Afford Anything - The Hidden Psychology Behind Every Financial Decision You Make with Dr. Daniel Crosby

Episode Date: September 19, 2025

#644: Why do we both crave money and resent it? Why do some people sabotage their financial futures in the name of short-term comfort? And why is your brain — not the stock market — the biggest threat to your wealth? In this conversation, we explore the surprising ways that psychology and money intertwine. Our guest, Dr. Daniel Crosby, is a behavioral finance expert, psychologist, and bestselling author of The Soul of Wealth, The Behavioral Investor, and The Laws of Wealth. His research dives into how our emotions, childhood scripts, and personalities shape the financial decisions we make every day. Dr. Crosby shares why investing is an act of optimism, why income matters more than coupon clipping, and how our spending reveals truths about who we really are — even when we don’t realize it.. Key Takeaways Money is a mirror. The way you earn and spend reflects your real values, not just your stated ones. Tracking your money reveals gaps between who you say you are and how you actually live. Income drives wealth. Frugality matters, but once the basics are handled, your long-term financial future is determined more by growing your income than by cutting costs. Short-term comfort is costly. The biggest threat to your wealth isn’t the market — it’s the temptation to prioritize momentary relief (panic-selling, stress spending) over your long-term goals. Resources & Links Dr. Daniel Crosby on LinkedIn Standard Deviations Podcast Books by Dr. Crosby: The Soul of Wealth The Laws of Wealth The Behavioral Investor Personal Benchmark Closing This episode reminds us that building wealth isn’t just about math — it’s about mindset. The markets may fluctuate, but the greatest risks and rewards often lie within our own psychology. If you enjoyed this conversation, share it with a friend, subscribe to our newsletter at affordanything.com/newsletter, and connect with our community at affordanything.com/community. You can afford anything, but not everything. Choose wisely. Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising segments. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (03:24) Does money really buy happiness? Rethinking the $75k income myth. (08:48) Our conflicted relationship with money: Love, resentment, and the paradox of wealth. (10:32) Childhood money scripts: How early beliefs still drive adult financial behavior. (16:10) Personality traits & money outcomes: Why agreeableness and neuroticism matter. (24:15) Investing as an act of optimism: Human progress, markets, and long-term growth. (30:39) AI, work, and the future of wealth: Why EQ may outpace IQ in tomorrow’s economy. (39:46) Habits vs. willpower: Why automation and environment beat discipline. (44:28) Frictionless spending: How Apple Pay and subscriptions fuel overspending. (47:32) Offense vs. defense in wealth: Why income matters more than extreme frugality. (1:03:16) Chronic vs. episodic mistakes: Small leaks, lost compounding, and long-term damage. (1:06:24) The pre-mortem exercise: A Stoic-inspired tool to prevent financial failure. Share this episode with a friend, colleagues, your veterinarian: https://affordanything.com/episode644 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Today we're diving deep into the psychology behind our financial decisions. We're going to explore why most people have a love-hate relationship with money. We'll talk about how childhood experiences shape our attitudes towards money as adults. And why the biggest threat to your wealth isn't a market crash. It's your own brain seeking comfort in moments of stress. Welcome to the Afford Anything podcast, the show that knows you can afford anything not everything. This show covers five pillars, financial psychology, increasing your income, investing real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pantt. I trained

in economic reporting at Columbia. And today we welcome Dr. Daniel Crosby onto the show. Dr. Crosby is a psychologist and behavioral finance expert, educated at Brigham Young and Emory Universities. He's the author of three books on behavioral finance, actually four books now. He's most recently written the soul of wealth. Prior to that, he wrote the laws of wealth. He wrote the behavioral investor. His books have been translated into over 10 languages. They've won multiple awards.

He also wrote personal benchmark. That became a New York Times bestseller. He was recognized as one of, quote, 12 thinkers to watch by Monster.com. He was named to the 40 under 40 list by Investment News. He hosts the Standard Deviations podcast, and his expertise is the intersection. between mind and markets. So it's all about how sociology, psychology, and neurology impact your investment decision making. Here he is, Dr. Daniel Crosby. Hi, Daniel. Hey, great to be with you. Thank you for joining. Daniel, many people think about

money as tactical. But beyond the tactics, there is meaning that humans ascribe to money. Can you talk about that? Yeah, I'm happy to. Consistently in my research, I was finding that there was sort of this tactical, practical reality to some of the findings, but it was often paired with what we might call a more soulful reality or a meaning-based reality. I'll give a couple of examples. One is when you look at people how wealthy they feel, there were two things that really rose to the top. One was, of course, how much money they had. That's tactical. That's practical. But then the second predictor was how generous they were with that money. And what the research showed is that if people were very, very wealthy, 95th, 99th percentile for wealth, but they weren't generous, they didn't feel

wealthy. There was also research that showed when you ask people how contented they were with their money, sort of how at peace they felt with their money. One, considering, Again, very tactical, very practical. It was how much money did they have. But the second that was just as predictive, which is who were they comparing themselves to? Who was their reference class? And so time and time again, I found that in the research, when we look at financial outcomes, yes, there's some practical element to wealth, but there's also a meaning-based element to it, and you can't have one without the other. You mentioned contentment. I know there's research around the link between money and happiness. And happiness in that context is actually assessed in a couple of ways. There's the evaluative element of looking at your life. And then there is, what's the other one? It's, it's. Yeah. They measure it. There's a couple of ways they commonly measure it. One is they will give you a pager if we think back to, you know, like the 90s. And they will. And they will. will just ping you at various points in the day, and you will literally have a set of emojis, call it five, seven emojis from frowny face all the way to happy face and say, hey, at this moment in time, where are you along this sort of spectrum? The other way that you're talking about is the more qualitative, more evaluative way,

which is to say, hey, Paula, write me an essay, how you live in? Like, how's life, write me an essay on how you're doing more subjective, more qualitative. And what you find with the research on money and happiness, you remember, of course, I talked about it, many others talked about it, you probably talked about it. Years ago, they had this study that says money stops buying you happiness after $75,000, which would be about $100 today. This was measured in that more sort of emoji-type way. I don't know what the best way to describe it is, but the emoji way. Like point-in-time analysis. Yeah, the point-in-time sort of on a discrete scale.

