The Psychology of Money II: Enough and Compounding

Part II of my take on some of the key points from The Psychology of Money. Click here for part I on Luck and Risk.

Chapter 3 Never Enough

Years ago, a senior colleague asked me why I stepped down from management, especially when I was the breadwinner of a young family? She was concerned if I could manage my financial obligation. I remembered telling her that even though I will miss the bigger pay check, the reduced pay was enough.

“The hardest financial skill is getting the goalpost to stop moving.”
– page 41

Enough is not a new idea to me and I do embrace this idea in my life. But once again, the usage of “enough” needs to be viewed in the correct context. Imagine a person who is doing something that he is passionate about or is purposeful to him. This person will always want to to do more, to even make the little bit of improvement. If in this process, he ends up making more money, then it would be wrong to conclude that the person is shifting his goalpost.

Housel’s sharing of what Warren Buffet said sum it up very nicely,

“If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.”
– page 40

Indeed. Enough or not really depends on the intent behind the action.

“Enough is not too little.”
– page 42

Oh, I really like this point and the analogy he used about eating until we are full and not beyond that. So it is not about setting a low target or limiting ourselves but knowing that anything more does not bring more satisfaction. Back to my own working experience. I have chosen not to climb up the ladder as I do not see greater satisfaction that I will get from the new role. It means not getting a higher pay grade but that’s fine as I treasure doing what I like to do more and what I already had then was sufficient.

I would like to reiterate that it is absolutely alright to climb the ladder if you like or simply don’t mind the new role. That would really be nice – doing something you like with a higher pay check. On the other hand, I think it is quite sad to just go into the new role just for the monetary return.

Chapter 3 Confounding Compounding

“If something compounds……a small starting base can lead to results so extraordinary they seem to defy logic.”
– page 49

Compounding is a well-known concept that is so difficult to follow, especially when we are looking at a single stock. The time required for compounding to take effect is so long, relative to our life-span, that most of us have little patience for it.

It is slightly easier though if we are looking from a portfolio or net worth level. Thinking back, what probably worked for me is that I was busy with my work and other life events. That has allowed my equities portfolio and CPF to compound to where it is now – enough for me to take a break from regular work.

“Linear thinking is so much more intuitive than exponential thinking “
– page 51

Totally agreed with the above and I wanted to add that looking at year on year (even worse quarter on quarter) performance is much more intuitive than looking at compounded annual growth rate over a 3-year to 5-year period. I am definitely guilty of what I just wrote but awareness helps! I can now look at such numbers to satisfy my curiosity without reacting to it too much or too frequently.

“As I write this, Warren Buffet’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s”
– page 49

Thanks for the reminder and this gives much hope to me since my 50th birthday is not that faraway! Nope, I don’t think I can achieve the kind of return Buffet is achieving in the second half of his life. However, it means that the likelihood of me not running out of money before I leave this world is pretty good.

Emmm, provided that I can still get a decent average return from my equities portfolio and I don’t do something stupid.


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