Dealing with money inevitably fuses math and emotions.
Sadly, we often fail at both.
Theoretically, math should be the more straightforward component of the two. You are either good at it or not.
But even if you have a decent hang of the numbers, our brain has a way of playing tricks on us (more on this below).
And that’s before you even get to the emotional part.
Despite what the friendly economists would like us to think, behavioral biases loom large, every single day of our lives.
In today’s post, let’s explore a couple of ways in which our brains play tricks on us when it comes to money.
Here’s one to get those brain cells fired up.
What’s a million seconds?
Let me save you the math – it’s about 11.5 days.
Now, tell me real quick – what’s a billion seconds?
A hundred days? A year?
It’s about 31.75 years.
And a trillion seconds is just under 32,000 thousand years.
Humans are notoriously bad at dealing with big numbers.
There’s an easy evolutionary explanation here. Until about 100 years ago, we simply didn’t have to.
You don’t need a million wild boars or a billion potatoes to make dinner for your tribe. A handful would do (and that’s if you get lucky).
As a result, our brains are struggling to deal with large numerical figures – and the repercussions can be significant.
The most important one is our failure to understand the power of compounding.
Here’s an example for you.
Warren Buffet had a net worth of about $1m when he was 30, amassed through working and investing in his teens and twenties.
He is now 90 years old and worth about $93 billion.
One day, Morgan Housel asked himself:
Had Warren started with $25k instead of a million – and retired at 60, how much money would he end up with?
The answer is staggering.
It’s not $93 billion.
And no, not even $9.3 billion, or $930 million.
Instead, it’s $11.9 million.
Now, Warren’s ability to deliver annualized returns of 22% is clearly outstanding.
But it’s his longevity that’s responsible for 99.9% of the wealth he created.
Our inability to process large numbers also has significant policy implications.
After all, the biggest trick the billionaires have managed to pull off is to convince the mere millionaires (including the aspiring ones), that everyone is somehow in the same camp.
Now, I’m not going to get into a political debate here as the issue is clearly complex and doesn’t have a binary answer.
But it’s worthwhile checking out this visualization to put things in perspective.
Speaking of billionaires, here’s another nifty one for you, courtesy of JD Roth over at Get Rich Slowly.
Assume you’ve been approached by an ailing ninety-year-old billionaire with a curious, highly secretive proposition.
As it turns out, the said billionaire has figured out a way to swap bodies.
Unsurprisingly, he is now looking for someone willing to take the other side in that trade.
You get his billions – all of them. But he gets your body.
Would you do it?
Chances are, you wouldn’t. Unless you are pushing ninety yourself, or your family is in a really desperate financial situation, this trade is as unappealing as it gets.
Thus, you give the said billionaire a big, confident “NO!” and walk away.
But hold on now… aren’t you taking part in that trade already?
The idea of trading time for money looks absolutely repelling when we frame it as:
An Entire Life = A Whole Lot Of Money
Now tell me, what exactly changes when we reformulate that equation as:
A Little Bit Of Life * A Long Time = A Little Bit Of Money * A Long Time
Which, incidentally, can be reformulated as a job.
Now, the “classic” way to summarize the above concept is to say that you can always make more money – but you can’t make more time.
Sure. I, however, prefer a different conclusion.
You have to make enough money. But once you do, take the rest in time.
The Best Lover In Town
It’s Thursday, and I’m feeling frisky – so let’s get personal for the last thought experiment of the day.
Here’s a question to noodle on:
Would you rather be the best lover in the world, but have everyone think you are the worst?
Or would you prefer to be the world’s worst lover – but have everyone think you are the best?
Make no mistake – the above question is loaded in more ways than one.
Clearly, being known as the best lover in the world can do wonders for your love life.
Leveraged properly, that information can increase both the absolute amount of lovemaking you get to engage in and the number of willing (and presumably good-looking) partners.
As appealing as that mental image may be, let’s abstract from it for a moment – perhaps by assuming that you are in a long-term, committed relationship.
In that case, which one would you go for? The substance, or the appearance?
There are no right or wrong answers here. Everyone picks their own sweet spot in life.
What is true, however, is that folks who choose substance are likely going to… ahem, enjoy themselves much, much more than those who go for appearance (and in this specific case, so will their partners!)
Personal finance is no different. You can look rich – or be rich.
Yes, there will always be some kind of a trade-off.
But the good news is that unlike the conundrum above, the two don’t have to be mutually exclusive. Being affluent doesn’t mean you have to look like a bum.
The other aspect you don’t want to ignore is the change in behavior people go through as they age.
In the least shocking news of the day, we tend to be more appearance-focused when we are younger.
Thankfully, as we age, we realize that it doesn’t really matter what others think of us.
As a matter of fact, they probably aren’t thinking about us in the first place.
Once you realize that no one really cares about you, you start focusing on substance – leading to a much happier life.
At the end of the day, that’s the only thing that matters.
Thank you for reading.