Book Review by Pamela Whalley

Established in 1978, Western Washington University’s Center for Economic and Financial Education provides in-service and pre-service training of elementary and secondary teachers in economic and financial education.

In September, Center Director Pamela Whalley wrote a ringing endorsement of Paul Heys’ new book, Spending Your Way to Wealth:

“Investing is the perhaps the most frightening of personal finance concepts, and this fear drives many people to ignore the topic or postpone learning enough to invest until that mythical point in the future, “When I have enough time.” Why? Television shows on the topic are hosted by people who seem to know everything about the topic and are cluttered with investing jargon. Most books on investing are 500 pages of details. They begin with the assumption that you have funds set aside for investing, and if you don’t, well aren’t you bad, drinking that mocha instead of building a stock portfolio. Once they make you feel guilty, they then begin their discussions of stocks, bonds, mutual funds, short selling, PE ratios, Betas and on and on and on. At the point where the average person stops reading (long before the end of the book), they are so confused and overwhelmed that they take no action. Paul’s approach is different because it helps us examine our decision making process at it relates to wealth broadly defined.”

“This book manages to take the research surrounding financial decision making and translate it into understandable and workable advice for general public.”

“As Paul explains the automatic reactive decision making that dominates our day, he introduces the reader to the biases that underlie many of these types of decisions, acknowledging the very natural human tendencies embodied in these choices. Our choices aren’t automatically bad or good, but they are too often unexamined, especially with respect to the true costs of our spending choices. He notes that much of our unconscious, reactive decision making involves shortcuts that enable us to efficiently and happily move through our days. We don’t have to stop and consciously think about the process of brushing our teeth, we do so by habit. Unfortunately, too many of our spending decisions are made based on the same process. Consider how much longer it takes to shop when our reactive shopping decisions are disrupted by a new store layout. While reactive decision making saves us time when brushing our teeth, it serves us less well when we are making spending decisions, because virtually all spending decisions ultimately boil down to spending today versus spending tomorrow (spending versus saving). This book does a masterful job explaining why we make reactive decisions and exposing the unconscious biases that underlie these types of spending decisions. It helps us take the next step into reflective decision making, where we integrate long term consequences into our decision making process. This book makes this process straight forward, no complex calculations required. The final chapter is ultimately a straight forward “how-to” move from spending only to maximize very short term satisfaction, to allocating our spending between today and tomorrow. Paul challenges us to consciously consider our spending by considering what else we could buy in the long term were we to invest the funds instead.”

“Very few investment books mention, even in passing, that ‘Mere financial capital (money) doesn’t make a person wealthy.’ This book does.”

“Paul’s treatment of investing is also unique in that he demystifies the process by recommending that people invest only in index mutual funds. The reality is that most people have neither the time, the funds, nor the desire to invest in individual stocks and bonds. He explains the steps necessary to purchase shares of an index mutual fund, even explaining what to look for in purchasing the fund. He gives practical advice on determining how to invest for the long term and not fall prey to reactive decisions like selling when the market falls (don’t look at market alerts, check your investments every few months), and not using your investment account as another spending tool (don’t get checks or debit cards for the accounts).

“This book manages to take the research surrounding financial decision making and translate it into understandable and workable advice for general public. His emphasis on conscious decision making, essentially examining our current spending decisions and looking at the long term costs of our purchases helps us allocate our income on what is most important to us. As he notes, building financial wealth gives us the freedom to build non-financial wealth. Very few investment books mention, even in passing, that ‘Mere financial capital (money) doesn’t make a person wealthy.’ This book does.”

The Marshmallow Metaphor

In a well-known experiment conducted in the late 1960s, Stanford psychologist Walter Mischel studied the behavior of children faced with a choice between immediate and delayed gratification.

Given the choice between a small treat now or two small treats if they waited 15 minutes, the children behaved in different ways. Some ate one marshmallow immediately while others waited—with effort—for the promised two marshmallows. The subject’s age often affected the results.

Some have argued whether or not Mischel’s experiment correlates with later success or failure in life, or whether some people are better at delayed gratification than others. But the bigger point is that we can easily identify with the kids in the test, especially (in my case) when writing about this example right before dinner.

Taking the first marshmallow right now is a great metaphor for spending on immediate consumption. It’s at the heart of the “spilling” phenomenon described in my book. It’s also a very normal aspect of human nature—even when we know it will limit our future consumption.