And what they found was, yeah, sure enough, on this little scale, money and happiness relationship plateaued or right around $100,000. But that, you could argue, I think, pretty persuasively, is a rather shallow way to measure. happiness. And what they found is that it's really inextricably tied to your physical well-being. That point in time analysis has a lot to do with, are you cold? Are you hungry? Are you sick? And of course, those things move you down the scale of happiness. And it turns out money's quite good at feeding us when we're hungry, buying us medical care when we're sick, and

patching the leaky roof and doing all those things. So indeed, there's a sort of base rate of happiness that we can concern ourselves with with respect to money. And money is very good at that. When we come to the more subjective, the more qualitative elements, we see a different relationship. For a lot of people, for most people, money and happiness was up into the right when they do this self-appraisal, up to half a million dollars of income per year. That's pretty substantial. That would put you at or near one, you know, the top 1% in this country.

So when people talk about their own lives in richer, more fulsome ways, there is, it turns out, more of a relationship. So it's a little complicated. Money can certainly bias the absence of misery. It can certainly bias in absence of physical suffering in many instances. But there's also evidence to say that it buys us some subject. well-being well into very high levels of income. Right. And I think that surprises many people because that $75,000 study is so famous that it shocks many people that the correlation exists up to half a million. Yeah, it does. There was sort of a tidy narrative that I think the $75,000 study

fit. And I mean, I was as guilty as the next person of perpetuating that, which was, see, you know, money can't buy you happiness. It confirms many of our priors that we want to. to believe that money can't buy us happiness. It turns out it's not quite that simple. But what's interesting from the research is we find that for about a third of people, happiness really takes off after that $100,000 level. So for a lot of people, they get a great deal happier. For about a third of people, they get a great deal happier once they've been able to check those physical boxes of having a warm place to stay and enough food to eat and, you know, healthy food and all of that, happiness really goes up rapidly because they're able to focus on their passions.

We also know that for a significant minority of people, about 15% in the research, there's almost no relationship between money and happiness. They're just sort of perpetually unhappy. And so for some people, whether it's an organic mental illness, or something situational, there's a different problem. And so I think there are certain times and seasons in our life where we may be trying to fix a problem with a financial tool and it may be the wrong tool for the job. Right. You know, you mentioned that it confirms a lot of our priors that study. And part of why those priors exist is because we tend to have this contradictory relationship with

money in that we pursue it and despise it at the same time. Can you discuss the inherent conflict in the way that most people approach money? Yeah, so the fancy psychological term for this is an approach avoidance relationship. We simultaneously love money, we're fascinated by it, we want more of it, and we sort of resent people who have it. Morgan Housel wrote about this really compellingly when he talked about, I forget exactly what he calls it, but effectively the rich person in the car paradox. When people get a financial windfall, often they want to go buy a new car, some outward display of wealth. But when we see someone in a flashy car, we lust after the car, but we don't think highly of the person in the car. In fact, we would often speak rather disparagingly

of the person and make negative assumptions of the person in the car. So it really is complicated that we both seek after money but have a complicated relationship with it. I think part of the reason, too, is because we talk about it in hypotheticals. We sort of dream about, you know, the lottery's gotten over a billion dollars again. It's one of these things where we dream about the hypotheticals, but our daily experience of money is often very negative and very practical. So I think most people wouldn't know what to do with a lot of money if they got it, frankly. So, yeah, we do definitely have this approach avoidance relationship. What are some other ways that money of avoidance tends to show up in a person's life?

Because you hear, of course, stories of people who are in financial distress who don't open their bills, but you also see people who are not necessarily in overt financial distress, but who still exhibit avoidant behaviors. Many of us have grown up with scripts in our lives, these financial scripts. And Carl Jung has this great quote, until you make the unconscious conscious, it will direct your life and you will call it fate. So many of us grew up with these scripts around money that are quite negative or were led to believe by people in our culture or our faith or our parents or whoever that money

was, you know, sort of evil or sort of bad or not something to be pursued. When you've internalized this script, whether wittingly or unwittingly, whether consciously or unconsciously, you're going to start to act in ways that are going to reinforce that. And so I think you see a lot of people who are sort of quote, unquote, bad with money or making poor decisions about money, the engine that drives those decisions is an acceptance of what is oftentimes an unarticulated script about the evils of money or why money is bad or not to be pursued. And so I think that coaches, advisors can be a great help to people as they help them elucidate and bring forth these sort of scripts

and let them see how they're operating in the background of a life in ways that we may not fully appreciate. And I think a lot becomes more clear then. Right. And the scripts, they come in part from society, in part from childhood experiences, perhaps in part from traumatic adulthood experiences.

Are there scripts that we've internalized that are positive or that lead to positive outcomes? And can you name any examples of those? What's fascinating about money is that taken to extremes, any script can be maladaptive, right? I'm a believer that almost any behavior broadly and almost any financial behavior more pointedly can be right or wrong depending on the context. If you think about a soldier who's at war and they, every time they hear a loud noise, they sort of hit the deck. Well, that's the right thing to do. But when you get back home and you're now a civilian and a car backfires and you

panic and your heart races and you hit the deck. That is now the wrong thing to do, right? That's a learned response that was appropriate for a time and place that's misapplied. I did research a few years ago, probably the most interesting research I've ever done, where I talked to 425 married couples. I talked to them about what they fight about when they fight about money. We framed it a little bit more elegantly than that, but that was the crux of what. it was, and the number one point of disagreement was whether money was best used to enjoy today or to secure tomorrow. Now, if you think about those two things and you say which one is right, which script is the correct script, they're both right. They're both very important, and we can't

say which is right in a vacuum. But at any point in time, in any couple's financial journey, they may be very right or very wrong. And what happens is people tended to grow up in homes where one script was emphasized to the exclusion of the other, where if you grew up in a save for tomorrow home like I did, people who spent money on vacations and having fun and doing this, they were irresponsible and they were making poor choices and they were, you know, light-minded and things like that.

