What Your Psychology Says About Your Relationship with Money

Think about your relationship with money.

Are you an ultra-saver or a carefree spender?

Do you take excessive financial risks or always play it safe?

Do you feel comfortable with what you have or feel like you will never have enough?

The answers to all of these questions have little to do with risk and return and almost everything to do with your psychology and personal history with money.

For example, I used to think that I became interested in money because of my love of mathematics and numbers. But that’s not the full story. The truth is deeper than that.

The real reason I am so obsessed with personal finance is because my parents got divorced when I was just six years old. It wasn’t the divorce itself that piqued my interest in finance, but my belief about why they got divorced that did.

Years later, as a teenager, I discovered that my parents had declared bankruptcy shortly after calling it quits on their marriage. I put two and two together and assumed that their bankruptcy had caused their divorce. Given that money problems are one of the primary drivers of divorce, this seemed like a reasonable assumption to make.

And for over a decade I believed this. I believed that, absent money problems, my parents would still be together. And I became obsessed with personal finance because I didn’t want to go through the same thing they did. I didn’t want to get divorced over something as simple as money.

It was this fear that drove me to study asset correlations, modern portfolio theory, and dollar-cost averaging. This fear that made me risk-averse with most of my finances. This fear that, ultimately, got me to start this blog and pivot my career into financial services.

But, there was just one problem with this fear of mine…it wasn’t true. My parents’ divorce wasn’t solely about money. I found this out about a year ago after getting into a discussion with my father. It was a profound moment for me because it made me realize how much of my relationship with money had been influenced by my psychology.

And as much as I pride myself on being data-driven and objective, the unfortunate truth is that my psychology has had a bigger impact on my finances than anything else. I was reminded of this after recently reading Morgan Housel’s new book, The Psychology of Money, which comes out today:

I have sung Morgan’s praises on this blog many times before and his new book is no exception. Unlike other books on investing, The Psychology of Money is able to explain the complex landscape of behavioral finance in a clear, entertaining way. The book addresses questions such as:

  • How do money amateurs beat the supposed money experts at their own game?
  • Why are risk and luck interrelated?
  • What really made Warren Buffett so rich?

and much more.

However, despite the great storytelling on Morgan’s part, I don’t think this is the primary benefit of reading the book. The main reason to read it is to help you examine your own relationship with money. Through learning about the behavioral biases and quirks of others, you can better understand why you make the money decisions that you do.

For example, I was able to better articulate why I have the relationship I have with money after reading Morgan’s book. And this clearer articulation was the impetus for this blog post. I debated whether I even wanted to share the information in this post publicly, but I’ve come to realize that my personal posts tend to be the ones that resonate the most with my readers.

While I can’t guarantee that you will have the same level of monetary revelation as I did after reading Morgan’s work, I promise you will find it worthwhile. Though I usually have more to say, on some days you just have to let others do the talking. Today it’s Morgan’s turn.

Thank you for reading!

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This is post 203. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data

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