Review: How Much Is Enough?

Every other Sunday, The Simple Dollar reviews a personal finance book.

how muchAs time goes on, I begin to see more and more that personal finance is mostly psychological. Sure, it’s useful to have a long list of money saving tactics, but if you’re under the belief that such tools are useless, it doesn’t matter how great the tips are. I can talk about savings tactics until the sun goes down, but if you’re psychologically committed to living paycheck to paycheck and don’t want to change, change won’t happen.

That’s why it makes a lot of sense to ignore the dollars and start with goals and values. What’s really important in your life? If you figure that out, it becomes a really powerful motivator for your other choices. Looking at the difficult financial choices in your life becomes easier – it becomes fun. Doing things like making your own laundry detergent move from being boring to being personally fulfilling, because you can actually see the bigger values behind that choice.

Arun Abey and Andrew Ford’s How Much Is Enough? digs right into that philosophy. The argument behind the book is that long-term financial security and personal peace comes from a place beyond money. It comes from a life oriented around your key values, with other, less-important things cast aside to make room for those key values and dreams to grow.

Let’s dig in.

1. The Foundations
How Much Is Enough? argues that there are three “simple” steps to financial well-being: define and understand your values and goals, apply your resources to achieve your goals, and develop your investment strategy.

One odd portion is how this chapter calculates retirement needs. From my perspective, they seriously underestimate it, suggesting that you run out of money when you reach the average estimated lifespan. I fully expect that the “average” lifespan in forty years will be longer than it is now – potentially much longer – and so my planning points towards full self-sustainability (or close to it).

2. The Meaning of Money
Here, the authors argue that a combination of peer pressure, “groupthink,” and a popular culture that overly values materialism and undervalues other attitudes opens us up to a lot of damaging emotions. Greed. Low self-esteem. Envy.

These emotions are powerful, and they often fuel reckless decisions that result in long-term disasters. We buy things to show off and live up to some unreal image. We focus on material gains instead of focusing on achieving our big goals. And, in the end, we feel lost.

3. The Happiness Challenge
The first big step is to abandon the idea that the value of everything can be expressed in terms of money. Value means more than just dollars and cents. A great example of this can be found in the possessions you most value. For most people, the things they would grab if the house was burning down aren’t things with a large monetary value – they’re things with a large personal value.

Doesn’t it make sense to focus on things with a large personal value? The things you wouldn’t save during that mad dash through your home aren’t really that important to you, so why invest so much money in them?

4. Strategies for Well-Being
Instead of focusing on better (and more) stuff, spend your energy focused on building your safety, competence, self-esteem, connectedness, and authenticity. Become good at things. Do things that you enjoy – and things that others enjoy. In other words, focus on the aspects of yourself that are independent of things.

One interesting tactic they suggest is being mindful about very ordinary things. For example, be mindful of a meal. Don’t do anything else while eating. Instead, focus carefully on each bite you take – the feeling of the food in your mouth, the textures, the flavor. It completely changes the experience of an ordinary meal, transforming it into something extraordinary. Do the same thing when you’re walking, focusing on how each step feels and the whole environment around you.

5. Kids, Money, and Happiness
It can be a real challenge raising children in a world that gravitates towards more and better stuff. How can you instill basic values in your children that don’t revolve around things?

One big suggestion is to buy gifts that revolve around experiences rather than things. Have their Christmas present be a family trip to a place they’ve been talking about going for a while. Instead of giving them more items to fill their room, give them a membership to a museum or a science center or something else that reflects their interests. Have a really memorable party as part of their birthday gift instead of just buying an expensive gift.

6. Giving with Meaning
Giving of yourself can be very difficult for some, but it’s a powerful part of expressing the things that are most important to you in the world.

The authors suggest by focusing specifically on the things that really tug the strongest at your heartstrings. Where you you feel there is great injustice? Where do you feel gratitude for the good work of others? Right there, you have a powerful place to give. Don’t worry about the other causes that aren’t as powerful – focus instead on the things that really rock your world.