And if you grew up in a YOLO home, if you grew up in one of these, enjoy the moment homes, you would look at someone like me and go, well, he's no fun and, you know, he's lame and he's a stick in the mud. And so we definitely grow up in homes

and in cultures and in faiths where these scripts can serve us very well or very poorly, but that's probably going to ebb and flow throughout the course of your life, Like the script that you learned, you know, I, again, my father's a financial advisor. I definitely grew up in a save for tomorrow, be mega frugal. My dad was, you know, fire before it was cool.

And this is the kind of home that I grew up in. A lot of that has served me really well. Like I take a lot of responsibility. I save aggressively. I invest well. But I have also had to titrate my behavior a bit to say, hey, if left to my own devices, we would never go on a vacation. You know, if left to my own devices,

if left to my most natural script, I would look a mess all the time. So it's things like that to say, hey, how appropriate are the things that I learned to my current context? It strikes me, as you talk about scripts, these are learned. But there are also, to a certain extent,

intrinsic or inherent traits that impact our relationship with money. And so specifically I'm thinking about research that I heard about scoring high on agreeableness correlates with worst financial outcomes. Are you familiar with this? Can you talk about the way in which inherent qualities in a person might impact financial outcomes? Sure. I love personality research. To back up a little bit, anything in psychology, Anytime you're talking about a behavior, it's going to be biopsychosocial. So the manifestation of that behavior will be partially a result of your biology, partially a result of your culture, and partially result of your psychology.

If you look at something like personality, that's certainly the case. And I love this research. Okay. So the way to remember the five facets of personality is ocean or canoe, if you'd like, right? But ocean, the O in ocean is for openness to experience. Okay? People with high levels of openness to experience like to see the world. They like to try new things.

They like to buck tradition. Openness to experience is also in general associated with higher IQs and higher earning potential in the workplace. If you think about how, you know, someone with a high, oh, high openness to experience is likely to spend their money, they're going to want to go on vacations. They're going to want to try the new restaurant. But they may be so open-minded when it comes to something like managing their money

that they may overlook sort of the steady traditional buy-and-hold 60-40 index fund portfolio may not be, you know, sexy enough for them. And they may overlook that. So there's, again, you know, there's pros and cons to each of these. The C is for conscientiousness. This is your how put together you are, how planful, how organized, how regimented your schedule is. Again, a lot to like there in terms of putting together a financial life. E is for extroversion.

Think we know what that is. The A is for agreeableness. This is a fascinating one. And I actually was not familiar with this research, but I'll talk about agreeableness and where I think that research might come from. agreeableness is your tendency to want to rock the boat. Someone with high levels of agreeableness is unlikely to speak up. They're unlikely to rock the boat.

And someone with low levels of agreeableness is going to tell you the truth, the hard truth, and nothing but the truth, sort of no matter what it does to your relationship. So if you look at the relationship between something like agreeableness and something like financial outcomes, people with high levels of agreeableness might be hesitant to do something like ask for a raise. If you think about something women in particular have been shown to have lower lifetime earnings, and in part because they are higher on agreeableness and less likely to ask for a raise and less likely to go pursue a job for which they may be unqualified. So something like agreeableness that makes you, you know, a very easy friend and someone who's very nice to be with might lead you to make some poor financial decisions if you're not careful.

The end in ocean is for neuroticism. This has very obvious correlates to people's anxiety levels, how much they worry about money, their preferred level of risk taking. So, you know, I love that you brought that up because understanding your psychology, understanding your personality is, again, helping to illuminate these traits. And there's always good and bad, I think, to any side of the personality or behavior coin. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

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That's W-A-Y-F-A-R-com. Sale ends December 7th. With regard to the notion of confidence generally, one of the points that you make in a different chapter is that you need a certain degree of confidence and in fact you refer also to optimism in order to invest. That investing itself is an act of optimism. Can you elaborate on that? Yeah.

We know that negativity sells in the news. We know from the very fact. foundations of behavioral finance that people get about two and a half times as excited about a bad headline as they do about a positive headline. Oftentimes, when it comes to managing our financial lives, trying to avoid the next bear market or listening to the negative prognostications of someone who's fearful about what's coming next, that can feel very real. That can feel very real. That feel very cerebral, right? And it can feel like the right thing to do. And yet, we see that time and again, the day belongs to the optimists. I fell into that trap early of trying to time the market

and trying to listen to, you know, these prognosticators of peril. And what really helped me was thinking about what investing is at its essence. And at its essence, investing is a belief that tomorrow will be better than today. That is a message that I can get behind. You know, do I think that 30 years from now, 40 years from now, the world will be more just, more kind, more efficient, more well-run, everything in history screams yes. If you hear that and you go, well, no, things are getting worse,

I think you're probably not, you need to take a step back and look at the bigger picture. You know, Dr. King said, I'm going to paraphrase, the arc of the moral universe is long, but it bends toward justice. And I think in capital markets and just in the human family, we're always getting a little better. We're always getting a little more efficient where tech is growing, compassion is growing, connection is growing.

And I think as we see that, you see a rise in markets that lifts all boats. You know, the stat that launched this book for me because it blew my mind, America is about to turn 250 years old next year. When this country was founded, 85% of the world was living in poverty. 85% of the world, like everyone everywhere was poor, 250, effectively, 250 years ago, everyone everywhere was poor. Today that number is under 9%. And it's really social movements and also the freer flow of capital that have made those realities be what they are. And so that's the future I envision is one where, you know, all boats get raised and things get a little better. And it's easier for me to vote for that than to vote on the particulars of whatever job report came out this week or, you know, whatever else I was worrying about.

