The Art of Spending Money

Introduction

While The Psychology of Money explores how we think about wealth and investing, The Art of Spending Money, written by the same author, Morgan Housel, as a follow-up, focuses on how we use it.

According to the author, neither book tells you what to do with your money, because everyone is different. However, both seek to understand what happens in our heads when we use money.
The same big idea applies to both books: Money is less about numbers and more about stories - stories we tell ourselves about what matters, what makes us happy, and how we measure success.

Spending is more art than science.

There is no universal formula, no fixed rules, because what brings one person joy may leave another feeling empty.
Just as with investing, understanding our emotions - our biases, hopes and fears - can guide us toward smart choices that reflect who we are, what we value, and how we want to live.

If The Psychology of Money taught us how to earn freedom, this book is about learning how to make the most of it.

The Quest of the Simple Life

There is an old saying that nothing is worse than getting what you want but not what you need.

That sums up many people's relationship with money and success.
If you are lucky enough to achieve what you want (money), you might still realize it is not what you need (family, friends, health, happiness, or being part of something bigger than yourself). This realization often leads to disappointment.

This book is about how spending money has little to do with spreadsheets and numbers, and a lot to do with psychology, envy, social aspirations, identity, insecurity, and other topics that are too often ignored in finance.

While money can buy happiness, using it is far more complicated than many people think.
In between the numbers sits the messiness and absurdity of the human mind.
Money is a remarkable tool that can provide a better life only if you know how to use it.

To illustrate:

Some rich people spend their lives desperately chasing money, because they never feel they have enough. Yet, they spend large amounts on supposedly luxurious things that do not actually make them happier, but are bought only to meet social expectations.
Someone who diligently saved their entire life cannot bring themselves to spend a reasonable amount of money in retirement because "saver" has become ingrained as part of their identity.
Many parents wish their children happiness over success, yet those same parents often chase money and status at the expense of their own happiness.
A broke young person buys a car he cannot afford because he thinks it will bring respect and admiration from his peers.
A young couple is saving for a two-bedroom house when their expectations are suddenly inflated by a friend who just bought a three-bedroom house.
Meanwhile, there are low-income people who get tremendous value out of the little money they have.

A combination of evolutionary and social forces dictates what we should want: more money, bigger possessions, and shinier toys than other people.

Sometimes, chasing those things is what we genuinely want.
More often, however, we realize that spending money merely to show off your wealth is a fast way to go broke and an expensive way to gain fleeting respect.
Hence, what society tells us we are supposed to do with money is often not what we should be doing to get the most value out of it.

The art of spending money is not a one-size-fits-all formula; it is complicated and often contradictory, covering things like individuality, greed, jealousy, status and regret. Nevertheless, a few common denominators do exist.

There are two ways to use money.

One is as a tool to live a better life.
The other is as a yardstick of status to measure yourself against others.
Many people aspire for the former but spend their lives chasing the latter.

Money is a tool you can use, but if you are not careful, it will use you.

It will use you without mercy, and often without you even knowing it.
For many people, money is both a financial asset and a psychological liability.
Blind lust for more can hijack your identity, control your personality, and wedge out parts of your life that bring greater happiness.

Spending money can buy happiness, but it is often an indirect path.

Money itself does not buy happiness, but it can help you gain independence and purpose - both key ingredients for a happier life if you cultivate them.
A big, nice house might make you happier, but mostly because it makes it easier to have friends and family over, and the friends and family are actually what make you happy.

Enduring happiness is found in contentment, so those happiest with money tend to be those who have found a way to stop thinking about it.

You can value it, appreciate it, even marvel at it. But if money never leaves your mind, it has likely become an obsession that controls you.
The best use of money is as a tool to leverage who you are, but never to define who you are.

If you are confused about what a better life would look like, "one with more money" is an easy assumption. But that can sometimes mask deeper problems.

Money is so tangible that it is an easy goal to strive for, and pursuing it can become the path of least resistance for those who have not discovered what truly feeds their soul.

Everyone can spend money in a way that will make them happier. But there is no universal formula on how to do it.

The nice stuff that makes me happy might seem crazy to you, and vice versa.
Debates over what kind of lifestyle you should live are often just people with different personalities talking over each other.
Author Luke Burgis puts it another way: "After meeting our basic needs as creatures, we enter into the human universe of desire. And knowing what to want is much harder than knowing what to need."

In his 1907 book The Quest of the Simple Life, William Dawson writes about two groups of people:

Those who devoted their lives to money and success but still seemed miserable.

They were so obsessed with wealth that it held control over their sanity, relationships, and quality of life.
What they intended to be a strategy to live a better life often became an ideology they were beholden to, like an invisible dictator.
They wanted to have more money so that they could become happier, which led to constant anxiety, which then led to unhappiness.
It was a vicious cycle, and most of them were blind to it.

Those who lived simple lives in the country were comparatively jubilant.

A simple life might still be extravagant, with fancy homes and luxuries and toys galore.
But it is simple in the sense that money serves you, not the other way around.
The kind of lifestyle you choose to live does not matter; what matters is that you actually choose it, rather than being addicted to the mere appeal of it.

