I love a good personal finance book so when A Wealth of Common Sense blogger Ben Carlson mentioned that his favourite book of the year was Jonathan Clements’ How To Think About Money, I had to check it out. The book is full of common sense advice and financial wisdom, but Clements goes beyond the ubiquitous ‘pay yourself first’ and ‘max-out your retirement account’ and instead offers something different for readers to ponder about living a richer life.

Buy More Happiness

Clements says to get the most out of our money we need to spend with greater care. Okay, we’ve all heard that we get more satisfaction spending money on experience rather than things, but Clements backs up his claims with academic research and throws in these nuggets for good measure:

  • Spending money on others can deliver greater happiness than spending it on ourselves.
  • We’re often happier when we have less choice, not more.
  • Raising children isn’t nearly as life-enhancing as many parents claim.
  • Satisfaction through life appears to be U-shaped, with reported happiness falling through our 20s and 30s, hitting bottom in our 40s, and bouncing back up from there.

He also said:

Thanks to what I have learned from the research, I am quicker to make time for friends and family, even if it seems like an effort. I will happily spend money to visit my children or to bring them together for a family vacation or a special meal. I ditched my suburban New Jersey home so I could eliminate a long commute. I quit a high-paying job I had come to hate, because I knew I would be much happier if I spent my days engaged in activities that I thought were important and that I was passionate about.

That passage reminds me of a book I reviewed earlier this year – Victory Lap Retirement, by Mike Drak and Jonathan Chevreau. A happy life is not about earning a big salary or retiring with the biggest nest egg. It’s about finding the right balance to lead the life you want. Sure, money can buy happiness, but not nearly as much as we imagine.

Bet On A Long Life

The biggest challenge after we retire is figuring out how to pay for a retirement of uncertain length, but which could easily last 20 or 30 years. And we need to figure out what to do with all that free time. Clements argues that we should worry less about dying early in retirement, and more about living longer than we ever imagined.

To that end, the author suggests delaying Social Security (CPP and OAS to us Canadians) to get a larger monthly cheque, and also buying longevity insurance and immediate fixed annuities that pay lifetime income. Pensionize that nest egg, so to speak.

I also enjoyed the author’s advice to college students:

I tell them to focus on making and saving money. I even suggest that they might deliberately opt for a less interesting but higher-paying job, so they can sock away serious sums of money.

Clements says, and I agree, that the idea of pursuing your passions in your 20’s (you know, before you become burdened by the demands of raising a family and paying the mortgage) is a big mistake. Get your career on track early, save like crazy, and you’ll be buying freedom for your future self. Who says you’re too old to travel in your 40s and 50s?

Rewire Your Brain

I loved this chapter for the list of 22 mental mistakes that have been identified by experts in behavioural finance. Some of my favourites include:

Believing the secret to investment success is hard work. Activity might give us the illusion of control, but it’s more likely to hurt our performance.

Thinking the future is predictable. It is, but only in hindsight.

Taking credit for our winners, while blaming our losers on others. If we buy an investment and it goes up, it was our brilliant choice. If it goes down, it’s the fault of our broker, or those clowns in Washington, or that idiot on television that we listened to.

Finding stories more convincing than statistics. Academic studies are no competition for a good story: We are still drawn to hot growth companies with their slick innovations and adoring customers.

Think (Really, Really) Big

Bring order to your financial life by focusing on your paycheque, or more importantly, your ability to earn many paycheques over a lifetime. This is called human capital and over a 40-year career it might provide us with earnings of more than $2 million, and perhaps much more. We should take this enormously valuable stream of income and design our financial life around it.

Amassing enough for a comfortable retirement is our life’s great financial task, says Clements, but saving for retirement gets short shrift because we’re so focused on immediate goals and so bad at planning for the distant future.

Chronologically, retirement might be our final financial goal, but we should always put it first. That means dealing with our goals concurrently, rather than consecutively, and always carving off a portion of our income to save and invest for retirement.

To Win, Don’t Lose

Clements reminds us again that the goal isn’t to get rich. Rather, the goal is to have enough money to lead the life we want. While our desires are no doubt different we likely share some common themes, such as time with friends and family, dinners out and vacations, to pursue activities we’re passionate about, and we want these things without constantly worrying about money.

But we only get one shot at this life and sometimes things can go awry. Don’t expose yourself to potential disasters by not having disability insurance, or putting your entire retirement nest egg into one stock (your employer’s), or not having adequate life insurance. Invest broadly, cheaply, and don’t trade too often. Own an appropriate mix of stocks and bonds and rebalance regularly.

Final Thoughts and a Giveaway

How To Think About Money offers readers exactly that – five easy steps to help you think differently about your finances and how to achieve financial independence. Clements weaves in a nice mix of personal anecdotes and backs up his sometimes controversial claims with solid research.

The author was kind enough to send me an additional copy to give away to a lucky reader. To enter, leave a comment below and tell us your all-time favourite personal finance book, or the best personal finance book that you read last year.

We’ll take entries until Friday at 5pm EST and announce a winner in the next edition of weekend reading.

Good luck!

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