The Compound and Friends - The Purpose of Money (with Barry and Jonathan Clements)

Episode Date: December 23, 2019

Barry Ritholtz sits down with author and former WSJ journalist, Jonathan Clements to discuss how money is similar to health, smart ways to spend it, and how our thoughts about money change over the course of a lifetime. 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

I'm here with Jonathan Clements. He has been a Wall Street Journal reporter for almost two decades. And today, we're going to talk about the purpose of money. Jonathan, thanks for coming. Great to be here, Barry. So, not only were you a reporter at the Wall Street Journal for a long, long time, you've written a number of books. What's your most recent book that just came out? The latest book I did is called From Here to Financial Happiness. So, let's talk a little bit about our broad subject, the purpose of money. I was always

under the impression that money is a medium of exchange. Am I misunderstanding that? Well, it certainly is a medium of exchange. I think the problem is that we're too quick to exchange it. People get money in their pocket and they rush out and they buy something. They want that immediate thrill. But as we know from the research, the thrill doesn't last very long. One of the most compelling statistics out there is what's happened to happiness in America since the early 1970s. Over that period, real inflation-adjusted income in the U.S. has more than doubled, and yet reported level of happiness has not budged. We are no happier than we were in the early 1970s, despite this vast improvement of our standard of living.

So what that tells you is money has not bought happiness, but I honestly believe that it can if we spend it properly. So the millennials would say, OK, boomer, of course money isn't going to buy you happiness if you're wasting it on goods and material objects. But money can be used to buy experiences and social events and time with family. And that's a better use of money. What do you say to that generation? I would say that millennials are surprisingly smart. They learned this a lot earlier in life than we did. In fact, I really feel like millennials get a bad rap. So when I talk to people about money and happiness and the three key ways that it can help, that is one on the list. Yes, use your money to have special moments with friends and family. It's a great use of money.

Use your money to have special moments with friends and family. It's a great use of money. The second way to use your money is to be able to spend your days doing what you love. That's full financial freedom that we get when we finally reach retirement. But if you're smart about handling your money, if you save diligently from the day you enter the workforce, you invest intelligently, by the time you get into, say, your 40s, you may have the freedom to cut back the number of hours you work, swap into a career that may be less lucrative, but which you might find more fulfilling. So the second key way to use your money to buy happiness is to use it to buy this sort

of financial freedom. That's two. Give us one more. So the third way to use money, and I think this is the great financial trade-off, which is if we spend a little bit less today and put away the difference, what we can do is reduce the amount of financial anxiety we have. It's the great trade-off. It's a trade-off that so few Americans do. We know, for instance, from the Federal Reserve study that four out of 10 Americans couldn't cover a $400 financial emergency without borrowing money

or selling possessions. I mean, can you imagine that, living that close to the financial edge, how anxious that would make you? So what I say to people is money is sort of like health. It's only when you're sick that you realize how great it is to be in good shape. So what I say to people is take some of that income that you're going to spend at the shopping mall, put it in a savings account, pay off the credit cards, and you will buy yourself a sense of financial serenity that will make you so much happier than whatever it was that you were going to buy at the shopping mall. So I'm hearing three big bullet points. One, it gives you the opportunity to spend time with friends and family. Two, it gives you options and financial freedom.

And three, it gives you peace of mind and security. Those are the biggest advantages of having money. How has your thinking about money changed over the decades you've been writing about it, studying it, and looking at all the sort of crazy things we read about involving money every day? and looking at all the sort of crazy things we read about involving money every day. So when I go back to when I was a kid, a teenager, I couldn't keep money in my pocket. As soon as I got money, I would spend it. I would go out and I would buy stuff.

And I've seen this with my kids. I've seen it with my stepkids. And in a sense, it is somewhat rational. When you reach our lofty age, Barry, we're not going to have that much time to enjoy the possessions that we purchase. But when you're a teenager, you've got decades ahead. So there's a big difference between the I have money in my pocket, I'm looking for a dopamine hit, and I'm 25 versus I'm 55, 60, 65. Life is short. What am I waiting for? Are you making that claim?

To a degree, yeah. Obviously, the stuff that I bought when I was a teenager, I do no longer have it. It has gone to the junkyard. Nonetheless, there is some degree of rationality there that if I buy a possession when I'm in my early 20s, I'm going to get a lot of use out of it. If I buy a possession today, I'm going to get far less use out of it. But the truth is, we also learn from experience. At this point, I've made thousands of disappointing purchases. Let's talk about that. Disappointing purchases, stuff that ends up in the junkyard. What sort of monetary regrets do you

have about things you've purchased? When I had a house, I used to have a basement. And as I've said to people, basements are basically badly curated museums devoted to the stuff that we bought that we thought was going to make us endlessly happy, but ended up disappointing, and we just simply can't bring ourselves to trash. So when I sold my house and moved into the city a few years ago, you would be shocked at the amount of stuff that ended up on the curb. And, you know, they were everything from, you know, pieces of art, old bicycles, you know, pieces of furniture. Every one of them I gave great thought to when I purchased. And by the time I moved out of that house, it was like, really?

Did I really spend money on this? So how should people balance spending money today versus saving for a happier and more comfortable future? It's a tough balance to hit. I think at this point, we don't have a huge problem with people saving too much. Most people spend too much. But for those people who are super good savers, maybe 20% of the population, once they reach retirement age and they go from accumulating

assets to spending assets, sometimes making that switch is enormously difficult. Actually enjoying the money that they've accumulated can cause huge distress for people who have been good savers over time. And what I would say is if you can't bring yourself to spend the money on yourself, then think about how you could spend it on other people. Maybe you could use it to give your kids a greater sense of financial security. Maybe you could use it to support the charities that you love. There are other ways to use money other than simply going to the shopping mall and buying stuff for yourself. Does than simply going to the shopping mall and buying stuff for yourself.

Does anyone still go to the shopping mall? That's certainly the one thing I think the millennials have gotten that right. It's all Amazon all the time and no one's wasting their time. Sports shopping, I don't think this generation does that the way, let's say, the Gen X or boomer generation did. But I think if you've accumulated a decent amount of money, the thing we started out talking about, about creating special times for friends and family, I think that's a great use of money. I mean, I will spend countless dollars to bring my kids together to have a special time with them, whether it's going on a vacation, whether it's going to a great restaurant, just getting everybody together, talking and having a fun

evening. I think that is a great use of money. So much better than going out and buying the latest electronic toy. Thank you so much for coming by, John. And thank you for watching. Be sure and subscribe below. Hit the like button down there. Leave us a comment.

And we'll see you again.