I was listening to a podcast a couple of weeks ago and the gentlemen being interviewed said that the common person thinks personal finance is 90% math and 10% everything else. After spending a lot of time reflecting on personal finance, I think it more appropriate to say personal finance is 10% math, 20% rules and tax laws, and 70% psychology. Don’t misunderstand me; compounding interest is a an extremely important concept to constantly reflect on. Every time I delve into the compounding of numbers I come out the other side with a sense of awe of how powerful and absolutely life changing it can be. However, if you have a psychological hangup with money, then no increase in salary or magic windfall will save you. Look at all the lottery winners who end up in a worse financial place a few years later than before they won the big prize.
This brings me to one of the more interesting and important psychological concepts to understand and it is deeply seated in everyone’s psychology; the scarcity mindset. In Kristy Shen’s Book, Quit Like a Millionaire, she calls her scarcity mindset her super power for building wealth. Shen grew up in China in extreme poverty. She explains how the national average wage in china was $327 per person. This is a less than $1 a day. For fun she scavenged medical waste heaps for things she could turn into toys because there was no chance her family could buy her any real toys. When her family relocated to Canada her previous forced scarcity allowed her to remove any shred of “invisible waste” from her life and be able to reach an extreme amount of frugality. She and her husband became millionaires in their early thirties and retired in large part due to her scarcity mindset and frugality, and now constantly travel the world.
This is the type of scarcity mindset I best understand. I have always understood the importance of saving and later learned how to invest, but I have also had medical issues which rendered me unable to work for close to half a year and left me with medical collections calling and my emergency fund depleted. That experience will probably make me save and keep more than others in my emergency fund and brokerage.
Another response to scarcity is to go in the extreme opposite direction; constant buying and hoarding objects. As humans we are working on hundreds of thousands year old mental framework and the early hominid who stored resources and hoarded them might survive a drought or winter that others would not. Today this feature of humans can lead to constantly buying trinkets to get dopamine hits on Amazon and leaving us wondering why we never have any money or financial security.
If scarcity mindset is Shen’s superpower, then I think being content with what I have is mine. Epictetus says “Contentment comes not so much from great wealth as from few wants.“ What I think should also be said is that the only way to become wealthy is to be content with living on less than you earn and investing what we don’t spend. Wealth is also what you do not see. It is the luxury car not purchased and living in the smaller house than you can afford.
However, let us reflect back on scarcity and how it can change our psychology. A central component of scarcity mindset can be decision fatigue. Decision fatigue is the degradation of the quality of your decisions because you simply have too many decisions to make. Jeff Bezos said while he was nearing his retirement that he was really only needed to provide input on a couple of big decisions a week. If you compare that with the lower paying positions in his warehouses who have extreme quotas to meet and thousand of small decisions to make a day, then you can see the extreme contrast. In addition, Bezos has all the paid help in the world to help with his house, family, cars, etc, while the warehouse worker does not.
Due to decision exhaustion of the warehouse worker we can see how they can develop some negative habits which might manifest itself as drinking too much alcohol, retail therapy, eating too much unhealthy food, or smoking. I have been guilty of all those things listed, and I have entirely eliminated most of them from my life or limited them with a better work life balance, lower stress, or medical assistance.
Unfortunately, there is not a simple or easy fix for decision fatigue. Getting a better job whether that is more money, better supervisors, office culture, or a better work life balance has helped me the most. Professional help like therapy can also help you work through complex problems that you haven’t been able to tackle in your life by yourself. Also being humble enough to seek guidance from someone successful or that you respect can point you in a direction you may not see yourself. Lastly, we need to understand that the skills and mentality that saved us through a harsh winter or survive poverty will not necessarily best prepare us and lead us into the next part of our lives. This is also true that worrying constantly about $3 questions when we are past that point financially might lead to decision fatigue and might negatively influence our ability to deal with other $10k questions.
One thing I want to add is that any google search of scarcity mindset or abundance mindset may lead you down a rabbit hole of trying to manifest wealth through some sort of spiritual belief. I don’t agree with this and listening to Jen Sincero, who is one of the proponents of this idea in her book, “You are a Badass at Making Money” was the most frustrating listening experience of my life. If I remember correctly, she spent tens of thousands of dollars to listen to a guru of some sort without knowing where the money was going to come from. I recommend getting your information from books because it is much cheaper or free from the library and vetted by a publisher and editor rather than a self proclaimed guru. Luckily she had forgotten about a 401k (this alone is frustrating) that she was able to cash out (even more frustrating) and pay her bill. She of course felt like it was divine intervention.
Unfortunately, scarcity mindset is caused by scarcity and poverty, and to be blunt it is impossible to manifest a chicken sandwich no matter how hungry you are or need it if it doesn’t exist. The better and more practical option is to devise a plan and follow it.
Millionaire Librarian 