The Psychology of Money
I believe wealth is created between the ears. It is not directly inherited but rather built based on the mindset and behaviors surrounding money. After all, if your parents live into their 80s, you are likely into your 60s by the time you see any sort of inheritance. I don’t know too many people holding out for the long con. Sure—there are some trust fund babies out there, but not many. If a massive sum is passed down through the generations, it typically only survives 3 generations before it is squandered. The mindset that built the fortune is not always present with those who grew up with money and inherited it based on genetics. Do I even need to comment on the bankruptcy rate of lottery winners? How about professional athletes? You get the idea. If you can’t manage $5,000, then you can’t manage $5M.
Only 2% of millionaires achieved this mark before age 30. And based on the monetization of social media over the past decade, I suspect this 2% number is much larger than in prior decades. Most millionaires achieve the status based on a good wage and regular investments that allow compound interest to work its magic. These millionaires made much less than CRNA money. Many worked as teachers, engineers, and other respectable professions making average or greater money. The formula used by most self-made millionaires for financial success is simple. Live below your means. Invest regularly. Pay off debt. There ya have it. But what about the psychology of money makes this difference?
Doctors are terrible with money. Common stereotype. And we all know that jokes and stereotypes only exist because they contain an element of truth. Intelligence does not trump behaviors when it comes to money. We are in a high opportunity cost profession and dedicated our careers to science. To think a 25% annual return year after year is achievable, you are sorely mistaken. Look at mutual funds. Fund managers have a team of dedicated researchers. The entire team has devoted their careers to studying the market and yet rarely outperform a broad market index fund, which literally does nothing except mimic the index. Don’t outsmart yourself. Look at the data. Put the majority of your investments into a broad index fund (and some in a total bond market fund) and let it ride. Don’t touch it. Don’t time the market. Don’t listen to the news, your neighbor, or anyone else for that matter. Add to your account every month. Up, down, or sideways – leave it alone and let it ride. Take your 10% return, minimize fees, and stick to anesthesia.
Impulse Control
Market volatility is a real bear. There will absolutely be difficulties over a lifetime of investing. Remember that all of the money comes from a few trading days. These days often come in volatile markets where it is tempting to pull money out of the market as an attempt to “time it” and maximize gains. Again, professional money managers try this and rarely succeed. Morningstar and Hartford Funds report that being sidelined for the best 10 trading days over the past 30 years would decrease your returns by 50%. They also say these days are common in down markets. You cannot afford to miss these days by trying to outsmart the market. This emphasizes that behavior trumps IQ.
My Beliefs
I believe it is my responsibility—and my responsibility alone—to create my financial success. Is that true? Kind of. As with anesthesia, I did not invent a single thing that I do. I didn’t see propofol and say, “I bet I can induce a patient with this stuff.” Nope, wasn’t my idea. I didn’t compile data leading to research supporting index funds as the best kept secret in finance. I just read the studies. The concept of spending less than what I bring in every month was not my idea, but I use it. It is my responsibility to do the research and surround myself with the right people. The decision to practice anesthesia was carefully chosen based on purpose and financial compensation (2 for the price of one 10-year path). That’s the only careful decision I made as a 15-year-old. It is my responsibility to remain disciplined and keep to my financial goals. So, it is my responsibility to learn about what works from the best minds in the business and implement a proven plan.
It's not About the Math
Working as a CRNA, it is no secret that I make good money. Even CRNAs hit with the “sunshine tax” make good money. Come on, the average full-time worker brings in about $55,000 annually. If a CRNA can’t make money work, there isn’t much of an excuse. I say that from a mathematical perspective. The psychological perspective is totally different. Winning with money is easy on paper, but incredibly difficult to carry out. I don’t think you would speak with many people who say it is ideal to spend everything you make, plus loading up that Visa card and paying 25% interest on that money. I could be wrong as I have no studies to support this. I suspect the average human would suggest spending less than or equal to one’s monthly income in order to turn a profit.
The math of finances overlooks the dopamine release during a purchase. It overlooks the compulsion to keep up with the Jones’s. The need to adhere to social norms. The hedonic adaptations that accompany lifestyle inflation. Math does not explain these phenomena. Only the psychology of money begins to provide a rationale.
My mathematically oriented brain reverts to the most mathematically efficient way to solve a problem – that problem being financial independence. Be mindful, my recommendations occasionally stray from mathematical efficiency because of psychological roadblocks and unpredictabilities. Take low interest debt. Will the average total stock market index fund greater than 5% annually over the long-term? Very likely. Maybe you don’t sleep well at night knowing you signed a piece of paper promising you will return borrowed money. I don’t have any problem with you paying off that mortgage at 3.5% interest. The mathematical efficiency isn’t worth the mental stress. What if the market goes sideways for 10 years? It has happened. It will happen again. No one knows when the lateral oscillations will choose a North or South direction. The mental burden isn’t worth the extra 4% return for a handful of years. Pay off the mortgage. Feel good about it. Then get to investing. Done. Easy. Don’t overcomplicate it. Like anesthesia, there is not an ideal recipe for everyone in every situation. Do what works for you. Not sure what works for you? Shoot me an email.