That's a message I can believe in. So it's one that was important to me to get out. There are those who would point to certain benchmarks that are declining. So, for example, life expectancy in the United States is actually declining from where it used to be, largely due to obesity and fentanyl. How would you respond to that when people point to hallmarks of things that are worse than they were in the past? Yeah, it's a fair question. So the first thing I would say is, look, if you want to pick one statistic here or there, yes, there will always be a case. And that's sort of what I found myself doing is latching on to some sort of doom and gloom statistic and sort of over fixating on that thing and then becoming worried about my money.

So at the height of COVID, we had this really terrible thing happen, which is for the first time in peacetime in U.S. history, the average age of death was declining. Right. So the average life expectancy was declining, like you said. And it was a combination of effectively three things. You know, COVID itself, deaths of despair, so suicide and overdose, and then, of course, the obesity crisis. You think about what has happened since then, and it's only been two or three years. We have not won the war against deaths of despair by any means, but I think there is reason for hope there. If you look at obesity, g-l-p-1s are going to meaningfully, you know, meaningfully, meaningfully

move the needle on that. And so that actually is the very thing that I'm talking about. This isn't this polyana-ish message that nothing's ever going to happen or that it will never get dark. It's just that human ingenuity is such that, you know, we kind of get ourselves into problems, but we get ourselves out of problems as well. You know, we got ourselves into an obesity crisis with hyper-palatable foods and cheap junk food and all this stuff. Well, now we're going to get ourselves out of it with something else.

So I think there's a lot to reinforce that that is kind of the give and take, the ebb and flow of human genius is, yeah, we're going to do some dumb stuff sometimes. It will get dark, but it'll get brighter as well eventually. You talk about human genius, but we're about to move into a future that's very uncharted, which is that it won't be humans that are thinking anymore, just humans that are thinking anymore. And what is particularly notable about this transition is that throughout human history, we have plenty of precedent for emerging technologies that are more and more powerful, but that always require a human operator. You know, we invented bombs, but even a bomb needs a human operator to make the decision.

This AI is the first technology that we've created that no longer requires a human operator. It's the first technology that can think on its own. How do we think about the fact that we are no longer the only thinkers? Yeah, this is where I think this is the right conversation to be having. I think a lot of people dismiss this question too easily by pointing to other technological advancement. right here in New York City, right down the street, in fact. There was a huge disruption. You know, many years ago, there was a huge disruption in the garment district where, you know, mechanized looms and all these things came through, and they put tons of people out of work.

There has been a history as long as humankind of new innovations taking people out of work and then new industries spring up in their place. I think this one, this technological revolution is a little different or a lot different for the reasons you just mentioned. There is an all-encompassing sweep in terms of the capability of AI that is not true of a factory or, you know, a loom or something like that. This has the ability to not take every job, but to wholesale reconfigure, many, many, many of our jobs. I was meeting with someone who was entering college the other day. He reached out and wanted to have lunch and talk about what to do in college. He was going into finance.

And I said, look, there are parts of this industry that will be completely gutted by AI. And there are parts of this industry that will get larger because of AI. And I think the closer you are to creativity and the closer you are to generativity, creativity, and the human element, the better off you're going to be. If you look at something like finance, I could see a world where five years from now, there's not an entry-level financial analyst in the world because why? you know why that is that is a profoundly mechanizable job but if you look at a part of the world like wealth management where you are sitting with families and having conversations about you know my son's getting married or end-of-life conversations the closer you are to that human element the better off you're going to be that just happens to be the industry that i know the best

but I think your listeners could look at their industry and say the same thing. Like there are parts of this world that are going to get automated away, but there will be green shoots as well. There will be parts that are closer to real, you know, generativity and real human genius that will spring up and you want to be where the humans are. The good news is eventually people get to do more fulfilling work. I do think there will be a period of pain. where jobs that people have prepared for are no longer useful, you know.

And so I think there will be an absolute period of pain. But I think the long-term result of the AI revolution will be more people doing more work that is truly eye-to-eye cheek-to-cheek with a human and serving humankind. You mentioned wealth management. And you mentioned the human and emotional aspect of talking to somebody about. about college planning, end-of-life care, these inflection points that are quite meaningful in our lives, does that mean that as we move into this AI future, that emotional awareness and interpersonal relationship building

and EQ generally is going to be increasingly important? I do think that, and it's already the case. The research already shows that EQ is a better predictor of terminal income than IQ. And that's a pretty incredible consideration that we're already there. And I think it's just going to become that much more dramatic in the years to come. Because the tactical rote parts of every job are going to become automatable. And in a world like that, I think the people who can connect, the people who can sell, you know, that's another job that I think has a bright future, the people who connect,

the people who can nurture, the people who can nurture, the people who who can sell, the people who can comfort and heal, those people are going to have a great livelihood. I think the people who can fix toilets and HVACs are going to have a great livelihood. I just wouldn't want to be in the middle there. So far, we've talked about personality traits. We've talked about money scripts. We've talked about societal, broader societal changes. But there's also another element to our relationship with money and broadly our relationship with our careers and all of these other money. influencing elements in our life, and that is habit formation.

Can you discuss where people get it wrong through an over-reliance on willpower rather than habit? Yeah, that's exactly where they get it wrong. When we think about discipline in the West, right, in the U.S. and in Western Europe, we've been shown to really lionize this idea of sort of white-knuckling it or just gritting it out or having more determination or more tenacity than the next person. And the research shows that nothing could be further from the truth when it comes to our financial discipline. There's really two things that people get right that show real financial discipline.

