Skip to Content
Financial Advice

Don’t Let Your Expectations Grow Faster Than Your Income

Award winning author of ‘The Psychology of Money,’ Morgan Housel, discusses how ‘money is a window into how people think about risk, reward, greed, and fear.’

On this episode of The Long View, Morgan Housel, one of the first guests on the podcast in 2019, returns to talk about financial freedom, storytelling in finance, and financial education.

Here are a few excerpts from Housel’s conversation with Morningstar’s Christine Benz and Jeff Ptak:

Financial Contradictions and Paradoxes

Ptak: I wanted to ask you about contradictions and paradoxes. You wrote a piece recently. I think, a day or two ago, I was marveling over this piece. It’s called “Little Rules About Big Things.” You wrote it in early October. We will include it in the show notes. And it’s an amazing piece. I think it’s 88, they’re not bullet points, but they’re just short little stanzas, and many of them are exploring contradictions, paradoxes in everyday life. It could be life, financial life, what have you. What is it that draws you to those sorts of things that feature so prominently in your writing?

Housel: I think one of the big things is that we tend to think of finance like there is one right answer for everyone, and if we can just find that one right answer, we’ve discovered the truth that everybody should follow. Very similar to like in physics, there is one right answer for everyone. And in math 2 + 2 = 4 no matter who you are. No matter where you’re from, how old you are, how much money you make, 2 + 2 always equals four. And in finance, it’s not anywhere near like that. We think it is. We want to pretend that it, but it’s not. And you can take people in finance who are the same age, from the same country, who earn the same amount of money, and the right financial decision for those two people might be completely different. How much money they should save might be completely different, how they should invest their money might be completely different, because they have different personalities. And again, in math, your personality doesn’t matter. In finance, it’s everything. Your risk tolerance is everything, your social aspirations, your family dynamics, how your spouse feels about risk tolerance, to say nothing of your own risk tolerance, that’s everything. That’s not a part of it, that’s everything.

And so, the contradictions I think really bring that to light. And I think a lot of times, the biggest contradiction is, I think the majority of financial debates between people, which is what 99% of financial media is, is people debating whether X, Y, or Z is going to happen. The majority of those debates are not actually people disagreeing with each other. It’s people with different risk tolerances and different time horizons talking over one another. And people are either oblivious to the fact that other people might not have the same goals and aspirations and risk tolerances that you do, or when they understand that other people have a different risk tolerance than they do, they’re upset about it, like how could somebody else view the world differently than I do? And they almost view it as a threat to their own worldview when they discover someone else who thinks differently. And so, those contradictions are everywhere.

And by the way, they exist at the personal level, too. There are probably things that I do with my own money that contradict each other. I can’t even think one at the top of my head, but everyone is a walking contradiction, and money is such a window into how people think about risk and reward and greed and fear, these really big topics that impact a lot of areas in life, and money is a window. The financial decisions that you make are a window into that. So, I think the contradictions are exciting to me because it is proof and a window into the fact that there is no one single right answer in this field.

Not Letting the Perfect Be the Enemy of the Good

Benz: Seems like you’re at peace with the notion of something being too hard to figure out and this idea of not letting the perfect be the enemy of the good. Have you thought about how you’ve gotten OK with the idea of something being good enough?

Housel: I think it’s hard to have any kind of historical view of finance and economics even in recent history of the last one to five to 10 years and not be completely humbled with other people’s ability and most likely your own ability to know what’s going to happen next, both at the individual level, like what’s going to happen in your own career—a lot of people, their ability to forecast where they will be in their career five years from now is atrocious. They have no ability to know. If they’re looking back and being honest with themselves, it was a completely blank slate in front of them. And at the broad economic level, the ability to know what’s going to happen next, is so humbling if you’re honest with yourself.

The recent example that I like is The Economist magazine, which I really admire. It’s probably the most astute financial publication that’s out there. I’ve read it for years. It’s great. Every January they publish an edition that is a review of the year ahead. So, here are the economic and investment risks that are going to impact you over the next 12 months. They do this every January. Their edition in January of 2020 did not say a single word about COVID. Of course, nobody was talking about it in January of 2020. That’s not a criticism. And their edition in January of 2022 does not have a single word about Russia, Ukraine, or energy markets. Again, because nobody was talking about it back then. I’m not criticizing them. But that ability of even literally a couple of weeks before these things completely changed the world. The most astute financial thinkers and writers are totally oblivious to it. I think it’s like that every single year that the biggest economic risk in front of you is something that nobody is talking about. It’s always like that. And you can say with so much confidence today that the biggest investing risks, the biggest economic risk over the next 12 months, over the next five years, is something that nobody is talking about right now. And you can say that because it’s always the case.