Dawson wrote that his goal was not to make a living; it was to make a life, and only a fool would sacrifice his actual life for the endless pursuit of an imaginary better one.

Many a man thinks he is buying pleasure, when he is really himself a slave to it.

All Behaviour Makes Sense With Enough Information

Most debates about what is worth spending money on are actually just people with different life experiences talking over each other.

Hence, there are no universal laws for what kind of spending will make everyone happy and fulfilled; some might even make no sense to you.
It is a sign of deep immaturity to think that because you do not value something, no one else should either. That is not how the world works.

Everyone is a product of their own unique past; they learned the way of spending from living.

In June of 1928, syndicated columnist Robert Quillen wrote a newspaper headline: "The more you were snubbed while poor, the more you enjoy displaying your wealth". After a decade of a crippling economic recession following the devastation of World War I, people seemed to justify wild, unsustainable spending to make up for being suppressed during the dour years, trying to heal an emotional wound.
Similarly, a successful businessman who grew up in an extremely poor and broken family might send his children to the most expensive school or buy the most expensive car or house as a symbol of achievement. These act like social trophies that made him feel great about the arc of his life.
On the other extreme, some may find it so difficult to spend their newfound wealth because they were poor for so long, and it was so hard, that they are afraid of going back there.
Unlike the middle-class family, the vision of the future for the very poor is often limited to the next 24 hours or sometimes to a five-minute window, like where they are going to get the next meal.
In summary, a lot of spending makes no sense until you peel back the layers of someone's personality, identifying the specific thing they are trying to accomplish, or the hole they are trying to fill.

Consensus realities are mostly the result of geography.

Two pieces of advice, both critical to understanding the art of spending money:

Do not let anyone tell you what you should or should not spend money on. There is no "right" way. You have to figure out what makes you happy and fulfilled.

No matter how you live, plenty of people - friends, family, coworkers, online trolls - are quick and eager to tell you that you are doing it wrong.

Be careful judging how other people spend their money.

It is one thing if someone does not understand the consequences of the decisions they make. They might need help and guidance. It is quite another to criticize someone's decisions only because they are different from yours.
The danger is that if I criticize how you spend money, I might convince myself that there is one right way to spend - the way I do it. But that might prevent me from being more introspective about my own decisions, or wondering if I could do better, or trying to understand my own emotions.

A healthy financial philosophy is having respect for others’ experiences, an appreciation of your own, and an understanding that all behaviour makes sense with enough information.

NOTE: A central question consistently raised across Morgan Housel's books, The Psychology of Money and Same as Ever, is: "Would I believe the same if I experienced what you have?" This question helps explain why people have diverse perceptions on various life topics, as those perceptions are heavily influenced by their past life experiences.

May I Have Your Attention Please

If you are confused about what a better life looks like, "one with more money" is an easy assumption.

But the desire for more money and the things it can buy (e.g., a nicer car or a bigger house) often obscures what you actually want: attention, respect, and admiration from other people.
However, it rarely delivers - at least not as much as expected - especially from the people whose respect and admiration you truly desire.

The reverse obituary is the cleanest, simplest way to plot out what you want in life and what truly matters. Try this: write down what you want your obituary to say, then figure out how to live up to it.

Everyone's self-written obituary will be different, but most people would want theirs to say: "You were loved, respected, and admired. You were wise, funny, smart, helpful, a good parent, a good spouse, a caring friend, or an asset to your community."
Almost no one in this exercise would think about their obituary mentioning their car's horsepower, their salary, or their home's square footage.
There is a stark disconnect here between what people want and what they aspire to.

When people struggle to gain respect and admiration through their intelligence, humour, or love, they resolve to show off the fancy stuff that they have.

Spending money on nice things might be the quickest way to get someone's attention because it is visible, public, and does not require talking to anyone.
However, the shock wears off a little each day, and a year from now, no one cares.
Worse, when most strangers notice your car, they are gawking at the car, not at you. Those close to you (e.g., family and friends), on the other hand, care much more about how kind, funny, intelligent, helpful, and loving you are.
So, spending money is probably the fastest way to get attention, but it is not durable attention, and it is probably the least effective with the people whose respect and admiration you actually desire. It is like junk food: very tempting, immediately satisfying, but long-term damaging.
The truth is that many people like Jeff Bezos and Steve Jobs are admired for reasons that have nothing to do with material possessions.

Two things that you should try to keep in mind:

Observe what actually makes you happy and maximize that.

What strikes me is that the things that make me happy with a higher income are the same things that made me happy with a much lower income: spending time with my family, doing things outdoors, and a long chat with a friend.

Show off the inside of your house, not the outside.

If you want to be proud of your success and display it with nice stuff, make it most visible to those whose respect and admiration you desire the most, and care far less about what strangers might think. Otherwise, you may stir up envy in strangers.

The Happiest People I Know

When you dream about being happier in the future, you are probably imagining yourself being content with what you have at that time (e.g., a new house or an expensive lifestyle).

