The Psychology of Money: Achieving Financial Peace

Recently, I came across this article in the Wall Street Journal titled, "I'm 37 years old, and I haven't saved nearly enough for retirement. What do I do?"

As a 38-year-old myself, I perked up and wanted to check it out. You can read it if you'd like, but the chart below sums up much of it. The article captures a prevailing tone, reflecting the mindset of many in today’s society

When the mentality is "I'll save for retirement with my extra or leftover money," you'll always be unprepared for retirement.

Morgan Housel, in The Psychology of Money, writes, “There aren't many iron laws of money. But there's one, and perhaps the most important: If expectations grow faster than income you'll never be happy with your money. One of the most important financial skills is getting the goalpost to stop moving. It's also one of the hardest” (p. 38).

I often share with my college students who take my investment class that moving goalposts might be the most difficult thing in personal finance and investing. What do I mean by “moving goalposts”? It's the tendency for your goals to change and increase as your income increases. When I'm in college, scraping together a few thousand bucks during my summer job, the goal is simply to have enough money to pay for insurance and gas for my 20-year-old car. But 10 years later when I have a great paying job, I'm out looking for a brand-new BMW. What is the typical response to a pay raise, large bonus, or promotion? “Now we can afford a nicer house, car, boat, or vacation.” It's difficult to be content—the goal post just keeps moving forward.

The temptation has been real for me throughout my career. In the Bible, the Apostle Paul often speaks about contentment, but two passages resonate with the idea of the goalposts moving. First, "I am not saying this because I am in need, for I have learned to be content whatever the circumstances. I know what it is to be in need, and I know what it is to have plenty. I have learned the secret of being content in any and every situation, whether well fed or hungry, whether living in plenty or in want" (Philippians 4:11-12). Again, Paul writes in 1 Timothy 6:6-7, "But godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it."

Paul speaks directly to the idea of finding contentment regardless of circumstances, which directly contrasts with the tendency and temptation to constantly move the goalposts of income, possessions, success, or recognition. He speaks to the wisdom of being satisfied with what we have rather than continually striving for more, which leads to discontentment and frustration.

People often think the key to retirement is investing in the right stocks or mutual funds. And while that does matter, the single biggest way to be financially healthy is to spend less than you make. Housel hits the nail on the head when it comes to financial success: "Whether it's savings or investing, getting the goalpost to stop moving—or at least move slower than your income grows—is the only way to both be happy with what you have and ensure you don't push beyond the limits of what you can handle."

It's that simple.

Further, having the right mindset on saving is important. The best financial advisors spend more time helping to develop healthy financial habits for their clients than they do managing a portfolio. Creating a mindset of living within your means and being content with your income, possessions, and status will have a profoundly larger impact on your financial security than the math behind your investment selections. Housel writes, “Doing well with money has a little to do with how smart you are and a lot to do with how you behave” (p.4).

If you structure your finances as giving the first 10% back to God, saving the next 10%, and the rest (80%) can be spent, you'll end up fine. If you only save your leftover pennies, however, you are unlikely to be prepared for retirement.

Our behaviors outweigh detailed mathematical and statistically models, education, or raw intelligence. According to Housel, “A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence” (p. 6). Even the brightest minds often fail financially because they fail to manage their emotions, making impulsive decisions. On the other hand, people with minimal financial and investment expertise can accumulate wealth by cultivating key behavioral traits—patience, discipline, generosity, humility, and contentment. Ultimately, success with money isn’t just about what you know; it’s about how you behave.

While most of us strive to make the “smart” financial decision, and pick the “best” investment, when it comes to saving for retirement, the psychology of money is more important than math.