IN OUR 20s, WE TEND to be a confident lot: We figure we know what we want from our life, that the goal is to become rich, that money buys happiness and that we can beat the market.
The years that follow teach us otherwise. We discover that things we passionately wanted—a new job, a new house, admission to a particular college or club—don’t prove nearly as life transforming as we imagined. Most of us grow richer as we grow older, and yet we can probably think of earlier times when we were happier. We have a long history of purchases that disappointed. Very few of us—if we make an honest calculation—have outpaced the market averages over time.
But with those failings comes the chance to learn and improve. Make no mistake: A more successful financial life begins with a profound sense of humility—hence our name, HumbleDollar. Here are five reasons to embrace a humbler approach to handling our finances:
1. We expect too much from money. Yes, a bigger paycheck and greater wealth can enhance our lives. But blindly pursuing wealth and indiscriminately spending money don’t guarantee happiness, and they could backfire. If we devote too many hours to getting ahead in our careers, we’ll have less time for friends and family—a key source of happiness. If we spend without thought, we might accumulate possessions that involve constant upkeep and which prove more of a burden than a blessing.
2. We don’t instinctively know what we want. To get the most from our financial life, we need to eschew snap decisions and instead think hard about what we want. We should pause before making major purchases, so we have a chance to consider whether it’s money well spent. We should contemplate the goals we’re pursuing, and ask whether these are things we truly want, or whether we’re fixated on them because we believe others will approve.
3. We lack discipline. Given a choice between spending today and saving for tomorrow, we’re quick to sacrifice the future. Indeed, many folks seem to engage in magical thinking, imagining that their financial future will be bailed out by high investment returns, a rich uncle’s bequest or the next lottery ticket purchase. But none of these things will likely come to pass. Want to grow wealthy? For most of us, the road to riches lies in diligently socking away dollars for three or four decades.
4. We aren’t smarter than the market. We make innumerable mistakes when investing, growing overconfident as the markets rise, panicking when they fall and imagining we know which way stock prices and interest rates are headed next.
Want to be more rational? My advice: Forget picking individual stocks and forecasting financial markets—and instead focus on capturing as much of the markets’ return as possible. That means slashing investment costs, minimizing taxes and spreading our investment bets widely. The best way to do that: Buy a globally diversified portfolio of index funds.
5. We’re bad at imagining the future. Even outside the financial markets, we shouldn’t assume we know what the future will bring. We expect the years ahead to be “normal,” meaning they’ll look like the past, and yet surprising things happen all the time. That means we need to be financially prepared for the unexpected—whether it’s illness, unemployment or an early demise.