Why Nobody Can Manage Money

On a hot summer afternoon in the state of Arizona, a woman named Ally goes to the store to pick up some groceries. Her bank account has as much money as a sweltering desert has water. Ally is poor. She works 60 to 80 hours a week just to survive. In the supermarket, Ally is alert, scanning the aisles for cost effective deals. After paying for her items, Ally loads the groceries in the trunk of her car, drinks some cold ice water to quench her thirst in the arid Arizonian heat, and blasts the car AC on her drive home.

Upon arriving home, Ally breathes a sigh of relief. She has escaped the heat of the unmerciful sun for the day. Having little free time, she promptly puts her groceries away and turns the television on to check the weather forecast for the following week. Once the news segment is done, Ally goes to the kitchen and whips up a delightful meal – Kraft’s Mac & Cheese. Indeed, this is the poor man’s caviar. It’s cheap and easy to make. Heat water in a pot until the bubbles bubble briskly. Pour the dry, hard pasta into the sizzling water. Drain the pasta. Pour the moist, mouth-watering pasta back into the pot. Mix half a stick of salted butter, a bit of delicious milk, and the bright orange powdered cheese with the pasta. In less than half an hour, a perfect meal for a poor person has been created.

While she eats the meal, Ally vaguely hears seven numbers: 2, 8, 55, 20, 10, 7, and 100 million. Bewildered, Ally goes to her bedroom and searches for a small piece of paper. Those numbers sound awfully familiar to her. She grabs the paper and reads the numbers: 2, 8, 55, 20, 10, 7. Ally’s feet are lifted off the ground. Her body floats higher and higher until she reaches the shining white clouds. She dances elegantly like a ballerina, beautifully tip-toeing on the soft puffs of mist. After the brief celebration, her body comes back down to Earth.

She drives to a lottery office to claim her huge prize. She is asked two questions. Would she like to claim her prize anonymously? Does she want to receive annuity payments or the lump sum? She states that she would like to remain anonymous. This is allowed in Arizona if the prize is over $100,000. That choice is easy. However, upon hearing the second question, her heart palpitates with pronounced pressure. Anxiety-stricken, Ally doesn’t know which to choose. This is, after all, a once in a lifetime decision – literally. Flashes begin to appear in her mind, each with a memory of her childhood. She recounts her parents’ piss poor ability to handle money. There were days that she didn’t eat dinner as a child. Failing to trust herself, Ally decides to receive the yearly installment of the $100,000,000.

Did she make the right choice? Many people would answer in the affirmative, while others would answer in opposition. We all have our concepts about how money ought to be managed. However, is there a “right” way to handle money? If so, how should it be managed? In his book, The Psychology of Money (2020), former columnist Morgan Housel argued that the right way to manage money is nonexistent. He proposes the idea that money is linked more closely to psychology than it is to economics or finance. By itself, money is simply a medium of exchange. However, in the hands of humans, money is enmeshed with the irrationalities of the human psyche. While we humans love to feign rationality, we make most of our decisions based on emotions. We all have different schemas of how the world works.

The Psychology of Money is not a book with a single plot. Rather, it’s a book with an introduction and 20 short stories. Each story has a lesson. By no means is the book extensive. Housel decided to write short, concise snippets as opposed to an elaborate, drawn-out explanation.

The first lesson of The Psychology of Money is “No One’s Crazy.” Despite the mind-boggling ways in which people use their money, Housel argues that everyone is sane. Your experiences involving money account for over three quarters of your beliefs about money yet are only a minuscule fraction of everything that’s been experienced by humans. You look at money through a different lens than your neighbors, co-workers, boss, family members, friends, and everyone else. Perhaps you believe that Ally’s decision was smart, or maybe you think it was foolish.

The following year, another lottery contestant named James wins the Arizona jackpot. His prize is $41,000,000. Like Ally, James claims the prize anonymously. However, unlike Ally, James takes the lump sum. He’d likely think that Ally has a few loose nuts and bolts. Her life could end at any moment. Also, fixed equal payments don’t account for inflation. James claims his lump sum and puts the money in real estate, stocks, bonds, and mutual funds. When James was a child, his wealthy father had him sit in board meetings with accountants, lawyers, executives, and other high-level professionals. He absorbed critical concepts and terminology through osmosis.

A few months after James wins, a woman named Tammy wins the Arizona lottery. Her prize is $303,000,000. Like Ally, Tammy grew up poor. In contrast to both Ally and James, Tammy decides to reveal her identity and goes on the news. She takes the lump sum. Showing off, she is seen in many Arizona news segments by millions of people. She enjoys the attention. As soon as she receives her sum, she quits her job, buys a multitude of mansions, travels the world on first-class flights, meets new people, and parties almost every day like there’s no tomorrow. “You only live once,” she says. She’s not wrong. She tells all her friends and family and rubs her victory in the faces of her enemies. She’d call James a bore and Ally a prude. “Money is meant to be spent. Live your lives for God’s sake!”

Is Tammy wrong? You live only once. I assume you want to enjoy your life. Nobody wants to dread waking up every morning. Housel would say that it’s impossible to determine if Ally, James, or Tammy are “more right” than the other two. Again, Housel would emphasize, one’s money is really a reflection of one’s psyche as opposed to cold, mathematical logic. The human mind is complex. If so, there cannot possibly be a set way to use money.

Another lesson in Housel’s book is titled “You’ll Change.” The premise of the lesson is that people’s desires change over time, making long-term financial planning even more difficult than most people believe. In the chapter, Housel talks about a childhood friend who wanted to grow up to become a doctor. Lacking natural intellect, the friend worked tenaciously until he became a doctor. After a few years, Housel met with the friend, finding out that the friend was burnt out and hated his life. The stress of being a doctor got to him. From this, Housel learns that humans are poor forecasters of their future selves.

This lesson also applies to money. You think you’ll know what you want for the rest of your life, but you really don’t. Perhaps Ally will want to start a business. Maybe Tammy will get tired of her fast-paced, hedonistic lifestyle. They, along with many other people who win the lottery, are bound to have regrets. The proclivity towards living in the moment is greater for young people than it is for older people. Young people are vital, while older people are beginning to decline. There’s nothing wrong with having fun with money, just make sure you take the future into account. Like a small spider, time will sneak up on you.

There’s no need to be “coldly rational” with money, as Housel phrases it. You just need to be, for the most part, reasonable. Being reasonable with financial planning is more sustainable in the long run, like how living an overall healthy lifestyle is more sustainable than following an overly strict diet regime. You will make mistakes, causing you to temporarily swerve outside your path to reaching your financial goals. That’s okay. All you must do is make sure your management of money aligns with the objectives you established for yourself. Remember, nobody truly knows how to manage money the “right” way. Be congruent with your financial goals, not “correct.”