However, the actual experience creates less joy than you anticipate. This is because the moment you acquire something new, you frequently jump immediately to desiring whatever else you lack.

True happiness is when you stop asking what else you need to be happy.

When you view it this way, you become eager to spend less time asking what is missing and more time enjoying what you already have - regardless of how much or how little that might be.
The key to happiness is being content with what you have, and its antidote is focusing on what you do not.
Hence, the happiest people I know are the most content - not necessarily the richest, the healthiest, the most beautiful or the most successful. This sense of contentment stems from low expectations.

All happiness in life is simply the gap between expectations and circumstances.

The person who has everything but wants even more feels poorer than the person who has little but wants nothing else.
Hence, this is not a plea to live like a monk. You can have a huge house, an expensive car, take incredible vacations. The key is realizing that happiness is the state when nothing is missing, regardless of the lifestyle you are living.

Nothing is desired as much as the thing you want but cannot have. In fact, for most people, the hierarchy of spending and desire follows a predictable pattern.

If you don’t want something and do not have it, you do not think about it.
If you want something and have it, you might feel okay.
If you want something and do not have it, you might feel motivated.
If you want something and cannot have it, you drive yourself absolutely mad.

By and large, your brain does not want nice cars or big homes; it craves dopamine rushes.

Dopamine is the chemical of desire, and it constantly demands more - more possessions, more stimulation, and more surprises.
The key is not in having the item; it is in the act of acquiring something new.
Therefore, your brain is wired to focus on the process and anticipation of getting new things.

There are two big things to keep in mind here.

People often chase the wrong emotion. They go for a buzz of happiness, which is fun but fleeting. It is better to go for contentment, which feels even better and is much more durable.

The problem with chasing happiness is that since it feels great but is short-lived, you can quickly enter something that looks like an addiction cycle.
Contentment is a prerequisite to being in the moment. You only get to live in the moment - enjoying what you have right now rather than dwelling on the past or dreaming about the future - when you have a complete absence of expectations that things would have or could have been better than they are now.

The best measure of wealth is what you have minus what you want.

Desiring less can have the same impact on your well-being as gaining more money. But it is not only more in your control; it is a game you can actually win, leading to durable contentment, instead of fleeting happiness.

Everything You Don't See

There are thirteen divorces among the ten richest men in the world. Seven of the top ten have been divorced at least once.

So much of everyone's life is invisible, especially the difficult, depressing, and miserable parts that people try to hide.
With a giant living room, you do not see how hard it is to clean or the six-figure bills required to replace something.

Most of what makes you happy in life has nothing to do with money, and realizing that after you have money can be a painful admission.

When we are poor and depressed, we may dream about a future when we have more money, believing that money will make all problems go away.
However, when the dream of a financial goal comes true, you realize you feel the same way you did before, which leads to a feeling of hopelessness.
We mistakenly think that some kind of outward success is going to change something in us, but the truth is that there are things that money cannot solve (e.g., marriage, health, friendship, well-balanced children, and meaning).

A few key things to keep in mind here:

If you are already an unhappy person, it is unlikely that more money will ever fix your problems.
When spending more money does make you happier, it is usually for indirect reasons.

A nice big house makes it easier to entertain friends and family, and spending time with those people is actually what makes you happier.
The best part of a vacation is a week of uninterrupted, work-free, email-free, commute-free time with your family.

Never focus on what money can do for you without a clear understanding of the cost of acquiring more of it.

Everyone is jealous of what you have, but no one is jealous of how you got it.

So much of a good life is about what did not happen.

While we focus too much on what is visible and easy to measure (e.g., people's homes, cars, clothes, jewellery, vacations, and toys), we fail to see the fights we did not have, the illness we avoided, the unhealthy desire you did not feel, and the unaffordable lifestyle you did not choose.

Looking back, whether you lived a good life will likely have little to do with how much money you made or spent.

What matters more than the money you make and the money you spend are the less tangible parts of life that cannot be purchased, such as marriage, family and passion.

The Most Valuable Financial Asset Is Not Needing To Impress Anyone

There are always two benchmarks to measure yourself against to determine how well you are doing in life: internal and external.

The first is how happy you are with yourself, the other is what other people think of you.
It is astounding to watch how agonizing it can be when someone focuses too much on the external benchmark.

Similarly, every decision we make when spending money falls into one of two buckets:

Are you spending money on something because it makes people think differently of you - to like you more, be more impressed with you, or maybe even be jealous of you?
Or because it actually feeds your soul and makes you happy?

The ability to not need to prove yourself to strangers is priceless.

When you do not feel the need to impress other people, your desires decrease.
When your desires fall, your satisfaction with what you already have grows.

Remember, money's highest purpose is to achieve what most people actually want.

What Makes You Happy

A weird thing is that everyone strives for a good life because they think it will make them happy. But what actually brings happiness is the contrast between what you have now and whatever you were just experiencing.