So, to me, the only like practical takeaway from that humility of our inability to forecast is to have some level of good enough, good enough forecasting to where I’m like, I have no idea what’s going to happen over the next 12 months or the next five years, but maybe I have some baseline expectations of—I expect there to be market volatility, I expect there to be recessions, I expect there to be bear markets. I don’t know when they’re going to come. But that’s good enough. If I can just have a baseline expectation of what’s going to happen, that’s good enough for me. And also, I think at the personal finance level, if you don’t have a concept of enough, then no matter how much money you make, it’s never going to feel satisfactory.

And one truth in finance is that if your expectations grow faster than your income, you will never be happy with your money, and it doesn’t matter how much money you make, if it’s $10,000 a year, or $10 million a year. That’s like an iron rule of finance that has to be obeyed. And one thing that I’ve always found fascinating is that there is so much effort, almost all of the effort in the financial industry goes toward the first part of that equation, which is increasing your money, increasing your income, increasing your net worth, which is great, of course, that’s an important part. But there’s almost a complete and utter ignorance of the other part of the equation, which is keeping your expectations in check. And it should not be any surprise that a lot of people, by and large, will go through their life where on average over a period of time, their income will rise, their net worth will rise, and are they any happier for it? Maybe a little bit, but not nearly what you imagined you would be.

And for most people, if I said, if your net worth doubled in real terms, if your real net worth doubled from here, how would you feel about it? Most people would say, I would feel amazed. That would be incredible. That would be such a windfall. I would be happier. We’d go on better vacations. We’d live in a better house. But when that actually happens to people, by and large, they’re not. They’re not. And everybody knows this. What I just said is not even controversial. But the reason it takes place is because people’s expectations grow just as fast, if not faster than their income. And so, I think the only way that we can fight against that and use our money to live a better life is to put just as much effort into keeping our expectations low as goes into growing our net worth and growing our incomes.

Do You Actually Want What You Don’t Have?

Benz: You recently told five short stories about people who thought they wanted something, only to realize that they didn’t want that thing, or it didn’t live up to their original expectations. The people you profile range from David Cassidy, the teen heartthrob, to astronauts, and a blind woman whose vision was restored. Why did you write that, and what pertinence does it have to the way we set our goals?

Housel: Those to me are some of the scariest stories I think that I come across because most people have some aspect of dream in their life where they’re like, oh, if I could get X, Y, and Z, I’d be happier. And X, Y, and Z is different for everyone. Maybe it’s a higher income. Maybe it’s if I got this career promotion. Maybe it’s if my kids achieve this, or if my spouse does this—whatever your aspirations are. And there are so many examples where people who achieve those enormous goals and they feel nothing for it or they’re even less happy than they were before.

One of the stories that I mentioned in this article that you just brought up was this woman who was blind her entire life. She had zero vision her entire life. I think she was injured in childhood. So, her entire adult life she can’t see anything. She has this experimental surgery to replace her corneas I think it was, and it worked. It was a miraculous success. And after the surgery, she could see. She had a full field of vision. And you would think that is the most incredible, should be the happiest thing that could ever happen to someone. They’re blind their entire life and all of a sudden, they wake up one day and boom, you can see the world. That’s amazing. And this woman, who it had happened to, was not happy, she was not ecstatic. It was completely overwhelming. And she told the doctor a few weeks after the surgery that she wished she could go back, that she was very accustomed to her world as a blind woman. And because she was disabled, she never had a job, she never had a career, she lived off of government assistance and she became accustomed to that. And now that she regained her vision, the government and the rest of the society expected her to go get a job and that was so overwhelming for her.

There’s another story that’s very similar to that about a guy who has this exact same situation. He was blind his entire life, regained his vision almost completely when he was in his 40s. And it was so overwhelming. The world was so overwhelming to him that a lot of times he walked around with a blindfold on. He couldn’t handle it. He couldn’t handle the stimulation. So, those experiences where people win the proverbial lottery of whatever the lottery winnings that they wanted were—whether it’s money or regaining your vision, whatever it is—and not only are they not happier, they’re overwhelmed with it, that’s pretty fascinating. If people like that are humbled by achieving their dreams, then what are my much lower dreams of what I want in my life—it’s not regaining vision. It’s my dreams of having a marginally higher net worth. If people who win the lottery are not any happier, what are my little dreams going to do for my happiness? And it’s so humbling to read and think about those stories. And to me, it gets back to the previous point about keeping your expectations in check. And it’s like, yes, I have aspirations and I have dreams. But if I don’t keep my expectations and how those dreams are actually going to make me happier—if my expectations for those are not low, I’m going to be so incredibly disappointed throughout my life.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

More on this Topic