WEALTH
By Johan Gouws, Head of PPS Wealth Advisory
When we think about our financial future and having financial security in retirement, one would most likely shift one's mind to the discipline of saving and investing. But there is another side of the personal finance coin we need to consider. How we choose to spend our money greatly impacts our level of happiness or contentment, now and in the future. It is an area of financial discipline that does not receive enough attention.
In his book The Art of Spending Money, Morgan Housel suggests that spending money is not a science but an art that needs to be mastered. Whereas science has fixed rules by which order, cause and effect are clearly defined, it is not as simple and predictable when it comes to us and how we manage our finances. The reason for this is that money has an emotional, behavioural and social side to it. Housel views personal finance as more about the personal than the financial. The reason being that our money behaviour is driven by our emotions, which are not hardwired but are learned and developed by our brain as we need them.
Each of us has a different emotional framework shaped by the particular social context (family, culture, friends) we grew up in, and our brains apply our emotions to construct our experiences. Our social context also shapes our individual values and preferences, which originate from our efforts to reconcile our daily needs with our past experiences and what makes us happy. Any discontent we experience arises from when we spend money in a way that does not match our personality.
When looking to develop better spending habits, it is important to understand where the need to always to acquire more money and the things it can buy arises from. In another book – Status Anxiety – Alain de Botton suggests that our desire to rise in the social hierarchy has less to do with the material goods we accrue and more to do with the admiration, respect and attention we can gain from it. To avoid this false validation trap, it is important for us to gain respect and admiration for who we are rather than what we own. Getting the approval and admiration of your friends and loved ones because of your presence and how you make them feel costs little but carries much value.
“It is important for us to gain respect and admiration for who we are rather than what we own.”
Housel also refers to the concept of psychological wealth when he speaks of spending money. He explains that the level of contentment or happiness we experience when it comes to our wealth is the difference between what we have relative to what we want. A person who has everything but desires more feels poorer than a person who has little but has no desire for more. Regardless of whether we are super rich or poor, the key is to appreciate what we have and to stop focusing on what is missing or what others have. We have more control over desiring less than over gaining more wealth, which leads to durable contentment rather than fleeting happiness.
An important distinction Housel makes about the life we desire, is between being rich and being wealthy. Being rich means you have all the money you need to buy what you want or desire. But being wealthy means that you have control over your desires and the power that money has in your life when it comes to your time, values, relationships, desires and mental health. When we have a healthy relationship with money and take control over why and how we spend it, it will serve us rather than us serving it. Money will enable us to become who we really are as a unique human being rather than define who we are.
If we want money to serve us in living our life purpose, we need to find a healthy balance between creating financial security for the long term and finding lasting happiness and satisfaction through healthy spending behaviour. We need to explore what type of spending provides us with the most meaningful experiences and lasting satisfaction at every life stage. But to achieve this, we need to avoid underestimating our own self-worth; to stop trying to live up to the expectations of society and not to compare ourselves and our lifestyles with that of others.