Trump is the first one going down this path and look at him doing the thing. A lot of people have tried this. I think there's a broader point, though, that a lot of people from both parties have tried this and it always sucks. So I think there is a point. That does not dissuade me from being optimistic about the future. Economic volatility and policy mistakes is the entire history of economic history. Right. And by the way, everybody, I asked that question knowing that many of you believe, hey, but the tables aren't equal.

36:39And so I'm willing to go through some short-term pain to get some equivalency in how we trade with the world. I'm not asking the question as a political one. I'm asking it as an economic one, because I might even agree with some of you on that. I would like to see trade become a little bit more equalized. But having said that, you should at least know what people that are smart think it's going to do to your money. And speaking of that, it's like a random question, but I get asked it a lot and I ask friends of mine this a lot. And it's got to do with kids. Let's say you are a saver. You're listening to the show.

37:09Do you think you should be saving money for your kids? It's in the book, but I'm asking you on the show. Do you think you should save money for your children? It depends on what you're going to do with it. When I look back at my childhood, I think my parents used their money that they had to give me and my siblings a safety net, but never a fuel. That was not explicit. It was just like looking back at how it worked, where my parents, by the time I was 17, it was like, best of luck to you. We're not going to give you money for rent or food or any of that. You're a big boy now, go do it. And I struggled in the early years as everyone would, but I always knew, even if they didn't say it, that if I fell flat on my face, they would be there to help me.

37:48And so they didn't actually spend that money on me. They didn't write me a check, but I knew it was there if I needed it. And that was everything. That gave me confidence. It helped me sleep at night when things were rocky. So I think that is an amazing way to use money for your children without actually writing them a check. Just knowing that they can go out in the world and take risks and experience life, and they're never going to fall too far. It's not that they're not going to fall at all, but they're never going to be homeless. I always knew that my parents would give me a place to live and a peanut butter and jelly sandwich and health care if I needed it.

38:20And so then I could go out and do it. I think it is virtually impossible to actually write your kids a check for money that they don't necessarily need, desperately need, and have it not impact their motivation in life or not like seriously distort their sense of progress and wellbeing and whatnot. It's virtually impossible. There are some examples of it. You know, if Elon Musk had inherited a billion dollars when he was 18, it would not have slowed him down. We would not have slowed down his ambitions whatsoever. But 99.9 % of people, it will. If you just give them money, it's going to slow down their ambition.

38:57And so there's a great Warren Buffett quote where he says, give your kids enough money so that they can do anything, but not so much money that they can do nothing. And I think there is a related point here that that level of money, of giving your kids money that's going to slow down their ambition is not that much. It is not that much money. So a lot of wealthy families are like, oh, you know, I give my son, my daughter, 2000 bucks a month to help them out. Well, 2000 bucks a month when you're 21 years old is a ton of money. That is a ton of money. So there's a lot of parents who mean very well and they desperately do not want to spoil their kids, but it's actually extremely easy and common to do it.

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41:02think you can use an analogy with health here. If you had a genie and the genie says, I can give you one of two things. The first option is I'll give you the most incredible athletic body that is possible. You're going to be the best athlete, the fastest runner, the best weightlifter. That's one option. Or option B, I can just make sure that you never get terminal illness. Which one of those you did? I think most people would say, I would rather cap my downside than have a ridiculous upside. Maybe some people would not. Maybe that's not black and white as I just made it out to be, but that would be me.

41:35If I had those two options of you can either be the most ridiculous athlete or I can ensure that you're never going to get terminal cancer. I would absolutely take that. And it's true for my finances as well, that if that same genie said, I can either make you a multi-billionaire or I can just ensure that you're going to be really comfortable for the rest of your and your kid's life. Again, this is not black and white. Some people might take option A. I would probably take option B. And I don't think that's an unhealthy fear. I think most people, if you actually give them some true serum and put a gun to their head, and you said, what do you want out of life?

42:12like if most people do not aspire i think it's it's interesting and curious to think about becoming super rich and famous but what most people actually want is just like i just want a comfortable life for me and my kids and my spouse and a couple of my friends that's that's that's actually way more appealing and realistic for most people and by the way i want you're right where i wanted to go so this is what i mean one of my favorite moments on the show this year right here i want to it's been on my mic what you just said so i've thought a lot about our culture and And even what I teach and what I do.

