The Book in Three Sentences
In this book summary of The Art of Spending Money, you’ll learn to harness the power of money to live a better life. The lessons in this book will help you reshape your decisions so that money works for you instead of the other way around. This book isn’t about getting rich, but about making the most out of what you already have.
Introduction: The Quest of the Simple Life
Happiness is often more complex than we first assume, and that’s evident when it comes to money. With money and success, you want to get what you need, not what you want. What you want (money) won’t get you what you need (friends, family, and health). Spending money isn’t about spreadsheets and numbers, but psychology, identity, and insecurity. Those topics are often ignored in finance, but they’re important.
Money can buy happiness and provide a better life, but you have to know how to use it, and knowing how to use money is different from knowing how to acquire it. Money isn’t a science, but an art. No one should ever chase money at the expense of happiness.
All Behavior Makes Sense with Enough Information
We decide what’s worth spending money on based on our life experiences. There’s no “right” way to spend money because there are no rules that define how spending money will leave you happy and fulfilled. When it comes to money (and so many other things in life), “all behavior makes sense with enough information”, as Housel says. A lot of spending doesn’t make sense until you analyze someone’s personality or the emotional hole they’re trying to fill in with money. The same expense has different meanings to different people.
To understand the art of spending money, follow these two pieces of advice:
- There’s no “right” way to spend money, so don’t let others tell you how to do so. Only you can determine what makes you happy and fulfilled. Money problems arise when people spend based on how they think they should, rather than in a way that matches their personality. Money is a deeply personal problem, and as such, you can’t solve it using a one-size-fits-all solution.
- Don’t judge how others spend their money. The fact that other people’s decisions differ from yours doesn’t make you wrong. Judging others is often an excuse to avoid being introspective.
May I Have Your Attention Please
What you want isn’t nice stuff, but respect, admiration, and attention. We often think a better life is one where you make more money, but that’s a wrong assumption. We do that because money is “an easy and quantifiable thing to chase”. In the end, we want respect and admiration from other people, not more money.
When someone dies, nobody mentions the size of their bank account or how large their house was. We all aspire to get nice things, but in the large scheme of things, they aren’t as important. In the end, our desire for better things is a strategy to get attention. This is a poor strategy because it’s easier to get respect and admiration through money than through intelligence, humor, or empathy. So we default to the easier (and least effective) option: buying cars, jewelry, luxury, and so on.
Instead of using money as a tool to manipulate people’s perception of us, we should focus on growth. The best position you can be in is to reach the point where your name has more value than anything you can buy. Then, you won’t spend money so that people respect and admire you because they already do. The goal we should all aspire to is being proud of who we are, not the car we drive. People will like you for who you are, not for what you have.
The Happiest People I Know
To be happy with money, never let your expectations grow faster than your income. True happiness is when you’re content with what you already have. In other words, happiness is the state when nothing is missing. Desire is a form of debt you have to repay before you can experience happiness. Our brain wants one thing: dopamine. Dopamine is the chemical of desire that keeps pushing us for more. It’s not the having that drives us, but getting anything that’s new.
Everything You Don’t See
There are more metrics than income to consider when it comes to happiness. We focus so much on what money can do for us that we ignore what it can’t. The best things in life (a spouse who loves you, children who admire you, and good health) you can’t buy. We think more money will fix everything, but this traps us on a psychological treadmill. The best qualities a person can possess have nothing to do with money. No amount of outward success can change what’s within us.
Happiness is hard to explain, but you can simplify it. Happiness is a loving family, health, friends, eight hours of sleep, and a sense of purpose. Money plays a role in some of those things, but its function is limited. Money can make you happier, but for indirect reasons. It’s often not the thing you buy that makes you happy, but what it represents. For example, having a big house makes it easier to spend time with friends and family.
The Most Valuable Financial Asset Is Not Needing to Impress Anyone
The ability not to impress others is your most valuable asset. There are two benchmarks to determine how well you’re doing in life: internal and external benchmarks. The former is how happy you are with yourself. The latter is how people perceive you. The best position to be in (financial or otherwise) is to only care about internal measures of happiness. We often spend money on things because we want to impress others rather than make ourselves happy. Doing what you want, when you want, and with whom you want is priceless.