The best drink you will ever taste is a glass of tap water when you are thirsty.
The best meal you will ever eat is cheap food when you are starving.
The best sleep you will ever experience is when your newborn allows you to sneak in a quick nap.
There is no such thing as an objectively good experience - every amount of “good” is just the gap between expectations and reality. It is the distance between what you have now and what you either had or expected before. The contrast, not the amount, is what makes you happy.

A good life is everything you need and some of what you want. If you have everything you want, you appreciate none of what you have.

The anticipation of something you are saving up for, the surprise of getting something you did not expect, and the change in circumstances from one period to the next, is what makes certain purchases feel valuable. The gap between struggle and reward is a big part of what makes people happy.
Consider how you felt when you got your first paycheck from your first job. Going from not being able to buy anything to being able to buy something is an amazing feeling.
Moreover, when you are content with what you have now, an occasional treat or surprise (e.g., a surprise dinner, a hotel room upgrade) can feel incredible.

A few things to keep in mind here.

A simple life can be the most potent way to enjoy luxury items.
The power of contrast can make ordinary things feel incredible and extraordinary things feel bland.

Back in the early 1900s, when cars were new, people felt excited due to the contrast with the experience of using a horse.

When you realize how powerful expectations are, you should put as much effort into keeping them low as you do into improving your circumstances.

The Rich And The Wealthy

Let me make a distinction between rich and wealthy.

If you are rich, you have money in the bank that allows you to buy the stuff you want.
If you are wealthy, you have a level of control over what that money does to your personality, your freedom, your desires, ambitions, morals, friendships, and mental health.

Money is a powerful tool, capable of shaping people’s lives in extraordinary ways.

That statement can either be an inspiration or a curse, because here is the truth: If you don’t figure out how to use money correctly, it will use you.
It will control you. It will make you its prisoner, showing no mercy and offering no sympathy.
At every income level, some people are so controlled by money that they think they are chasing money to live a better life, but in fact money plays them like a marionette doll, pulling the strings and demanding that they chase things they may not like and aspire to things they do not even understand.

Being controlled by money is a hidden form of debt. And like all debt, it will eventually be repaid plus interest.

Entrepreneur David Siegel once built a 90,000-square-foot house in Florida. Asked why he was building such a big house, he thought about it for a moment and replied: “Because I can.”
George Washington Vanderbilt, spent six years building the 135,000-squarefoot Biltmore house - with forty master bedrooms and a full-time staff of nearly four hundred. He allegedly spent little time there because it felt more like a commercial building than a cozy home. The house nevertheless cost so much to maintain it nearly ruined Vanderbilt. Ninety percent of the land was sold off to pay tax debts, and the house was turned into a tourist attraction.

We should not blindly accept money's ability to persuade your personality and dictate how you spend your day, but to use enormous wealth as a tool to become even happier.

Beyond a basic level of necessities, it is hard for more money to make you happy if you are not already happy with who you are.

A few things to keep in mind here.

Separate what you like from what you want.

Many people like cigarettes because they feel good, but few actually want them.
I like aimlessly scrolling through social media, but I do not necessarily want to do it.

Don't be proud of your consumption. Be proud of what you have built.

The family you have built, the friends you have found, the memories you have, the wisdom you have accumulated. There are times when the stuff you buy can help produce memories and foster quality time with friends and family. But the people, not the stuff, are what are actually meaningful.

Utility VS Status

An imperfect model I use in my own life is thinking like this: If my family and I were stranded on an island with no one else around to notice us, and we could have any material goods we desired, what would we own?

In this situation, you would instantly value utility over status. You would value comfort over appearance, the right fabric more than the right logo, function more than brand, durability more than prestige, practicality more than size, a great view over a prestigious zip code, and social interaction more than social hierarchy. You would want a high-end Toyota, not an entry-level BMW.

What I find fascinating are cases when people confuse the two: utility and status.

People sometimes think they are buying something nice because it will make their life more pleasant, comfortable, interesting, or fulfilling.
But unknowingly, what they are paying for is a chance that other people will look at them, ideally in a positive light.
You wanted to show others, and know for yourself, that you own something few others can have. It makes you feel better about who you are and what you have accomplished.

Utility being hijacked by the pursuit of status is so common in everyday life.

Think about the burden of maintaining a house that is bigger than you need, or the stress you feel from buying a nice car you can barely afford.
However, the pursuit of status can be dangerous in a world where people are so different - different in tastes, goals and skills.
Plus, there is a decent chance that no one is thinking about you at all.

A few things to keep in mind here.

Buying things for their utility gives you the ability to express your own identity, while chasing status often makes you conform to others' identity.
The pleasure you get from utility can be more durable than pleasure gained from status.

Risk And Regret

Actor David Cassidy's last words were "So much wasted time".

What a terrible thing to realize when it is too late.
Will this become more common as many of us spend our days aimlessly scrolling social media?

One of the biggest conflicts when managing money is finding the delicate balance between the two most powerful forces in the world:

Compound interest, which turns patience today into fortunes tomorrow.
The fact that you are one day closer to death than you were yesterday, so make the most of your short time here and enjoy every day you are lucky enough to be alive.

The struggle is knowing how much you should invest for the future versus spend today.