42:45And I shared earlier, my net worth's done pretty well. My daughter went, because she's blessed, she got a chance to go study abroad for a month this summer in college. She was in Italy. And like many of my friends that have come back from there, she goes, Daddy, I think they get it over there. And I said, Honey, what do you mean? And she said, Well, I would never want to not live in the United States. But she said, It just seems like their quality of life's a little higher, Daddy. and I and she said again I want to live in freedom and I want to be in the United States but she said the more I was there the more I realized how much everything here is you get up and you hunt and chase all day and then it's all about cold plunging and resting and recovering so you can get up and hunt and chase again and climb and climb and climb and climb and she said I felt like over there you know daddy it's okay to take a two or three hour lunch and not everybody works six days a week and they just laugh a little bit more and seem a little bit happier and of course I went back at her with the normal per yeah but Bella daddy's about the ultimate expression of himself and creating and expanding and and I am about that and I would be miserable sitting at three hour lunches every day I have to be honest but there's somewhere in between the two and when I started the pursuit of becoming wealthy I had equated wealth with freedom to choose to have that three-hour lunch or that two-week vacation or that round of golf where my phone doesn't ring.

44:11And then quite honestly, I've never really gotten around to doing the freedom part, even though I've got a bunch of money. And I'm 54 now. And so talk about money and freedom, what it means to you, and maybe what the mindset ought to be or could be for somebody as they look at their money, as opposed to what you just said about having the jet and the island. Maybe it's more about having a great life. What's interesting about American culture, to contrast it with Europe, as your daughter did, is I think in America, we want to benefit the whole at the sacrifice of the individual. So we want to create amazing new technologies and become more productive, even if that comes at the sacrifice of our own individual life.

44:55and spending time with our kids and sleeping well. We are willing to commute and work 100 hours a week to create a new technology that's going to benefit the world and benefit the Europeans, even if it comes at the expense of our own life. And we've always been like that. That was true 200 years ago. I think it'll be true 200 years from now. Whereas I think a lot of other cultures would say, we would rather the whole slow down a little bit. And we're not going to create a lot of amazing businesses or amazing technologies, but we're going to spend a lot of time with our family and live a great life.

45:24I can see the pros and cons to each. You get problems. Yes. I mean, just at the individual level, I am so glad that people like Bill Gates and Elon Musk and Jeff Bezos and Mark Zuckerberg, I'm glad they exist because I get to benefit from the technology that they've created. Never in a million years would I want their life because they effectively don't have personal lives. Their entire life is devoted to their business, their products. That's why they're so successful. And so I think the ultimate answer here is having a well-calibrated sense of your future regret. When you and I are on our deathbeds, and we will be someday, what are we gonna look back and regret?

46:01And some people would say, I would regret not taking the chance to start a business and create something great. That might be a regret. A lot of people will look back and say, I regret that it worked so hard. I didn't spend enough time with my kids. There's an amazing study from a guy named Carl Pillemer. He's a gerontologist. and he did a study on a thousand elderly Americans, most of whom were in their nineties. And he just said, you know, looking back at your long life, give me some advice. And there's a part of his book that's on finance. And he says in his book, of the thousand people that he interviewed, not a single person, not one person out of the thousand looked back and said, I wish I made more money.

46:39Not one single of them said that. Virtually every one of them looking back at their life said, I wish I'd spent more time with my kids. I wish I spent more time with my friends. I wish I accepted who I was rather than trying to become somebody that I wasn't. Virtually every one of them said that. So it's interesting for you and I who are not 90 years old trying to figure this out. Look at what our aspirations are, knowing that there's a very good chance that when you and I are 90, we're going to look back and not regret earning more money, but we will regret not spending more time with the people who we loved.

47:12And we will regret not saving more. So you, I understand better than most both worlds. I probably land in the, at the end of my life, I want the tank to be empty. I want to have expressed and learned and grow and given everything I possibly give to have maxed out my life. Okay. So I have been teaching these things for you. But as I get older, I also have an appreciation that I never had before for people who choose the other life, which is the one about time with family. And this is what i've concluded everybody and this is important for all of you. They're freakazoids like me They're like i'm gonna max my life out You need to save money.

47:53Let me tell you why you need to save money Because at some point if you have it will give you the option to change your mind later And if you don't save anything while you're expanding and contributing and growing You have no choice but to stay on this train until death but if you save along the way it gives you the freedom to choose at some point to get off that train if you choose to or to get off it for a while or to just downshift but if you don't save you have made a life decision that you're going to run this thing till the wheels come off and maybe pass your capacity to innovate and create you may pass your prime your ability to expand and grow and you're gonna have to stay on that train if you don't save money and that's why Morgan's work matters so much because you can be this crazy person like I am, but my savings has given me an off-ramp if I choose to take it at some point, temporarily or permanently.

48:46So everybody make sure they have that.

48:52When did making plans get this complicated? It's time to streamline with WhatsApp, the secure messaging app that brings the whole group together. Use polls to settle dinner plans, send event invites and pin messages so no one forgets mom's 60th, and never miss a meme or milestone. All protected with end-to-end encryption. It's time for WhatsApp. Message privately with everyone. Learn more at whatsapp.com. I want to ask you kind of a powerful question. By the way, one of my favorite conversations ever because I've been able to go back and forth. You say in the book why you should never check check up on your investments.