What Makes You Happy
If you had everything you wanted, you wouldn’t appreciate anything you had. Good is the gap between expectations and reality. What makes you happy is the contrast between those things, not the amount. Likewise, what makes certain things feel valuable is the anticipation of getting them. The gap between struggle and reward is what makes people happy.
The joy of getting new things diminishes over time, and if you ever get to the point where you can buy anything, you’ll value nothing. The occasional treat generates more joy than permanent luxury. After experiencing hardship, it’s inevitable to feel overwhelming joy. That’s true for life as it is for money.
The Rich and the Wealthy
Rich is money in the bank that lets you buy things. Wealth gives you control in terms of your personality, freedom, desires, ambition, morals, friendships, and mental health. Unless you figure out how to use money correctly, it will use you. If you’re not careful, you can become obsessed with money, and that’s where money goes from a tool to live a better life to a liability.
Being controlled by money is a form of debt. Like all debt, it has to be repaid with interest. The possession of money alone won’t make you more “valuable”. The goal should be to use money to build a life. This is where money’s an asset. Otherwise, you’re just living to serve your money; it should be the other way around. The secret to a happy life is to never let your money dictate how you should live. If what seems frugal to others means freedom to you, then you have wealth.
Utility Vs. Status
The value of things is their ability to help you live the life you want. When in doubt, go with utility rather than status. This means you should buy things because they make your life more pleasant, comfortable, or fulfilling. Not because it will attract people’s attention. This is important because when you buy things for their utility, you can express your identity. Also, the pleasure you get from utility is more sustainable.
Risk and Regret
Part of becoming good with money is minimizing future regret. This isn’t about how much you lose or how you’ll feel about the money spent. It’s about compound interest (money not spent can become a fortune) and time (the more we live, the closer we are to death). The money problem is hard to solve because it’s deeply personal and it doesn’t fit into a unique formula.
Ideally, we want to allocate our resources between “investing for the future” and “living as efficiently as possible”. Don’t spend recklessly, but don’t deny yourself an enjoyable life just to build wealth either. Instead, we should aim to minimize future regret. That’s the balance we need between living today and saving for the future. The closest thing we have to living for today and compounding for tomorrow is good memories. If an activity will make you experience nostalgia later, just do it. Think of memories as cherished assets that compound over time, just like stocks.
Another important point Housel makes is that money saved gives you independence. This is the case because once you reach a certain point, money gives you the freedom to do what you want, when you want, with whom you want.
Look at Them
Jealousy is a powerful emotion in the sense that it makes it difficult to appreciate what you have because you desire to be higher on the social hierarchy. When we’re interested in buying things, we should remove other people from the equation. Envy is always dangerous because it’s the start of a never-ending vicious cycle. You’ll always find someone who has something better or more expensive than you, especially now that we have social media.
Housel also notes that there isn’t such a thing as winning the status game. The things you’re interested in go from enviable to common really fast. This is the case because nobody ever stops wanting new things. Not to mention you outsource critical thinking to strangers. To dissolve envy, you need to delve into yourself and ignore other people’s desires. Social comparison crushes independence, so do your best to ignore it. Envy is an insult because it means accepting that you chase other people’s desires and opinions. In other words, envy makes you inferior.
Wealth without independence is a unique form of poverty. Money not spent buys freedom and the ability to spend time however you want. The most successful people in life are those who are the most in control of their lives. Having fancy toys means nothing if you can’t control your own schedule. Likewise, every dollar of debt is a piece of your future someone else controls. Unlike other things you can spend your money on, independence has the highest return on investment. Nothing provides greater joy in life than having more time and mental clarity.
Financial independence is easy to ignore because it seems like something reserved for billionaires, but every dollar you save improves your life a little more. Many people don’t chase independence because it seems out of reach, but independence isn’t binary. It works on a spectrum. The more you save, the higher on the spectrum you are. The higher on the spectrum you are, the happier you are.
Social Debt
Housel defines social debt as “what happens when how much you spend your money influences what people think of you in unwanted ways”. This is the idea that there’s an ideal net worth for everyone, and if you go above it, money stops bringing pleasure and becomes a liability. Of course, this amount is different for everyone, but the more money you make, the more chances you have of experiencing social debt.