Because no one knows exactly how much time we have left to live, the world is split evenly between those who do not know when to start spending money and those who do not know when to stop.
On one end of the spectrum, you have the FIRE (Financial Independence, Retire Early) movement, which promotes extreme savings and an almost pathological devotion to frugality.
On the other end is the YOLO crowd, which pumps day trading, bankrupt penny stocks, and crypto memecoins to become rich as soon as possible, with a sneering disdain for those investing for long-term stock market appreciation.

When dealing with money, the real risk is the regret that might come years or decades later.

As a father, the idea of being on my deathbed looking back with regret at a life of missed opportunities - the vacations I could have taken, the cars I could have purchased - is terrifying. Conversely, there is the relief and pride for the material sacrifices we made if we die young.
Good advice is never as simple as saying "Live for today" or "Save for the future". The only good advice is "Minimize future regret".
Attempt to minimize your regrets with an understanding that different people will regret different things, and you yourself will regret different things as you age.

A few things to keep in mind here.

Good memories are the closest thing to living for today while compounding for tomorrow.

The purpose of life is to experience things for which you will later experience nostalgia.

Saving for the future creates independence today.

Once you view savings as providing the benefit of independence, you stop viewing saving for tomorrow as sacrificing today.
Savings has given me independence that allows me a degree of doing what I want, when I want, with whom I want, that makes today - right now - better than it would have been if I had saved less in the past.

Look At Them

Jealousy is such a powerful thing. It is difficult to appreciate what you have and what you have accomplished, because beyond a basic level of necessities, what you often want is to place yourself in a higher ring of the social hierarchy.

A lot of life is a competition for resources - for money, time, mates, attention, friends, land - where what matters is not how good you are, but how good you are relative to other people.

For many, the question of whether your home is big enough is actually “Is my home bigger than my neighbour’s?

Yet, you often crave most whatever someone else has but you do not.

In the art of spending money, there is a fine line between being motivated by what others have and you do not (potentially good) and being envious of what they have and you want (mental torture).

We all look around at others, potentially jealous of what they have, and set our spending desires accordingly.
Today, everyone is effectively your neighbour, where social media turns envy and comparison into an Olympic sport.

A few things to keep in mind here.

It is nearly impossible to "win" the status game. What is unique and enviable in one period becomes common and bland in the next.

What lower-income groups will aspire to spend their money in the future, look at what higher-income groups exclusively do today.
European vacations, investing, two-car households and retirement are no longer exclusive to the rich.

Being jealous of what others have and assuming your life would be better if you were like them is misleading because you are not getting a full picture of their lives.

If I want what you have, I overlook that you want what someone else has and therefore you feel exactly like I do. And that someone else wants something another person has, on and on, like one continuous chain of social envy.

Being jealous of what others have is outsourcing your critical thinking to others.

Envy is inversely correlated with self-examination. The less you know yourself, the more you look to others to get an idea of your worth. But the more you delve into who you are, the less you seek from others, and the dissolution of envy begins.

FOMO - the fear of missing out - is one of the most dangerous financial reactions that exists.

You see someone with something you want and lose all inhibition to get it.

Your propensity to be jealous of what others have can increase as you become wealthier.

If you cannot afford rent or food, the desire for more money is existential, and has a very clear objective and finish line. But if you are already financially comfortable, the desire for more money is mostly about status, which has no upper limit and is insatiable.
Sometimes, I think the most status-starved and money-hungry people are rich celebrities because their social comparison group are ultra-rich mega-celebrities.

Be careful who you socialize with.

You are a reflection of the three or four people you socialize with the most.
If your friends have expensive tastes, your expectations converge on that lifestyle.

Wealth Without Independence Is A Unique Form of Poverty

The people I look up to the most are not necessarily the richest or most successful.

Almost always, they are the freest, the most in control of their own lives.
Independence is the true wealth.

Money you have not spent buys something intangible but valuable: freedom, independence, and being able to spend time in your own way.

Every dollar of savings buys a claim check on the future. And every dollar of debt you hold is a piece of your future that someone else controls.
I have always been a big saver. But I have never viewed my savings as idle money or as saving for a purchase in the future. Instead, every cent of savings serves as a ticket toward a greater degree of financial independence, which is my true goal.

Financial independence is not black or white. It exists on a spectrum.

A every point on the spectrum - every additional dollar of savings - you move up a little bit, and your life can improve a little more.

Social Debt

When how you spend your money influences what people think of you in unwanted ways.

It is often a hidden form of debt, which makes it especially dangerous.
Sometimes it is people being envious of you.
Sometimes it is you suddenly feeling superior to people whose company you used to enjoy.
It can even be your own higher expectations that come from inflating your lifestyle.
There are some purchases for which every dollar you spend changes how the rest of the world thinks of you, and what you think of yourself, in ways you might come to regret.

An important topic in pharmacology is called the Arndt-Schulz rule, which states that "for every substance, small doses stimulate, moderate doses inhibit, large dose kill".

