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Personal finance: How to save, spend, and think rationally about money | Big Think - YouTube
Channel: Big Think
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VICKI ROBIN: I was leading a session on a
relationship with money.
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I just was curious about where people were
with this at this point.
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This was in 2016.
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We had 50 people in the room.
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We circled up and we went around the room,
just say something about your relationship
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with money.
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And I realized every person in that room was
in fear about money.
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From the 80 year old who I know has millions
of dollars to the 20 year old who's like already
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$20,000 in debt.
[40]
And it just, honestly it infuriated me like
what kind of society requires that everybody
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participate in something that terrifies them.
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This feels so amiss to me.
[54]
DANIEL KAHNEMAN: People are not fully rational
and they make many choices that if they reflected
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upon them they would do differently.
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There's no question about that.
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The major tendency is people tend to frame
things very narrowly.
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They take a narrow view of decision making.
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They look at the problem at hand and they
deal with it as if it were the only problem.
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Very frequently it's a better idea to look
at problems as they will recur throughout
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your life and then you look at the policy
that you're to adopt for a class of problems.
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Difficult to do would be a better thing.
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People frame things narrowly in the sense,
for example, that they will save and borrow
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at the same time instead of somehow treating
their whole portfolio of assets as one thing.
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If people were able to take a broader view
they would in general make better decisions.
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So that is certainly one of the weaknesses
of human decision making.
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We call it narrow framing.
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Four layers of financial independence
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ROBIN: First of all, I'd like to distinguish
between independence and freedom.
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So, financial freedom is like freeing your
mind.
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Financial freedom is understanding that I'm
me and there's an economy out there and I
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have a relationship with it but it doesn't
run my life.
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It's freeing my mind from the messages of
the consumer culture, the messages of the
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economy.
[150]
The messages that a house is a starter house.
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No, that's my house.
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I could die in my house.
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It's like there's so many presumptions that
drive us into waste slavery, debt, and it
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doesn't matter whether you are at the low
end or the high end.
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If you are engaged in that sort of anxious
process of more, more, more, you are not free.
[174]
So the first layer of financial independence
I talk about is this freedom of the mind.
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This freeing your mind.
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Of saying like I am sovereign.
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The economy is secondary.
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I will move my sovereign self into the economy
for my own purposes rather than I am a schlump,
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the economy is my mega-boss and I don't know,
my boss seems to be as big as the sky and
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so I will just let my life be run by my boss
and the tax system and I'm just going to let
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myself be run by this thing.
[209]
No.
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So you are sovereign beings so that's your
first layer of financial independence is your
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own sovereignty.
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And then the second layer is to get out of
debt.
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And for some people debt feels endless.
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And the first step to getting out of debt
is stop going into debt.
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There's many people who have written to us
who flatten their debt in a couple of years.
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Impossible debt.
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Debt that was going to be endless.
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They would die with this debt.
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And once they see what the debt is doing to
them in terms of the actual opportunities,
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the future opportunities of their lives, that's
the sort of link that we try to get people
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to make so that something in the future is
more important than the immediate pleasure
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of buying one more tchotchke that you're never
going to use.
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And the third level really is to get those
six months of savings in liquid assets whether
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it's bank accounts.
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Someplace where you can actually within 24-48
hours you could realize that money.
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So that you have an emergency fund.
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So that you are not tumbled back into debt
as soon as something happens amiss.
[273]
You lose a job which, you know, many people
now feel that even their very, very important
[280]
and significant jobs are precarious.
[283]
So you want to get out of the zone of precariousness
and part of how you get out of that precariousness
[291]
is savings.
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And then over time the next layer of financial
independence is you start to see that surplus
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savings can be invested in such a way that
it throws off an income.
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And over time if you become a systematic and
sometimes obsessive saver – and you can
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see, you could chart it.
[311]
You can watch your passive income grow knowing
money is your life energy, you track everything
[318]
you buy.
