The Art and Science of Spending Money

Jan 12, 2023  by Morgan Housel@morganhousel

Former General Electric CEO Jack Welch once nearly died of a heart attack. Years later he was asked what went through his mind while he was being rushed to the hospital in what could have been his last moments alive.

“Damn it, I didn’t spend enough money,” was Welch’s response.   The interviewer, Stuart Varney, was puzzled, and asked why in the world that would go through his mind.

“We all are products of our background,” Welch said. “I didn’t have two nickels to rub together [when I was young], so I’m relatively cheap. I always bought cheap wine.”

After the heart attack Welch said he “swore to God I’d never buy a bottle of wine for less than a hundred dollars. That was absolutely one of the takeaways from that experience.”

“Is that it?” Varney asks, stunned.

“That’s about it,” says Welch.

Money is so complicated. There’s a human element that can defy logic – it’s personal, it’s messy, it’s emotional.

Behavioral finance is now well documented. But most of the attention goes to how people invest. Welch’s story shows how much deeper the psychology of money can go. How you spend money can reveal an existential struggle of what you find valuable in life, who you want to spend time with, why you chose your career, and the kind of attention you want from other people.

There is a science to spending money – how to find a bargain, how to make a budget, things like that.

But there’s also an art to spending. A part that can’t be quantified and varies person to person.

In my book I called money “the greatest show on earth” because of its ability to reveal things about people’s character and values. How people invest their money tends to be hidden from view. But how they spend is far more visible, so what it shows about who you are can be even more insightful.

Everyone’s different, which is part of what makes this topic fascinating. There are no black-and-white rules.   But here are a few things I’ve noticed about the art of spending money.

1. Your family background and past experiences heavily influences your spending preferences.

I love this Washington Post headline from June, 1927 – the Roaring ‘20s, the last hurrah before the Great Depression:

This is timeless, and explains so much.

After Covid lockdowns there was the concept of “revenge spending” – a furious blast of conspicuous consumption, letting out everything that had been pent up and held back in 2020.

Revenge spending happens at a broad level, too. The most stunning examples I’ve seen of this are wealthy adults who grew up poor – and were heckled, bullied, and teased for being poor as kids. Their revenge spending mentality can become permanent.

If you dig into it, I think you’ll see that a disproportionate share of those with the biggest homes, the fastest cars, and the shiniest jewelry, grew up “snubbed” in some way. Part of their current spending isn’t about getting value out of flashy material goods; it’s about healing a social wound inflicted when they were younger.

To continue reading, please go to the original article here: Long but well worth the time

https://collabfund.com/blog/the-art-and-science-of-spending-money/