Similarly, money has a tipping point where it stops bring pleasure, but becomes a social liability.
Lottery winners often quickly become overwhelmed - even bankrupt - by social debt. The minute people learn how much money they have, friends, family, and strangers feel entitled to ask, beg, and steal in a way that leaves the winners not only broke but socially exploited.
The more your identity becomes attached to your physical possessions, the more other people’s thoughts about you influence your spending decisions, and the more eager you are to constantly wow those people with something newer, bigger, better, and more expensive.
Another way social debt creeps into your life is your own expectations. After buying a new, bigger house, you wanted a nicer house to socially compete with other people who had nice houses.

The best position to be in is rich and anonymous.

Quiet Compounding

Every few years, there is a story of a country bumpkin who has no education and a low-wage job but manages to save and compound tens of millions of dollars.

They just quietly saved and invested for decades. They never bragged, never flaunted, never compared themselves to others or worried whether their investments trailed their benchmark last year.
Their entire financial universe - their thoughts, their goals, their beliefs - was contained to the walls of their home, which allowed them to play their own game and be guided by nothing other than their own desires.

On the other hand, people become so nervous about what other people think of their lifestyle and investing decisions that they end up doing two things: Performing for others, and copying a strategy that might work for someone else but is not right for them.

Quiet compounding means a few things.

An emphasis on internal versus external benchmarks.
An acceptance of how different people are, and a realization that what works for me might not work for you and vice versa.
A focus on personal independence over social dunking.
A realization that quick wealth is fragile wealth.

Money that comes easily tends to be spent easily.
The quicker the wealth was made, the higher the odds it came from luck that will revert just as fast.

An appreciation that the fastest way to get rich is to go slow.

When you stop performing for others, your attention naturally peers further out into the future, as you ask how to create a better life instead of seeking more attention.
You are never in a rush, never impatient, rarely worried or influenced by others doing things differently. You know that longevity and the ability to keep something going for the longest period of time is the true magic of finance.

Identity

One of the most common ways that money stops being a tool, and becomes a master, is when your financial goals and beliefs become part of your identity.

"I am a saver"

A lot of financial planners will tell you that one of their biggest challenges is getting clients to spend money in retirement, even an appropriate, conservative amount of money.
Frugality and saving become such a big part of some people's identity that they can never switch gears, even though they intended to save enough money so that they could stop thinking about it and focus on other stuff.

"Value investor", "trader" and "tech investor" in investing

The labels seem harmless, but once you label yourself you have formed an identity that can prevent you from seeing the big picture, finding other opportunities, or changing your mind when you need to.

"I am a rich person"
"I am a poor person"
"I always buy this, I always buy that"

A couple things to keep in mind to prevent your money from infiltrating your identity in a harmful way.

Value the ability to change your mind, change your lifestyle, alter your spending, and try something new.

A belief is not dangerous until it turns absolute.

Recognize what true independent thinking looks like.

The best definition of independent thinking is when your beliefs on one topic cannot be predicted from your beliefs on another topic.

Try Something New

Spending money is an area of life where you want a wide funnel and tight filter.

Within the confines of your budget, experiment with as many types of spending as you can, cutting quickly and without mercy the things that are not working for you.
To illustrate, if you only pick up books that you know with certainty that you are going to enjoy - reading the same authors, the same genres, or the same topics - you are missing out on so many potentially life-changing books that you never realized you might have enjoyed. At the same time, you should have a ruthless filter, where you feel no shame or guilt for failing to finish a book that you do not find interesting after the first few pages.

There are so many different ways to spend money that are right for one person but crazy for another, such as food, travel, clothes, sporting events and experiences.

It is impossible to know what you are going to like until you try it, so you have to try everything.
Then, you reject what does not bring you joy until you find the odd things that does.
After you cut the other stuff that brings you no joy, you will likely to have enough money to actually spend on what makes you happy.

A few points are critical to understand in this endeavour to find your "thing".

If you cannot find your “thing,” there is a good chance that money has entrapped you, controlling your personality, and you are either addicted to saving money or ignorant of its potential, becoming unable to use it as a tool to provide joy in your life.
It is common for people to default to whatever society tells them they should like.

Premium prices are often found on branded products, and the purpose of a brand is not to signal consistency, not quality.

Learning what to quickly say no to can be more important than what to buy.
Trying new things creates variety in life, which is a value all of its own.

Monotony makes time speed up, variety makes it slow. So it is with spending money.

Your Money And Your Kids

One of the most treacherous topics with kids and money is how you, as a parent, use your money to help them without spoiling them.

The two options for the rich when giving money to their children: ruin their ambition with inheritance, or risk some form of strife by denying them an easy life.

It is particularly dangerous for you, as a parent, to live one lifestyle, while you demand your kids live a different, more modest one.

As a parent you may have good intention for wanting to make your kids live a comparatively humble existence: to teach them virtue, hard work and respect. But your risk teaching them something completely different, which is resentment.
To take an extreme example: If you fly first-class while making your kids fly in coach, the message you intend to send them is “Work as hard as I have and you may get this one day.” But the message they may hear is “I am more worthy than you and enjoy watching you squirm."
“You haven’t earned what I have” can be a less effective message than “Let me teach you the value of hard work by doing it together.” Lead by example, not by humiliation.