The first is probably the least expected, which is they just do a good job of avoiding temptation. they do a good job of staying out of harm's way. So if you're on a diet, you know, you don't keep Oreos in the house. If you are trying to become a long-term investor, you don't tune in to every cable news, markets and turmoil special. You just don't put yourself in positions where you're likely to do the wrong thing. In previous presentations, I'd liken this, you know, when you look at marital infidelis, The best predictor of marital infidelity is frequency of travel. Just people who are gone a lot are the people who tend to cheat.

So just putting yourself in the right headspace and in the right position and avoiding temptation is the first thing that people do. Not because they're stronger will than the next person. They just haven't put themselves in a position to need to exert that will. The second thing that folks do is make it habitual or they automate it. If we look at the most powerful behavioral economic intervention in finance ever, I would argue with anyone that it is the Save More Tomorrow program whereby you auto-witdraw and auto-escalate your savings. The magic of this is that you,

You take this human tendency towards laziness and forgetfulness and status quo proneness, and because you've locked in every two weeks when I get paid, I just draft it out and it goes to savings and every time I get a raise, it just goes up by that much. You've taken this human tendency to be kind of lazy and forgetful, and you've made it work for you and not against you. Our traditional notion of willpower says, yes, every two weeks I should get my check and with a great flourish, write the savings check back to myself, the research shows it's not quite that dramatic.

You just got to make it a habit or you have to make it easy. Last thing I would say about this has to do with the making it easy bit. The easier you can make it, the greater the likelihood. There's a lot of relationship, there's a strong relationship between fitness behavior and finance behavior that's been shown. And one of the things that we see from the fitness research is, even as simple an act as putting out your gym clothes the night before, you know, putting your shoes and, you know, gym clothes by the door of your bedroom,

that small act greatly increases the likelihood of someone working out. Choosing a gym that's close to your house greatly enhances the chance of you working out. So anything you can do to make it simple or automated is going to really serve you. So don't try and be a hero. Just stay away from bad messages. and bad ideas and temptations, and then make it easy to do the right thing. So what I hear is reduce friction. Sure. See? Much better put.

We live in a society where frictionless payments are becoming increasingly common. Through our phones or through our watches, if you have a smart watch, it is increasingly easy to use Apple Pay. You don't have to take a credit card out anymore. You just tap your phone. In fact, most of the payments that I make is I just tap my phone. Even at CVS, I pick up a bottle of Tylenol and tap the phone to pay. Will that lead to a future of higher spending rates? We're already a nation with a low savings rate, is that money that's just going to come from elsewhere? What is happening as payments become more frictionless?

There's really good research on this that cuts across a couple of domains, and all of it speaks to a single message. the more real you can make that dollar, the better your behavior will be with it. Some of the most interesting research on this actually comes when it comes to misbehavior, like stealing. If you look at something like what percentage of people would reach their hand

in a tip jar and take a $20 bill out of a tip jar, it's very low, right? Like that feels very real. Like you very directly see. stolen from someone. Well, what percentage of people would then steal a credit card? Well, it's a little bit higher than that. What percentage of people would steal the numbers from a credit card? Well, it's even higher. So we see that when we come to people's financial misbehavior, there's good research by Dan Ariely and others that shows that the more real you can make that dollar, the more honest that

person's going to be. Well, the same is also true of our spending behavior. I just got back from the Philippines. And the exchange rate in the Philippines when I was there was about 57 to 1. It would not be uncommon for, you know, lunch to cost a thousand Philippine pesos. It became this really disorienting thing for me because I was only there for like four days. And it just never felt real. It just felt like monopoly money the whole time. Like the bills were different color, the numbers were crazy. I found my spending get really out of control because it was just so unmoored from what I know. The same way you can make saving and investing frictionless to be better behaved, the more friction you want to put between you and a spending impulse,

if that's something you're trying to get under control. There is a reason why every business in the world wants to put you on a monthly plan because the same way that you forget about that savings that you're making every two weeks, you also forget about your Showtime bill or your HBO bill or your Peloton subscription or whatever it is, you see subscription-based businesses popping up everywhere, places they have no business being candidly, because it's such a good model for parting people with their money. So the same thing is. is true in reverse. You want to make saving and investing as frictionless as possible, and you want to make spending as effortful as possible if you're trying to get your savings under control.

To what extent should a person focus on getting their spending under control, as opposed to focusing on the income side of the equation, or focusing on given limited cognitive bandwidth, to what extent should savings be part of what grabs our extremely limited attention? I truly believe that the biggest impediment to savings is income. Now, that is controversial. If you think about this and you think about it as a sort of offense versus defense consideration, I feel like a lot of folks in our community give a lot of focus to the defense and saying,

how can you play defense, and how can you save more and how can you be thriftier? And God bless, that's all good stuff, right? that's all important stuff and that is indeed part of it. But there is an incredibly strong correlation between income and terminal wealth. I mean, if you could just look at one thing to determine someone's terminal level of wealth at retirement, it would be their income. It's not, you know, whether they were able to ring an extra 1% out of picking great stocks or whether they clipped a bunch of coupons to save a couple bucks on their groceries, it really is their income. And so I think a lot of times we don't focus enough on that. And I do think it's more

fungible than people realize. I think people could do a better job of asking for raises. People could also do a better job of just looking first for opportunities to grow their income. One of the things that we do most consistently is we look at things that are out of our control and then we get frustrated when they don't happen for us. We look at things like trying to time the market or pick good stocks and that's sort of this externality. It's hard to get that right and it has a lot to do with things that are out of your power. Whether you go back and get that master's degree, whether you go get that certificate that's going to open up new professional avenues for you, that's completely within your power. And nothing will ever predict the growth

of your wealth like your income. So they're both important, but we pay more attention to the defense than we should and give too little attention to playing offense. People often talk about how the way in which you spend your money is a reflection of your values. Would the same also be true for the way in which you earn your money? Oh, that's interesting. I've never considered that. But now that you mention it, I do think it is reflective.