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And an easy way to do it if you don't like
writing in a little notebook every time you
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do a transaction is just use your debit card.
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I said debit, not credit.
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You use your debit card and your bank has
a complete record of all your purchases.
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Every month you take a look at your purchases,
you sort out in categories that apply to your
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lifestyle.
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You just look at that and you kind of tell
yourself the truth about whether spending
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your life energy in that way makes a difference.
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Understanding finance and keeping emotions
controlled
[347]
KAHNEMAN: You need to be numerate for certain
kinds of decisions so numerate people have
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a significant advantage over those who are
not.
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Understanding compound interest makes a huge
difference whether you're a credit card borrower
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or somebody with savings.
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People have a very hazy idea of compound interest
and it's very detrimental so I would say that
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first of all you need to be numerate but many
people are.
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Then you need to frame things broadly.
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I mean it frequently goes with numeracy but
it's not quite the same thing.
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By taking the broad view it is very important
not to have overly strong emotional reactions
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to events.
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And what I mean by that is that most of us
tend to respond to gains and to losses, to
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changes that happen in our life.
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Actually you're better off if you frame things
broadly and you think of you win a few, you
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lose a few, and you have very limited emotional
response to small gains and to small losses.
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Money can buy happiness — if you spend it
right
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ROBIN: There's so many ways in which we project
onto money the ability to not only make us
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happy but to make us better or better than
other people or safe or so many deep, gut
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level emotional feelings are playing themselves
out in our relationship with money.
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MICHAEL NORTON: We want more money and we
want more happiness so maybe if we get more
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money we'll get more happiness.
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And it turns out that the relationship is
really a lot more complicated than that.
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It's not too surprising to say that money
can't buy you happiness.
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We've heard that phrase a lot, but that doesn't
help us understand then what kind of spending
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will actually make us happy and what kind
won't.
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ROBIN: So we've got a certain limited time
on the planet.
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We're going to spend a third of it sleeping.
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We're going to spend another third of it commuting
and showering and sitting at a desk and doing
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somebody else's bidding.
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That's not a lot of life.
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So you think I've got a third, I have a third
of my waking hours are mine to do whatever
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I want.
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Who am I?
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It's like it then sends it into an existential
question.
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Who am I?
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What do I care about?
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What do I want the impact of my actions to
be?
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What do I want to learn?
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What do I want to understand?
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What do I want to feel, taste, touch?
[507]
What do I want in what Mary Oliver calls my
one wild and precious life.
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NORTON: What we tend to find when we look
at the data is that the biggest category of
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things that people spend on is stuff for themselves.
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Of course we need to pay rent or our mortgage.
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We need to have a car.
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We need to have food and clothes, but it seems
as though people are spending an inordinate
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amount of their money on stuff for themselves.
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And the biggest problem from out standpoint
as psychologists is the percent of money that
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you spend on stuff for yourself is completely
uncorrelated with how happy you are with your
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life.
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It doesn't make you unhappy.
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It's not like if you buy a lot of stuff you're
miserable which sometimes we think is the
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case.
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It's just the case that it's flat.
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No matter how much it seems you buy for yourself,
nothing really seems to happen.
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ROBIN: Once people start to pay attention
to the flow of money and stuff in their lives
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in this way their consumption drops by about
20-25 percent naturally because that's the
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amount of unconsciousness that you have in
your spending.
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So, when you become conscious that falls away
and many people say they don't even know what
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they used to spend their money on.
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They just oh, surprise.
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I'm spending less.
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I don't know how that happened.
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I just paid attention.
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I just asked myself is this purchase of something
making me happy.
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NORTON: When you focus on other people you
sort of reverse the arrow from me to you,
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it seems that on average when people give
to others which can be giving to charity,
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it can be treating a friend to lunch.
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It can be buying people gifts.
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Those actions of giving rather than keeping
seem to be associated with more happiness.