Another point here about picking your lifestyle carefully is the extent you, as a parent, set your children’s lifestyle expectations when they are young.

Will they in fact pick a career they don’t enjoy but that pays well because they feel pressure to at least match the lifestyle they grew up with?
Does my desire to give my kids a good material life today set them up for disappointment down the road if they cannot afford the same lifestyle they grew up with?
Generational growth - the feeling that you have matched or exceeded the life built by your parents - is an important part of most people’s wellbeing.

The most important financial advice I can give to my kids is that money alone would not provide the thing that they and almost everyone want most in life.

No amount of money can compensate for a lack of character, honesty, and genuine empathy toward others.

A few other things about money and kids I have always found important.

Warren Buffett say it is good to have people in your life who you do not want to disappoint.
Your kids are paying attention.
What do you want them to pay attention to?

When you realize kids are always paying attention, you realize that every moment is an opportunity to lead by example.

Remember what they'll remember you by.

Kids may want your money, but what they’ll come to value - and remember you by - are the deeper values that money cannot buy.

Spreadsheets Don't Care About Your Feelings

In a perfect world, the decision to buy a home (or any life-changing decision) would be a calm analysis made on a spreadsheet.

In reality, you walk through a for-sale house and start to imagine where furniture will go and dream about barbecues with your friends.
Sometimes, those feelings are the most important part of a big financial decision.

Managing money becomes easier when you come to terms with how emotional it can be.

Instead of a math problem to solve, you view it as an emotional problem to fulfill, within the confines of some budgetary boundaries.
After all, the subjective emotional part knows what you want better than the rational part of your brain or a spreadsheet ever could.

The Finer Things

The small, easy-to-ignore expenses add up to be so profound over time that they overwhelm the large, obvious costs you pay attention to.

The cost of smoking cigarettes is the price of a pack plus the long-term cost of medical care associated with the habit.
Hence, building a long-term fortune has less to do with big, brilliant decisions and more to do with small, consistent decisions compounded over a long period of time.

However, the amount of attention a problem gets is the inverse of its importance.

Too many people ask $3 questions (can I afford this latte?) when all that matters to financial success are $30,000 questions (what college should I go to?).
Focusing on small budget items makes you feel like you are being responsible, taking action, and making progress. However, we often give zero attention to (and are irresponsible with) much larger purchases, like college, a home, a car, healthcare, and childcare.

Hence, a lot of doing well with money is understanding the barbell approach to good behaviour:

Save like a pessimist and invest like an optimist.
Expect the worst, hope for the best.
Live for today, prepare for tomorrow.
It is very difficult to grow wealth without caring about smaller expenses, but it is almost impossible to build wealth without controlling your biggest expenses.

The Life Cycle Of Greed And Fear

Greed and fear control so much in life, and are the root cause of most money mistakes, regrets and embarrassments.

Spending money often requires optimism; saving often requires pessimism.
At one level, both of those emotions are not only OK, they are necessary and useful.
At another level, they backfire and turn into dangerous liabilities. You often only know when you have crossed the line when it’s too late.
So much of success in life is finding the delicate balance of when optimism turns into greed and pessimism turns into fear.

There is a natural cycle that causes innocent optimism to evolve into greed, which turns into denial, then confusion, then, eventually, fear. It often drops you off where you began, with the lesson you think you learned from experiencing fear setting up your next rendezvous with greed.

Innocent Optimism → Greed

The cycle begins with the most innocent idea: that you deserve to be right, due to the past hard work.
With good decisions, you should be rewarded with recognition, attention, admiration and pay raises.
When you are being rewarded for being right, you fall into the trap of delusion, assuming your action alone caused the success (overestimating skill and contributions, but underestimating external variables like luck). This desire for more reward - driven by social comparison and the addictive feeling of being right - causes you to double down on the same actions, often with leverage or excess, leading to Greed.

Greed Backfires → Denial

Greed causes you to double down on unsustainable actions or strategies, often missing crucial feedback from the world. When reality inevitably creeps in and the strategy stops working, the initial reaction is not self-doubt, but a belief that the world is offering a new opportunity.
You stick to your guns, convinced the strategy will still pay off. You cut off those who criticize you and may double down again with more confidence, instead of updating your approach.
With increasing failures, you begin to see yourself as a victim, blaming others (friends, bosses, the media) rather than admitting your own contribution and skill was overestimated. At this peak of denial, you may reduce risk without abandoning your core (and flawed) view, carrying on with less enthusiasm but still believing your initial idea was right, just pushed too far.

Denial Fails → Confusion

After repeated failures and a forced reduction in lifestyle (selling assets, cancelling plans), the consequences of being wrong become undeniable. The pain of admitting failure is immense, leading to a period of cognitive adjustment.
You begin to wonder if your views were merely incomplete, signalling to others that you're "learning a lot" or having a "growth experience" rather than admitting you were flat-out wrong. This is a painful transition where you start to question your core competence.