One of the things that I love about this conversation and about budgeting and personal finance in general is that I feel like it is a little. a little bit of a window to the soul. I'm not inherently all that interested in money. I'm just not. I don't find it all that compelling. But what it can tell us about ourselves, I find to be extremely compelling and extremely interesting. And so I love this notion of yours that we can learn something about ourselves by the way that we both earn our money and the way that we spend it. And it turns out that we don't know ourselves all that well. There was really interesting research that came out a couple years ago that showed that our coworkers were far better predictors of our behavior than

individuals were of their own behavior. So the people in your orbit literally know you better than you know yourself because we view our own behavior through this very favorable lens of wanting to sort of righteously account for everything we've done and give ourselves the benefit of the doubt other people have no need to do that and they just see us as we truly are, I think our money can serve a similar function. The way we earn it, the way we spend it can tell us a lot about what we value and whether we are lying to ourselves about what's important to us. In the manner that money is a window into the soul, if you take a step back and ask why, it's a limited resource. And the allocation of a limited resource is,

insightful. To what extent then are there parallels between money and the way that we allocate other limited resources such as time and attention? There are huge parallels. Nassim Taleb has this great quote about never ask a person their opinion on markets, but only ask to see their portfolio. You know, talk is cheap. How are you positioned? I think there is a very similar conversation to be had with our time and with our money. When you ask the average person on the street, you know, the average listener at home, you know, what do you value? There is going to be remarkable consistency in those answers. It's going to be things like personal growth or faith and family and friendship and growing my intellect, all of these sort of high-minded ideals, that's awesome. But if we take

a step back and go, okay, whether it's my time or my money, if I value my health, how much did I spend this year on healthy fruits and vegetables? How much did I spend on personal training? How much did I spend on massage or therapy or whatever it may be? And I think many of us, you know, myself foremost among them, we'd be disappointed in those answers. You know, if we value personal growth, how much did we spend on coaching or therapy or new books. You know, if we value our faith, like how generous were we with our tithing. I think there's all of these places where our allocation of these limited resources cuts through our own self-sutterfuge and sort of the self-deceptive messages that we tell ourselves. And so with that in mind, can provide really rich insights into who we really are and who we can

really become if we just tweaked a few things. What should we conclude then if we look across those three domains, money, time, and attention, and we find disparate results? So let's say that through an assessment of our spending, our money goes towards specific categories, but through an assessment of how we spend our time, we arrive at a completely different set of conclusions. And then when we do an assessment of where our attention sits, it points to something yet different still. So if all of those things are pointing in different directions? Exactly, yeah. Yeah, I think more often than not, it's not if they're pointing in different directions. It's like, are they pointing in the direction that you want?

I'll just use myself. I think I'm probably fairly typical in that my attention is grossly misspent, right? Just through, you know, phones and the way that I sort of move through the world and how I'm addicted to my screen and all this, I think an audit. of my attention, if I were to be that self-reflective and that honest would really make me sad. Yeah. And then I could say, okay, where am I spending my mental energy and where do I want to spend? I just think it's a call to gentle correction. Same thing with your money.

What's the delta between where you're spending it now and where you want to spend it? And what's one incremental step, a gentle step, right, in that direction? Because what's interesting is when we're not gentle with ourselves, I think we get more of the same. The reason people zone out on their phones, the reason people overspend or eat too much or whatever it may be, is because a lot of times I think they feel bad about themselves and those things are a comfort.

So this audit that we're talking about, be it intentional or financial or whatever, don't let it be a reason to beat yourself up. Just have it be an awareness-raising exercise that lead you to take one small, gentle step in a new direction, One thing we know is that a behavior in motion tends to stay in motion and a behavior at rest tends to stay at rest. It's easy for me to spend gobs of time on my phone when I'm unaware of how much time I'm spending and I'm not really calling myself on it. But even a small step in the direction of positive movement, I think, bears the possibility of a big change.

What are the most effective methods of gentle correction? Is that something that a person can do by themselves or does external accountability? and rewiring your outer environment, is that necessary? Like, how do we go about with that gentle correction? Yeah, I'll give you three E's. The first is education. Sometimes it is just factually, like, we just don't know what we need to know. I think education is the first step.

Do we have enough information to do differently than we have done in the past and be more of the person that we want to be? I think education is empowering. But it's not enough in isolation, usually. The second one of these is environment. Back to our conversation about willpower. Who do you want to be? Are you surrounding yourself with the people?

Are you standing in the places? And are you taking in the messages that are going to make you more of that person? One of my biggest learnings about human behavior in these many years of me being a student of human behavior is that you're Your environment is a much better predictor of your behavior than your goals or even your values. We want to believe that, you know, we are who we are true blue in all situations. It's not true. We are usually as good or as bad as the people we surround ourselves with, the ideas we're putting in our head. So be really thoughtful about your environment.

And then the last one is encouragement. You know, who's going to be that person in your corner? Who's going to be that person that's pulling for you? I work with a lot of financial advisors, and the outcomes literature for people who work with financial advisors versus those who don't is really positive. And it's not because advisors have some magical crystal ball or secret insights into the market. It's because they're an accountability coach who keep people from making three or four really boneheaded decisions in the course of an investment lifetime.

So those three things, I think, are how we do the gentle correction. educate, we attend to our environment, and we get the right form of encouragement from a spouse, friend, coach, advisor. You talk about three or four boneheaded decisions across an investing lifetime. Is much of having a healthy financial life simply avoiding doing the worst things? It is the biggest part. It's often analogized tennis where if you look at people who are beginner, beginners at tennis. You know, beginners in tennis, the games aren't won, they're lost, right? That's how people win a game, not because of their own excellence, but because the other person messed up. And that's what it is like in our financial lives as well. The getting it right

half of the equation in saving and investing is shockingly easy. I mean, shockingly easy. You could spend one weekend read two or three books and know everything you ever need to know about how to allocate your money, how to automate a savings program, and that is all you would really ever need to know. Not stepping on rakes over the 30 or 40 years of your investment life, though, is shockingly difficult. And it's something that I've done a ton of, like, despite the fact that I write books on this, it's really, really tricky. So you win way more points. You win way more points by avoiding the big error than you do by, you know, slamming home the perfect serve. And yet we spend almost all of our time and attention on that perfect serve.