49:30I'm like, really? I did it today. By the way, it was a disappointing day when I looked. Bitcoin's not doing so good today. Neither was the stock market while we're recording. So maybe I shouldn't have checked. But is that why you say that? Or what's the point of not checking up on your investments? Or what did you mean? Well, to the extent that when people follow their investments all day, that it might lead them to want to make a change, to want to fiddle with the knobs and the levers that's going to do that. I check my investments every day, usually multiple times per day, because I think markets are so fascinating.

49:59They're a fascinating window into culture and incentives and psychology, but never when I check it, does it influence how I invest? Never. But I think for a lot of people, it's not the case. If they check their portfolio and it's down, they're like, oh, I should sell. I should change this. I should buy this and sell that. And everything we know about investing is that the more actions that you take, the more levers that you're pulling, the worse you're going to do over time. That is true for almost everybody. And so if you are the kind of person who every time you check your portfolio is tempted to make a change, those are the kind of people who should set it and forget it and leave it alone.

50:32And people understand this if you are growing an oak tree in your backyard. You plant a seed and if you check it every hour and you go, oh, it's not growing. I need to add more fertilizer. I don't know. Just leave it alone. Let it grow. They understand that with something like gardening. But with money, there is this idea that the harder I try and the more fertilizer I dump on it, so to speak, it's going to do better. even if it's almost certainly, it's almost never the case. Do you think most people have a dramatic underestimation of how much money they're going to need to have saved in order to choose to stop working and continue their lifestyle at some point?

51:05I do. Yeah, I think that's broadly true. I think we still have this 1970s idea that a million dollars is a fortune. And if you're a millionaire, you live, there's this great meme on Instagram, I'm sure it's been all over the place, of like, when you were a kid, when you dreamed what a million dollar house would look like. And it's like the Playboy Mansion kind of thing versus what$1 million will buy you today. And it's like nothing in most parts of the country. And so I think that is true. That is just because we underestimate the power of compounding over time and inflation compounds over time.

51:36So if inflation is 3 % or 4 % per year or whatever it might be in any given year, over the course of 20 years, that's a lot. That is a ton. And then you mix that with an even more powerful idea, which is expectations inflation, which is that your idea of a good life when you're older might be very different from your idea of what a good life is today. So I remember when I was 19, my idea of a good life was like a Honda Civic and an apartment. That was rich to me. And now that I have two kids, it's a little bit different than that. So you mix in actual price inflation with expectations inflation, and it's a recipe for underestimating how much you're going to need.

52:13Expectations inflation. That's so good. Okay. Last question for you, brother. This has been so good today. By the way, the book is The Psychology of Money. I think you can tell why you're going to want to get it because there really is a psychology around this. If someone ran into you at Starbucks, you're in Seattle, so it's an appropriate question or in the suburbs there. So someone runs into you at Starbucks goes, I heard you on the Ed Milet show about this money and the psychology of money. And is there something that you wanted to say on the show that you didn't get out about life, mindset, the way you look at the world through the prism of money that he didn't get a chance to ask you, that's in the book, what would you just share?

52:53You could grab one more random thing out of a book about money or mindset. What would it be? And I think the most important thing with money that's so easy to overlook is that there is not one right answer for everybody. That if you are the person who listened to this podcast and said, I disagreed with Morgan about X, Y, and Z, there's a good chance that we actually don't disagree with each other. That what's actually happening is that we're different people talking over each other. And most people want to find the answer for investing. Like, tell me how to invest. You're like, it depends on who you are and your risk tolerance.

53:24And people understand this with like food. If I say Mexican food is the best and you say, no, Italian food is the best, we're not actually disagreeing. We just have different tastes and different preferences. It's not right or wrong. And I think that is so true with money that the way that people save and invest and spend is there is no one right way to do it. And so rather than going out and trying to look for the right answer, you need to look in the mirror and figure out who you are, what kind of life you want to live, what your social aspirations are, what your personality is, and build something around that.

53:53Even if there are friends and online commenters who say you're doing it wrong, if it's working for you and it's helping you sleep at night and it's making you happy, then it's probably the right thing for you to do. It's a great answer. This is a good conversation, brother, over a topic that so many people are afraid of. And the reason I brought you on the show today is I don't want everyone to think this whole getting financially free, independent, starting to change your life financially has to be scary or complicated. You will find, you know what really smart people do like Morgan, you guys?

54:26They take really complicated things and they explain them in simple ways. And not so smart people take simple things and try to explain to them in complicated ways so that you're confused. Just this whole life thing and money and the psychology around it doesn't need to be complicated. And I'm so glad finally someone's standing up saying you got to know yourself and your personality. You can tolerate taking on a bunch of debt and living with that stress every day. Go ahead and do it. But if you can't, there's another way. And that's what we talked about today. Morgan Housel, The Psychology of Money.

54:57Thank you for being here today, brother. Thanks so much for having me, Ed. Great conversation. Share this episode, everybody. I know you will. God bless you. This is the Ed Myland Show.