How To Think About Money

As part of your Continuing Financial Education (CFE), you should get in the habit of picking up 1-2 books a year on financial topics.

I know. They’re boring. It’s dull.

But you made it through 1L year and Supreme Court cases from the 1800s. You can handle some personal finance books.

If you don’t learn about money on your behalf, who will? Even if you’re working with a financial advisor, you at least need to know the basic vocabulary.

Today’s book is How to Think About Money by Jonathan Clements.

As always, these are my actual notes from reading the book.

Jonathan Clements is the former personal-finance columnist for The Wall Street Journal, where he wrote for almost 20 years (we have no financial relationship). Previous to the WSJ, he wrote for Euromoney and Forbes and spent six years at Citigroup as Director of Financial Education for the bank’s U.S. wealth-management business.

His latest book is about the relationship we have with money and more specifically how we should think about it. He divides the world into two types of people: Those who think the goal of investing is to beat the market and amass as much wealth as possible, that street smarts and hard work ensure investment success, and that the road to happiness is paved with more of everything. And then there are those who get it.

Want a more prosperous, less stressful financial life?

Growing wealthy is actually embarrassingly simple: We save as much as we reasonably can, take on debt cautiously, limit our exposure to major financial risks and try not to be too clever with our investing. Early in our adult life, progress can be agonizingly slow, and it’s easy to get discouraged. That first $100,000 can take many years to amass. If we stick to the simple, prudent path, however, the results can be astonishing. After a few decades, we might have $500,000—and that $500,000 can quickly become $1 million and maybe $2 million.

That’s nothing new to readers of this blog, but it’s worth remembering that the path to wealth is pretty simple. However, as Biggie said, mo money, mo problems. The first is the paradox of choice. Once you start accumulating money, you open up a lot of doors. While having options can be good, it can also be bad for your mental health.

If we don’t like where we live but we can’t afford to move, we adapt. But if we have enough money to move tomorrow, we might never adapt and instead wrestle with the decision every day, trying to figure out whether we should stay put or buy a home somewhere else. Happiness lies not in the choice, but in making a decision and eliminating the choice.

I always say that if you go to the store and look at 60 different types of jam, there’s a high probability you leave without any jam.

Another problem is projecting happiness.

“Does Living in California Make People Happy?” For a study with that title, almost 2,000 undergraduates were surveyed at four colleges, two in the Midwest and two in California. Students in the two regions reported no difference in their overall satisfaction with their lives—and yet they both expected someone living in California to be more satisfied than someone living in the Midwest. What’s going on here? When students imagined living in the Midwest and living in California, they focused on easily observed differences between the two regions, notably the better California weather. Their mistake: They failed to appreciate that happiness with the weather isn’t that important to satisfaction with one’s overall life.

So how to we make decisions, stop projecting and actually achieve happiness with money? For starters, Clements wants us to embrace humility.

It’s the great Wall Street fantasy: With hard work, street smarts and maybe a little luck, we can pick the right stocks and mutual funds, and thereby beat the market. This fantasy is so powerful that it sustains an entire industry—one that encompasses investment newsletters, professional money managers, financial websites, cable business channels, market strategists, securities analysts, boutique investment research firms, financial talk radio shows and more. These folks are desperate to keep the fantasy alive, because their livelihoods depend on it.

So, step off the financial ferris wheel and concentrate on increasing your savings rate. The money will take care of itself. Then your goal is to make sure you don’t lose it (which also happens to be Warren Buffett’s first rule of investing).

How is a lawyer going to lose their hard-earned wealth? Here are just some of the nightmare scenarios:

(1) We become disabled and can’t work, we don’t have much in savings—and yet we never bothered to buy disability insurance. Can’t imagine doing anything so dangerous that you would suffer a disability? Keep in mind that the vast majority of disabilities are caused by illness, not accidents.

The truth is that you’re much more likely to become disabled than to die an early death. Disability insurance is top of my mind for a 2017 goal, so expect to see more writing on that in the future.

(2) We load up on our employer’s stock in our 401(k) plan—and our employer turns out to be the next AIG, Bear Stearns, Enron, Lehman Brothers or WorldCom, all major companies that suffered spectacular collapses in the last 15 years.

Thankfully, most lawyers are unlikely to make this mistake but there’s certainly no reason to take uncompensated risk.

(3) Our spouse, who is the family’s main breadwinner, dies suddenly. We have neither life insurance to collect on nor much in savings—but we do have three children and a hefty mortgage.

Until you’re financially independent, term life insurance is a cheap solution to what would be a catastrophic problem.

(4) A booming stock market boosts our self-confidence, we load up on stocks, we get a repeat of 2007–09’s 57 percent decline—and we panic and sell when our stocks are worth half what we paid.

This is pretty typical. A rising tide lifts all boats, convincing people that they’re great at picking stocks. This is why it’s a good idea to write an Investment Policy Statement to help you stay the course.

(5) We pour our savings into a few rental properties, we have trouble finding tenants, we can’t make the mortgage payments—and we wind up in foreclosure.

Leverage works both ways.

(6) We don’t have health insurance—and we get diagnosed with cancer.

Medical costs are responsible for a large number of bankruptcies.

(7) We bet everything on one country’s stock market—and that country turns out to be the next Japan.  At year-end 1989, the Nikkei 225 hit its all-time high. More than a quarter century later, Japanese stocks remain stalled at less than half their 1989 level. Can’t see that happening here in the U.S.? In 1989, no economy was more admired than Japan’s, and ambitious American businessmen and women were regularly exhorted to learn Japanese.

I can’t see this happening in the US, but I suppose you can’t argue with his point. I’d like to think that US company’s broad international exposure mitigates this risk somewhere as compared to Japan. The US economy is more than four times as large as Japan.

The point is that you can take steps to mitigate “losing” your money and you should be doing so.

If you save more than you earn and take steps to reduce or eliminate risk, the last part of the puzzle is simply redefining retirement and your career.

My contention: Retirement should be redefined, so it is viewed not as a chance to relax after four exhausting decades, but rather as an opportunity to take on new challenges, without worrying so much about whether those challenges come with a paycheck. We might even take a phased approach to retirement. As our wealth grows, we could use the resulting financial freedom to focus less on pulling in a big paycheck and more on doing work we find fulfilling. That might mean switching to a less lucrative career in our 40s or 50s, or perhaps working fewer hours so we can devote more time to hobbies we are passionate about. In our 60s, we might take this a step further, working part-time and eventually quitting paid work entirely.

Given the abundance of books on investing, I found How to Think About Money a refreshing take on the philosophical side of how we save, spend and enjoy our money (full of lots of references to research about money and happiness).

After all, you should have a reason why you’re saving all this money and how you plan to live the “good life”.

Editor’s Note: This post contains affiliate links. This means I get paid a tiny amount of money if you choose to click through one of my links. If you do, THANK YOU. I greatly appreciate it. If you don’t, no sweat. It’s more important that you learn about finance. See my disclosure policy to learn about how I’m working to be transparent to my readers on any conflict of interest.

Joshua Holt is a former private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Empower keeping track of his money. He’s also maxing out tax-advantaged accounts like 529 Plans to minimize his taxable income.