What leads to the error? Because in the moment you don't realize that this is about to become an error, what happens in the lead up to it? What are the necessary preconditions? Well, there's a couple of ways that this can go wrong. I would say at its core, it usually has something to do with psychological comfort in a moment. If I had to distill it down to the one thing, it's a seeking of psychological comfort in a moment of pain that degrades our long-term outcomes. You know, whether it's splurging on that thing you wanted because you had a bad week at work or whether it's selling, you know, all your holdings because you're fearful of correction. all of these things have, I think, in common a seeking for momentary comfort at the expense of long-term benefit.

Right. And that ties back to the avoidance that we were talking about earlier. You know, because if you end a tough work weekend, you splurge a few hundred dollars on a thing, that's not going to pull you off your game. You know, 20 years from now, you're not going to remember it. But avoidance of looking at your financial life, if that avoidance, is chronic and it creates psychological comfort because you never have to deal with the facts, that then can really mess you up. I think the avoidance pieces is spot on. And I would even say that sometimes what looks like avoidance from the outside may just be lack of awareness, right?

So that the purse or the sunglasses or the guitar or whatever you buy that costs a couple hundred bucks that one time won't throw you off course. but the constant leakage of that $2, $400 every week because of some indignity you suffered caused us tremendous damage. About a year and a half ago, I started tracking my nutrition. I started tracking my protein and calorie intake in particular. Since that time, I've lost 65 pounds without changing anything in my workouts. It was incredible to me when I started looking at, if you had asked me, why are you overweight?

I would have said, Paula, why are you asking me this mean question? No, no, no, no, but then I would, you know, if you would ask me, like, why are you not at your ideal body weight? I would have said, it's just bad genes. Like, you know, I don't know. I'm just unlucky. I'm a middle-aged dad. It is what it is.

Like, I work out. I don't know. I guess I'm just unlucky. I just like, I got bad. jeans. When I started actually looking at what was happening, there were times in every day and every week where I was just like, you know, grabbing a cookie here or some crackers and hummus there. It was nothing crazy in isolation, but it added up in ways that were beneath my awareness. And I was telling myself a story that wasn't true until I got the awareness.

And so I think that a lot of people do that. I think if you look at a lot of people's financial lives, they would say, I don't know where it all goes. Like, I just don't know where it all goes. I'm not doing anything crazy. And indeed, they're probably not. But there's also a lack of awareness. And until you have that awareness, you can't have the power. So I think that is a very innocent way that I think a lot of people live in sort of live hand-hand

mouth and live in a sort of constant state of financial panic because there's just this lack of awareness and where there's a lack of awareness there can't be really any control. Does that mean that most financial errors or many financial errors are chronic and cumulative rather than episodic? Oh, yes. I think that is definitely the case. I think we certainly focus on the big strikeout. So much of what happens is chronic and episodic.

And I mean, you know the way that money. money grows when it's treated well, the chronic episodic nature of bad decisions really adds up over time and that lost opportunity, you know, lost compounding. You talked about the lost opportunity for compounding as something that can really hold back your portfolio

and hold back your net worth. With that said, by choosing to invest in, to put your money in a 401k and invest in an index fund, you are necessarily not directing that money, money towards starting a business or towards, you know, some other useful, perhaps pro-social and possibly profitable alternate use of that money. How should a person think through those trade-offs?

I think they should think in terms of two things, because there will always be a trade-off when it comes to compounding. One thing that I think people would be really wise to do is to the extent possible, take the worst case off the table. The imagined worst case is the catalyst for so many poor financial decisions. I can't even begin to explain it. Having an emergency fund, that begins to take one layer

of the worst case off the table. Like, yeah, God forbid there's a medical something or whatever, I can make it through two, three, four months, whatever your surplus is. Paying off your house is a form of, you know, taking the worst case off the table. So depending on your level of neuroticism, depending on your level of anxiety or worry,

one of the things that we can really do that facilitates good, sound decision-making is taking the worst case off the table. And as you go through the different layers of that, then it becomes less material. This next $10,000, do I put it in a balanced target date fund, or do I go buy a duplex in Atlanta and try and get into the real estate game?

It kind of doesn't matter. Like, it matters less because your foundational elements are there. That's sort of job one. The second thing I would do, though, this is a little wonkier. I would look at base rates and probabilities. If you're saving for retirement 30 years hence, the likelihood of the money you put in that index fund being higher 30 years from now

is really great, like exceptionally high probability that you will make money on that. Putting that $10,000 into your friend's AI startup, the distribution of outcomes is wildly different. That $10,000 may be $10 million, but it will probably be zero. And you have to be able to look at the base rates, the probabilities, and say, hey, am I cool taking this risk? Because those are wildly, wildly different things. Both of them could be really good, but I think it gets easier to have those conversations when the worst cases off the table and the fundamentals are starting to get handled. What are some of the worst case scenarios that people don't anticipate? The number of worst cases is as varied and as individual

as the people listening to this show, but I want to give them a technique that is really effective for thinking about these. And it's called a premortem. Most of us are familiar with a post-mortem, where something goes wrong and we go, oh, geez, what happened there? And we try and get the lessons learned from that. But then the disaster has happened and that's no fun. Psychologists talk about something called a premortem, though, and you can do it with your financial life. If you think about your financial life and you say, okay, here's where I want to be in 10 years, 25 years, whatever your number is, and you say, if I'm sitting here with Paula, 10 years from now, and the worst has happened, what are the likely sources of that dysfunction? What are the likely

points of failure? What are the likely, you know, gaps in the armor? For a lot of people, I think it's going to be too much risk or too little risk, right? Yeah, like if I'm sitting here and I don't have enough for retirement, it's either because I bet it all on black and it went south or because I sat in cash the whole time, right? So too much risk or too little risk. I think for a lot of people, it's going to be an insurance conversation. You know, it's like not having enough protection. Other times it will be a life choice, right? Maybe the reason I'm sitting here 10 years from now and things didn't go my way is because I wasn't bold enough to quit my job right now and go back to school and do the thing I really love and then go work in the field that I'm truly passionate about.