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But another opposite of stuff for yourself
is to think about changing, you can still
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spend on yourself but change from stuff to
something else.
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And lots of research over the last decade
has shown that on average when people buy
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experiences it tends to pay off in more happiness
than buying stuff for themselves.
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Often when we buy stuff for ourselves we end
up by ourselves with our stuff.
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Think of yourself on your phone playing a
videogame, whatever else it might be.
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You're often alone with your stuff.
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Whereas experiences yes, we do some experiences
solo, but many, many experiences have built
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into them that they're social.
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If we go out to dinner or go see a movie or
go on a hike, whatever else it might be, now
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we're with other people.
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It turns out that talking to other people
makes us happy.
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Even casual interactions with other people
make us happier than sitting by ourselves
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in a room.
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Teaching children about money
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BRUCE FEILER: Eighty percent of children,
eight zero, get to college having never had
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a conversation with their parents about money.
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Where it comes from, how it's earned, how
it's spent, what debt is.
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You can't just give your kids, launch them
into their lives without giving them the tools.
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So I went to what I thought would be the smartest
people to talk to about this – Warren Buffett's
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bankers.
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They advise the wealthiest families in the
country and I thought they must know more.
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They can help my family.
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It turns out that these wealthy families are
making even more mistakes and I walked away
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from this conversation with a number of takeaways.
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Takeaway number one – show them the money.
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It's incredibly important to talk to children
about money at an age appropriate level, but
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you need to talk.
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Buffett's banker said to me, ""I spoke to
the richest woman in America and she said
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it's a burden if I tell my children how much
money they have.""
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And he said, ""It's much more of a burden
to burden them with ignorance than to burden
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them with the truth.""
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Number two, actually try to limit the influence
of money.
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After doing all this research in our home,
we have chores, we have allowance.
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We do not overlap the two.
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Because if you do it turns out the kids will
do the chores just for the money.
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You get an allowance as part of being a member
of our family, but sorry, someone's got to
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put the dishes in the dishwasher, someone's
got to make their bed.
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You're part of the team, you have to take
care of yourself.
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And the last thing is let them make mistakes.
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Buffett's banker chided me when I told him
we were kind of forcing our kids to put their
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money into different pots – spend, save,
give away, et cetera.
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He said, ""Let them decide for themselves.""
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And I said, ""But what if they make a mistake?
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What if they want to buy something and they've
spent all their money on candy?
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What if they drive into a ditch?""
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And his answer was one of my favorite quotes
in ""The Secrets of Happy Families.""
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He said, ""It's much better to make a mistake
with a six dollar allowance than a $60,000
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a year salary or a $6 million inheritance.""
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The point is when the kids are young, when
the stakes are lower, let them make their
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own mistakes.
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Then you're there to pick them up.
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You don't want to get that call when they're
24 and suddenly they're in debt and they've
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made bad decisions and they're really in a
hole.
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The new road map
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ROBIN: There's several ways to expand markets.
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One is you export and another is to educate
your citizens to want more than they need.
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And then you've got an infinite way to, you've
got an infinite market called the endless
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willingness of people to buy into the story
of more is better and keep buying stuff.
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So that is the old roadmap.
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Growth is good, more is better, game over.
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The new roadmap says that there is something
called enough and enough is not sort of like
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this oppressive ceiling that okay, I've got
enough and I can't have anymore.
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No, enough is this sort of vibrant vital place.
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What we teach is an awareness about the flow
of money and stuff in your life in light of
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your true happiness and your sense of purpose
and values.
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And that you're enough point, having enough,
is having everything you want and need to
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have a life you love and full self-expression
with nothing in excess.
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It's not minimalism, it's not less is more
because sometimes more is more.
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But it's that sweet spot.
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It's the Goldilocks point.
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And so enough for me is like one of the absolute
fulcrums between the old roadmap for money
[862]
and the new roadmap for money.
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