On a recent episode of his podcast, Morgan Housel was discussing his new book, The Art Of Spending Money. He said that regardless of how rational we think we can be regarding money, that our behaviors regarding money will be influenced by our upbringing, environment, experiences and emotions.
He then used himself as an example. Because he craved a feeling of security and stability, he chose to pay off his mortgage early vs. using that money to invest in stocks – even though he knew that investing that money in the stock market for higher returns was the more rational decision.
He also kept a year’s worth of expenses in cash instead of having it invested even though that meant getting a much lower rate of return on that money.
He said, “…you have to make decisions that you will be comfortable living with…paying off my mortgage and having a larger cash buffer helps me sleep better at night…”
I get it. I have done the same with my home and my emergency fund. It brings me peace of mind and is worth the potential “loss” of not having this money invested in the market.
We are not always going to make the most rational decision. It’s perfectly fine to make a reasonable decision that we can live with instead. What is reasonable will be different for each of us…
Morgan Housel (paraphrased)
I like that concept for everything in life, not just financial decisions.