So I think that premortem, you know, this has been something that wise people have done since the time of the Stoics. They called it, you know, I'm going to mess up the Latin, but, you know, the meditatio malorum, right? Like the premeditation of evils, the premeditation of the bad thing. Think about what's the worst that could happen before it happens and then prepare, situate your life such that the likelihood of that happening is much lower. It is another layer of playing defense, but it's a very different form of playing defense than a fixation on frugality. Yeah, well, it is a way. of playing defense, but the outcome of that could be to play offense, right? I mean, the outcome of that conversation could be, oh, I'd need to cut my spending, or it could be like, I need to go make more

money. You know, that's one of the likely outcomes. Well, thank you for spending this time with us. Where can people find you if they'd like to learn more? It's been my pleasure. Thank you for the thoughtful read and the thoughtful conversation. I have my own podcast called Standard Deviations, and I am on Twitter at Daniel Crosby and on LinkedIn, Daniel Crosby, PhD. Thank you to Dr. Daniel Crosby. What are three key takeaways that we got from this conversation? Key takeaway, number one,

your money is a mirror into who you are. The way that we spend money reveals stuff about ourselves, stuff that we might not even be aware of, because there's often a disconnect between our ideal selves and our real selves who we want to be versus who we are in the moment. To that end, our spending patterns are a mirror. They show us what our real priorities are, not just what we think they are. And if you track your money, you can see the gap between your stated values and your actual

behavior. And that's helpful because then you can either reassess your values or bridge that gap. you can make a more conscious decision about what to do next. I'm not inherently all that interested in money. I'm just not. I don't find it all that compelling. But what it can tell us about ourselves, I find to be extremely compelling and extremely interesting.

The way we earn it, the way we spend it, can tell us a lot about what we value and whether we are lying to ourselves about what's important to us. So that's the first key takeaway. Key takeaway number two. The real secret to building wealth has absolutely nothing to do with cutting expenses, or specifically with cutting minutia.

People obsess over coupon clipping. People obsess over really sweating the small stuff, growing your own basil. I say that because I've actually done that. Like rather than buy store-bought pesto, you know, I grow my own basil and then harvest that basil. And it's fun. fun hobby, but like the $4 a week of cost differential between making my own pesto versus just buying it from the store, that $4 a week is not going to move the needle. And even if I stack that on top of canceling my HBO Mac subscription and also taking a pledge to go 30 days of no restaurants,

these things get a lot of attention. And I'm not dismissing them. They have a lot of their place, particularly if you're just getting started, if you're new to the scene, or if you're in a really tough financial spot, like these things have their place and time. But there's an expression, what got you here won't get you there. And once you have picked the low-hanging fruit, once you have embraced an ethos of frugality into your life, more isn't always better. And that applies to frugality as well. More frugality is not necessarily the answer. Once you've picked the low-hanging fruit, it's time to focus on the income side of the equation, to focus rather than playing defense, to focus on playing offense,

because that can really transform your financial future. I truly believe that the biggest impediment to savings is income. Now, that is controversial. There is an incredibly strong correlation between income and terminal wealth. I mean, if you could just look at one thing to determine someone's terminal level of wealth at retirement, it would be their income. It's not, you know, whether they were able to ring an extra 1% out of picking great stocks or whether they clipped a bunch of coupons to save a couple bucks on their groceries, it really is their income. That is the second key takeaway. Finally, key takeaway number three.

There are many people who think that market crashes or some other economic black swan event is the biggest threat to their financial future. But often we, ourselves, our unconscious habits, we get in our own way. Sometimes that's panic selling during a market dip. Sometimes it's stress shopping after a rough week. but however it manifests, it boils down to prioritizing momentary psychological comfort over the values that we hold most year and the goals and the vision of what we want to create for our life. If I had to distill it down to the one thing, it's a seeking of psychological comfort in a moment of pain that degrades our long-term outcomes, whether it's, splurging on that thing you wanted because you had a bad week at work or whether it's selling all your holdings because you're fearful of correction.

So thinking short term rather than thinking long term, that is one of the biggest threats that our portfolio faces. And those are three key takeaways from this conversation with behavioral psychologist Dr. Daniel Crosby. Thank you so much for being part of the Afford Anything community. If you got value from this episode, please share it with your friends, your family, your neighbors, your colleagues, your veterinarian, your accountant, your financial planner, your kids' teachers, the other parents on the playground, or at the swim meet, or at the soccer game. Share it with the buddies that you watch sports with, with your book club, with your favorite cashier at the grocery store. Share it with all of those people and more, because that is the single most important way that you spread the message of,

F-E. Please subscribe to our newsletter. It's absolutely free. You can find it at afford anything.com slash newsletter. We send stuff out every sometimes. It's a surprise. It's a wonderful surprise. We have been infrequent for the past few months,

but I've got a lot of articles brewing in my brain, and we will be more prolific in the weeks and months to come. So again, afford anything.com slash newsletter. You can also chat with other people in this community by going to afford anything.com slash community, completely free. And it's a great place to connect with like-minded people. Thank you so much for being part of this community. I'm Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.