We have two systems in our brain. One is the prefrontal cortex, responsible for rational decisions, and the other is the brainstem/limbic system, which controls our emotions. Our emotional center has much more influence over our decisions than we often realize. This influence can lead to irrational financial choices under stressful circumstances, such as selling stocks during a market crash instead of buying more.

We can mitigate the irrationality of our emotional brain by planning ahead and taking time to reflect, such as sleeping on significant financial decisions.

Diminishing Returns on Spending

• There is less happiness gained with each additional dollar spent.
• Saving now is akin to giving to your future self, while spending now is taking from your future self.

Happiness Plateau with Wealth

• Happiness tends to level off after reaching a $4 million net worth.

Investment Risk Spectrum

• Investments come with varying levels of risk:
  • Low-risk: Cash, savings accounts, CDs, and bonds.
  • Moderate-risk: Real estate.
  • High-risk: Stocks.
• Another worthwhile investment is in oneself, particularly through education. While generally a good investment, education carries its own risks.

Educational Investment Example

• Individuals with degrees in fields like sociology tend to earn less than those in STEM fields, such as engineering.
  • For example, a counselor may earn around $30,000 per year, whereas an engineer could earn $100,000 or more.
  • Studies indicate that even after controlling for IQ and socioeconomic background, the financial outcomes vary significantly:
    • Those who drop out of college after taking loans often end up with a net worth approximately $50,000 less than individuals who never attended college.
    • Conversely, college graduates, even those with loans, generally achieve the highest net worth.

Original draft written in June 2020.