My Awkwardness with Edward Jones Investments
Back to the fact that when people find out I give anesthesia, they assume I make good money. They are right and it is uncomfortable. After knowing I had enough saved to pay for CRNA school, I spoke with an Edward Jones advisor to get set up with some investments with the remaining $40,000 or so in my account. I knew about index funds and was set on that approach. I lacked the confidence to just open my own brokerage. (I conquered that fear later on.) Anyway, I showed up with a scratch sheet of paper with all of my accounts and the dollar amounts. I noted how much I would conservatively need for the next few semesters and said I could invest the rest. He asked about my graduation date. He asked about potential expenses such as a house or vehicle. I spoke of my expected salary and savings rate. He was thorough. I told him I felt behind because I didn’t have anything invested besides my 401(k). No debt, but that wasn’t good enough for my standards.
My future savings goal was 50% of my net income. I unknowingly quoted him significantly less than what my wife and I currently make. The only time underestimating is good. About 75% of the way through my monologue of expectations and concerns he said, “I have to stop you there. You have no idea about the absurdity of what you just said.” He said, most people I work with make less than what you expect to make and save approximately 10-15% of their income. He was very concerned that I was going to put away that much money. “You don’t even know how far ahead you are.” After working with hundreds of clients, he found my situation to be quite atypical and almost unrealistic. Well, he underestimated how determined I was to reach financial independence. I don’t compare myself to those of my age or income levels. I compare myself relative to financial independence markers.
For most people, his estimations were right in the bull’s eye. A 15% savings rate is what most advisors try to milk out of their clients. They also retire at 65. I can’t really get on board with that. His investment recommendations mirrored my broad index fund ideas, but his psychology behind the money didn’t match mine. Needless to say, I no longer have financial advisors (aside from my company sponsored 401(k)). I have tried a couple and self-managing saved me a bunch in fees. And yes, my net returns improved. No regrets. The difference between a 15 and 50% savings rate is psychological. No amount of math will make that change. It is all between the ears. It is a choice to live a certain way. Invest a certain way. Save a certain way. Spend a certain way.
P.S. Our savings rate is currently 75%.
Money’s Utility
Money is the root of all evil. Money can not buy happiness. Money isn’t everything. I agree that if money and the accumulation of wealth is one’s sole purpose in life, thing’s won’t go well. Worshiping the dollar is not advisable. But these negative connotations are only half of the story. Again, an element of truth resides here.
Money is an incredible tool. Money provides time, security, and opportunity. Used wisely, these perks extend beyond just the earner. Buying time is self-explanatory. Why spend time doing something when outsourcing is an option? Don’t want to mow your lawn -- hire it out. Not a fan of cleaning the house. Someone will do it for a fee. At some point in life, it will likely be worth having a professional change your oil or complete your taxes in exchange for time.
Security is a big motivator for me. I want to know that if something happens to me, my family will be ok. Not only ok, but well off. That’s my goal. It is an expensive goal, but the trade is worth it for me. I sacrifice my time picking up work in exchange for money that I put towards security. My security comes in the form of investments. Nurturing an investment account will cease the “time for money” transaction. After a certain level of security is achieved, I will reduce the amount of time I will sell. This is the “work hard in your 20s and 30s to enjoy the rest of your life” mindset comes in. The opposite of this is to live it up while you are young, but the trade off is financial security. I theorize missing out on decades of compounding interest is not worth spending every dollar you make. There is a balance with all of this that should be personalized to the individual. Use your priorities to determine whether you are looking for financial security or experiences during your youth. Ask me in 50 years how this worked out as I could be dead wrong.
Money buys opportunities. An opportunity may be a vacation at an all-inclusive resort. It may be the opportunity to travel or retire early. An opportunity is the ability to send your child to a specialist to address a health concern. Having capital makes you a potential investor or venture capitalist. Start a foundation to help a cause of your choosing. Many of these are not available to those without money. None of these are inherently good or bad, they are what they are. Often time high income earners are looked down upon when they have opportunities or options not available to everyone. Choose your company wisely.
As I feel I am digressing, so I’ll close with this. Money can be a fantastic and powerful tool. One of the only resources that can be traded for time, the only true limited resource. Thoughtful behaviors and decisions best maximize its effectiveness. You can’t out earn stupidity. That deserves to be bolded. When cared for, a money tree will pay dividends and multiply. Decide what is important to you and that is how you should use your capital. Just a drop in the bucket regarding the psychology of money.
