The Psychology of Money

Housel argues that many professionals dole out advice to clients that they would not necessarily follow themselves. For example, 50% of mutual fund managers do not even invest in their own funds. Housel maintains that while there are certain guidelines to money management that are essential, most financial decisions are subjective and personal.

He explains that for him personally, being independent and having control over his own life has always been the top priority for him and his wife. He learned from his parents that it is good practice to live below your means so that you can maintain a high savings rate, giving you more freedom and flexibility in the future. Housel and his wife have followed a similar tactic, maintaining a relatively modest lifestyle that is far below their income, always saving for the future. Housel has prioritized “reasonable” over “rational” decisions: For example, he owns his house without a mortgage, even though he could have taken advantage of low mortgage rates when buying. He argues that the peace of mind this gives him is far better than whatever profits he could have generated with spare cash. Likewise, Housel, citing his low tolerance for risk, maintains an accessible savings fund that gives them peace of mind that they could survive emergencies. He also believes that this increases the likelihood of being able to leave his stocks untouched, allowing compounding to occur uninterrupted.

Housel explains that his investing strategy is to own low-cost index stocks. In his youth, Housel tried to be a “stock picker” and purchased stocks in specific companies such as Proctor and Gamble, but cites the low chances of “beating the market” (195) with his decision to diversify and maintain index investing instead.

Housel appreciates the simplicity of his approach. His assets consist of his house, savings, and Vanguard index funds. He argues that such a simple approach has the same chances of success as strategies that are complicated and time-consuming, since he believes that in investing, increasing effort does not guarantee a better result. Housel explains that his investing strategy “relies on a high savings rate, patience, and optimism that the global economy will create value over the next several decades” (197).

Housel explores the American consumer experience since WWll. He argues that any “reasonable narrative” predicting such an unlikely course of events would have been impossible to make, reminding the reader that history is full of surprises (198). Once WWII was over, America faced several crises. One was a housing shortage, since the country had focused its manufacturing on producing war goods rather than construction. Another issue was an abrupt shift in the type of work available, since war production jobs were no longer necessary and returning soldiers often quickly married and wanted to establish themselves in their own homes. To make matters worse, America struggled to find markets for its exports since Europe and Japan were in shambles.

Economic advisors warned President Truman that these factors could prompt another Great Depression. In response, the Truman administration made interest rates low, and Americans easily borrowed money to fund their consumption: “Consumption became an explicit economic strategy in the years after World War ll” (201). When credit cards were introduced in 1950, it became even easier to borrow heavily, while returning soldiers enjoyed the benefits of the “GI Bill,” which  enabled them to access low-interest mortgages.

Housel argues that the frugality and thrift of the Depression and war years created a “pent-up demand for stuff,” which was enthusiastically filled in the post-war years as consumer spending soared, creating an economic boom (202). The results of this economic boom included lifting many Americans out of poverty, narrowing the class divide between rich and impoverished, and more women joining the workforce.

Housel claims that Americans of different classes and regions became more economically equalized as they accessed the same goods and tuned in to the same pop culture. While debt certainly rose, incomes were also rising, and so many Americans found their debt manageable. As a result, for younger Americans indebtedness became normalized and acceptable.

In the 1970s, America endured a recession, which occurred alongside social upheaval and protests against the Vietnam War and other policies. While other nations such as China, Japan, and Middle Eastern countries became wealthier and more competitive, Americans grew disappointed in their own economic progress, especially since the younger generation had grown up as enthusiastic consumers in a relatively egalitarian culture. While the economy eventually rebounded in the 1980s, it did so in a way that created more income inequality, which Housel describes as “nearly the opposite of the flattening that occurred after the war” (210).

Housel connects the “flattening” of incomes and people’s similar living conditions in 1950s America with the “Keeping Up With The Jones’s” phenomenon, which plagues American consumers today. Housel argues that envy and a sense of entitlement prompt some Americans to overspend in order to attain the same lifestyle as higher earners, saddling them with significant debt. Housel calls the beginning of the debt crisis “an ugly, painful moment” (213) since some consumers realized they had acquired more debt than they could pay off. While the worst aspects of the debt crisis have waned in recent years, Housel argues that the American economy today “works better for some people than others” and that the path to success “isn’t as meritocratic as it used to be” (213). He claims that America’s inequality is growing, sparking resentment amongst people who aspire to success, but feel held back by something systemic. Housel claims that social movements as disparate as Occupy Wall Street, Brexit, and Donald Trump’s supporters are all, in part, reacting to dashed expectations, as adherents to these movements seem to feel disappointed and left out.

While the US has had some economic difficulties in recent years, Housel is optimistic about the future, pointing to growing employment rates, rising wages, slowing college costs, and improvements in other services such as medicine, transportation, and more. The author argues that “expectations move slower than reality on the ground” (215) and that people’s impression that the middle class is declining will likely persist for some time, even if a middle-class boom occurs now. He concludes his work by stating that economics is cyclical, and conditions will always change.