Confusion → Fear

The eventual acceptance of being wrong - especially under public scrutiny and embarrassment - causes the little self-doubt you had to cascade into full-blown panic.
Your mindset shifts entirely to damage control. You avoid getting feedback and become stuck in a doom loop of doubt, believing there is nothing you can do to influence a positive outcome. You are now just as blind to opportunity as you were to risk during the peak of greed.

The Return

Eventually, the panic subsides, and you find stability. The pain of the fear makes you vow never to repeat the mistake. You develop a new worldview based on the painful lessons learned, becoming convinced that now you deserve to be right.
This renewed conviction - that your new, hard-won views are correct and deserve to be rewarded - brings the cycle back to innocent optimism, ready to start all over again.

How To Be Miserable Spending Your Money

A brief guide to bad decisions that will make you miserable.

Direct your gaze at the socioeconomic group just above you, assuming that within it you will find a level of durable happiness.

Tell yourself that you’ll be satisfied once you make just a little more money, have a little bit nicer home, and can spend just a little bit more than you do now.
Ignore the fact that the group you’re in now used to be a dream that you thought would bring you contentment and happiness.

Pursue status at the expense of independence.

Assume that happiness relies on masses of strangers being impressed by the material possessions you own rather than the hidden magic of you owning your own time.

Let money - the making of it, the spending of it, the accumulation of it - become a core part of your identity.

Spend more time thinking about money than the life you have built with that money.

Spend so much of your income that you become completely reliant on the decisions of other people, like bosses and bankers, many of whom couldn’t care less about you.
Fantasize that having more money is the solution to all your problems (e.g. happiness, respect, relationships).
Assume money can solve none of your problems, and that it is the root of evil and ego.
Have such a fierce saving ideology that you are never able to treat yourself to a good life you can afford.
When taking stock of your own life, assume that all your success is due to hard work and all your failure is due to bad luck.

When judging others, assume all failure is due to bad decisions and all success was due to luck.
Place ego over empathy. This is the surest way to become detached from the reality of what you can and cannot control in life.

Compare your inside with other people’s outside, envying others’ success without having a full picture of their lives.

Assume that other people’s cars, homes, clothes, jewellery, and social media accounts are an accurate reflection of how happy they are.
Tell yourself that because they have nice toys they must also have good relationships, good health, moral clarity, emotional intelligence, and overall life satisfaction.

Ignore the hidden social, emotional, and expectations costs that come from certain purchases.

Ignore what some purchases will do to other people’s impression of you.
Forget that you may have created a higher bar you’ll need to exceed during the next purchase, which is a hidden form of debt.

Have no sense of your own tendency to regret.

Become so wrapped up in the bubble of the current moment, or so fixated on the long run, that you eventually look back at your life and wonder what the hell you were thinking.

Associate net worth with self-worth (for you and others).

Think of money as the ultimate scorecard for how well people have done in life - and, worse, assume that their material appearance is an accurate indication of how much money they actually have.

Treat all financial decisions as math decisions with no appreciation for reasonable emotion, sentimental value, and desire to feed your soul.

Become more interested in making the spreadsheets happy than making yourself happy.

Be persuaded by the advice and lifestyle of those who need or want something you don’t.

Want what society says that you should want. Desire what the marketers say you should desire. Look to other people, including strangers, for answers on what’s best for you. Have no appreciation for the vast spectrum of people’s needs, wants, and desires.

Anchor your lifestyle expectations to the most successful people you know, creating a mindset where even exceptional success in your own life feels inadequate.
Become so optimistic that your expectations grow faster than income.

Live in a world where things get better but you appreciate none of it because you expected all of it, and more.

Risk what you need in order to gain what you don’t need.

Risk relationships with your family and friends for the potential of a raise that will have little impact on your life, or risk how well you sleep at night for a new car that no one will pay attention to.

Overestimate the attention you get from having nice stuff, and assume the attention you do get is a reflection of people admiring you versus them fantasizing about having what you have for themselves.
Assume you have all the right answers.

Try nothing new. Reject the mystery of life, and fight against all inclinations you have to grow, adapt, and change your mind.

The Luckier You Are, The Nicer You Should Be

There are two reasons to be kind to everyone.

Morally, you should do it because you are empathetic.
Selfishly, you should do it because it is easy to underestimate how many people you may eventually rely on to help you, and you will only gain their cooperation if you remain in their good graces.

Summary

In school, finance is taught as a science, with clear formulas and logical conclusions. But in the real world, money is art.

Most of us do not know how to spend money well. Instead, we somehow figure out how to chase things that impress others or save endlessly while living a poor life. We confuse admiration with envy, comfort with excess, and utility with status.
The Art of Spending Money is not about getting rich, but explores how to get the most out of what you already have and learn to want what's worth wanting.

However, as you read The Art of Spending Money, you may feel you are reading a detailed sequel that simply complements and expands upon the core ideas already presented in The Psychology of Money.

Perhaps it is best viewed as Morgan Housel’s personal "how-to guide" on his spending philosophy.

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