7. The Investment Prize
Often, one’s goals are big and expensive, and it’s hard to see the connection between the things we do today and those big goals. It’s vital, then, to take a look at the long term potential of the money we’re able to save by being careful with our spending. If we’re able to scrape together $10,000 by cutting spending each year, then are able to invest it at 7% annually for 15 years, you have $269,000 in the bank.

What about that $10,000? That’s just $27.40 a day – on average. If you can find a few big ways to save – putting off that car upgrade for another year or two, not buying a new house without a big down payment, doing a bunch of one-time savings tactics – you can easily knock that number down to $10 a day. In our lives, it can often be easy to find ways to trim away $10 a day – not stopping at the coffee shop, for example, might do it.

Think of what $269,000 could do in your life. That’s the result of the little choices you make.

8. The Madness of Myopia
How can you get returns like that? You need to let go of the short term. In the short term, stocks have very painful drops, but they’re counterbalanced by very nice gains in other years. Thus, looking at what happens over one year won’t get the job done.

If your goal is more than ten years away and you’re not a professional investor, you have to let go of the day-to-day and even year-to-year fluctuations in the stock market. Instead, you have to sit back and ride the overall tide.

9. How to Be Prudent and Take the Long View
So, how can you ride that tide? The big key is wide diversification (again, assuming you’re not an investor that’s going to devote tons of time to study). Buy very broadly-based index funds and just sit on them.

A great example is the Vanguard Total Stock Market Index. It allows you to effectively own a tiny sliver of every publicly traded stock sold on the New York Stock Exchange. If the market goes up, you go up. If it goes down, you go down. You are not at the mercy of a single company’s mistakes.

10. The Puzzling Properties of Prosperity
In a nutshell, the authors advise individuals to stay away from investing in real estate if they’re not getting additional value from it.

Their argument is simple: real estate risks are often understated, returns are often overstated, and there’s no clear market that absolutely establishes real estate values. Thus, without careful study, it’s hard for real estate to be a great value.

11. Confronting the Enemy Within
So why not just do the studying and investing ourselves if we can do better? The biggest reason is that our own psychology is the enemy.

People have a tendency to see patterns, even when there are none. They find patterns in market data, in real estate sales, and in buying patterns, even though there often is no pattern at all. When they move on that false pattern and make an investment, it’s akin to gambling, since they’re investing for a nonexistent reason.

Even professional investors fall prey to this, especially since there are people out there constantly trying to muddy the waters with questionable information (like CNBC and various analysts who are out there just trying to improve their own bottom line).

12. Good and Bad Advisers
How Much Is Enough? largely argues that you should avoid advisors and do your investing yourself unless you have a ton of money to invest or have a very unusual situation. If you’re not in those situations, a financial advisor is mostly just a salesman seeking a cut when you could just do the shopping yourself quite easily.

Thanks to the internet, we live in an era where people can learn about investing and actually do it on their own without advisors holding their hand.

13. How Much Is Enough?
The book closes with a clear, simple message: your future is up to you. You get to make the choices every single day to determine your future. What do you want?

Is How Much Is Enough? Worth Reading?
How Much Is Enough? is very philosophical in nature, focusing more on big ideas and concepts than specific action. For some (like me), that makes How Much Is Enough? a very compelling read – it forces you to think. However, if you’re seeking specific, tangible personal finance advice, How Much Is Enough? isn’t going to be the right book for you.

I actually found many of the ideas in How Much Is Enough? to be thought-provoking. More than most personal finance books I’ve read lately, I was left thinking about my own life and the choices I make in a daily basis. It takes many of the good philosophical ideas presented in other books and builds on them, making a thoughtful reader turn introspective and reflect in new and unusual ways.

If that sounds like it’s your kind of book, How Much Is Enough? is really worth a read. If it sounds … boring, you’re probably better off staying away.

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