Waiting 15 minutes for two marshmallows is also a metaphor—for spending towards long-term growth. Like the children in the marshmallow experiment, we need to develop habits that reinforce our reasoning and increase the likelihood of spending behavior that leads to future, spendable wealth.

An Unlikely Scenario

A sample from the upcoming book…

Imagine living in a house or condominium that you own—either outright or with the help of a mortgage. Despite its imperfections, it is home. It satisfies many basic needs and, in all probability, will appreciate in value over time.

Now imagine a stranger coming to your door, offering you money for the house or condo right now. If his price is ridiculously low, you will probably close the door—and perhaps call the police (or suggest counseling). If it is ridiculously high, you might accept it as a windfall—if he is not actually mad. But if the price is anywhere in between, you will almost certainly just say no. You were not considering selling and are satisfied with your home and the likelihood of its increased value in the future. It has value worth more to you than any price he is likely to offer. Price is wholly irrelevant, and you would consider anyone offering to buy suspicious.

Now, relate that unlikely scenario to investments. If a stock or fund has value in the long term, and you have no immediate need to sell it, then almost no price will be acceptable. However, with investments is there is a “stranger at the door” quoting a different price every day. Whether it’s a mobile investment app, a too-frequent portfolio review, or a cocktail party conversation, the price message is persistent, and almost always unrelated to a portfolio’s long-term value.

The secret is to treat the “stranger at the door” with the same suspicion when it comes to the price of stocks as you would with an uninvited offer to buy your house. The stranger may not be deranged, but his message is almost always moot. If you have no immediate need to sell something of value, then almost no price is worthwhile.

A Must-Read Letter

Not so long ago, I was privileged to work with University of Washington professor Dr. Ronald Smith in the Investorship Training seminar series we co-developed.  As I was working on my book, Spending Your Way to Wealth, I was thrilled to receive a letter from my long time colleague and friend. His enthusiastic support has resonated with that of many others in educational and financial circles, so I wanted to share the entire letter with you.


Why Do We Spend?

We spend for only one reason: to satisfy a need or a want. That’s all, folks. There’s no other reason. Think about that while reflecting on the definition of spending…

Spending: The act of exchanging one thing of value for another. It is not limited to money; spending also includes one’s time, energy, or reputation. It can be beneficial or detrimental. It may be characterized as either worthy & meritorious or unnecessary & frivolous, depending on the outcome. Spending is something everyone does, naturally and frequently.

Given this definition, it is easy to understand why spending is one of the most frequent activities and behaviors that we all engage in. For most of us, hundreds of times a day. We do it knowingly and willingly. And, for the most part, we enjoy doing it. We enjoy it so much, in fact, that we are inclined to engage in it frequently, excessively, and without giving it the thought it deserves. Done properly, spending is not only a worthy activity, it can be a noble one. Think “spending our time” for education, “spending our energy” on a community or charitable project, and yes, spending our money on our loved-one’s (self included) financial security.

Because we spend so often and so easily, we almost always fail to consider the fact, that every spending decision has both a short-term and a long-term financial consequence to it. Since the subject of this and future articles by your author is “spending your way to wealth”, let’s pause and consider what the long-term financial consequence are of the kind of easy and frequent purchase decision we all tend to make.

Consider the person who love lattes; and indulges in two a day.

Let’s assume the person is 27 years old, and that they feel they need (or deserve) a couple of lattes a day. At a cost of $2.95/latte, their daily expenditure amounts to $5.90/day Very seldom does the person stop to consider that a latte expenditure of $5.90/day for the remainder of their working years will amount to over $162,000 (adjusted for 3%/year inflation). By framing the latte’s cost as a daily expense of only $5.90 the amount seems rather small. However, if the amount spent is framed as an aggregate expenditure over time, the amount becomes significant. In fact, that expense amount adjusted for inflation amounts to a whopping $162,000. Worst of all, that money is gone, vanished, forfeited: Never to be available to the spender again: EVER. However, all is not lost. Its possible to have your latte and future wealth as well.

If the consumption of lattes were reduced to one per day instead of two, and if the money spent on the second latte ($2.95) were re-allocated to a no-load, low fee stock mutual fund (S&P 500 Index Fund), its likely value (assuming the average return of the fund over the past 60+ years) at that person’s retirement age will be in the neighborhood of $710,000.

Moral: Spend after thinking: thinking about the long term consequences of even the smallest expenditure, and you’re well on your way to spending your way to wealth.