According to Housel, assets are easy to measure, but liabilities are often hidden. For instance, how much money a celebrity makes is simple to calculate, but measuring the fact that they have no privacy is harder.
When your identity becomes attached to your physical possessions, people’s thoughts start influencing your spending decisions. This changes the price tag of things. The suit you buy to impress others isn’t $1,000, but the $1,000 and the higher price of the next suit you’ll feel the pressure to buy a year later, “to keep the spotlight on you”.
You don’t want just money; you also want freedom, privacy, and independence. Otherwise, you’ll always be paying some form of social debt. In other words, you want to be rich, but you also want to be anonymous.
Quiet Compounding
According to the author, “the fastest way to get rich is to go slow.” When it comes to compounding, growth is invisible right now, but staggering over time. Quiet compounding is important because it’s simple. Anyone can save and compound a lot of money. This just requires you to never brag or compare yourself to others. That’s it. Even if this is the only financial skill you master, it’s the most important one.
Money is a very personal matter, and it’s impossible to talk about it and not feel embarrassed or influenced by other people’s opinions. Don’t perform for others and don’t copy their strategies. Your financial strategy should be quiet and personal, not loud and performative, because that’s what leads to a happier life. Quiet compounding places emphasis on internal benchmarks. It also means accepting you’re different than others. Finally, you’ll accept that this is a long-term endeavor and, as such, you’ll manage it more carefully.
Identity
Your financial goals and beliefs shouldn’t become part of your identity. Your identity should be what’s important to you. Ideally, you don’t want money to be part of that equation. In other words, money should enhance the things that are important to you (such as being a good father, husband, and friend), not a defining quality of you as a person. The more money you make, the more complex your life gets, and simplicity is underrated. Identifying yourself as a “saver” hurts you because it makes it harder to spend money reasonably during retirement. When you’re young, you want to live well beyond your means, but you want to start spending as soon as you hit your goals.
If money isn’t a tool to improve your life, then it will define who you are. This is a toxic belief because you may believe that having money makes you better than others. That’s when money becomes your master rather than a tool.
Try Something New
Managing money as a parent is difficult. This isn’t a financial problem, but a psychological one. The most important topic about this is how to use money to help your kids without spoiling them. Giving them money ruins their drive and ambition. Not giving them anything creates resentment. There’s no simple solution to this problem. On the one hand, you want to teach them virtue, hard work, and respect. The alternative option teaches them resentment.
Never ask something of your kids that you’re not willing to do yourself. Lead by example and never humiliate them. Provide money as a last-resort safety net. Help them recover from setbacks to prevent collapse without depriving them of learning important values such as hard work, dignity, and managing failure.
Ultimately, what you do around your kids is extremely important because they’ll learn your opinions whether you realize it or not. They’ll inherit your beliefs around money, even if you never lecture them on the topic. Kids always pay attention. This gives you the perfect opportunity to lead by example. Show them you can use money to live a better life. More than anything, though, show them you love them unconditionally.
Spreadsheets Don’t Care About Your Feelings
Most financial decisions are emotional ones, even when you think you’re acting rationally. Money problems are math problems when you look at them on a spreadsheet, but that’s not what happens in real life because emotions get involved. That said, emotional decisions don’t mean recklessness. Just like you can’t make a spreadsheet with checkboxes when choosing a partner, the most important money decisions you make don’t happen on spreadsheets. Knowing this, try to use both resources: rational math and emotional joy.
The Finer Things
Obsessing over small purchases is important because the money you spend on those compounds over time. Small changes over time lead to massive results. There are cases, though, where money spent on small things (the most common example is lattes) is totally worth it if that’s what you like. The lesson here is that building a long-term fortune is the result of small, consistent decisions compounded over time. But there’s a hidden lesson that’s as important.
We tend to focus on small, unimportant things when we should be focusing on big, life-changing things instead. The most important questions you could ask yourself are: Who should I marry? What should I study? And where should I live? Focusing on small problems can turn your attention away from larger problems.
The Life Cycle of Greed and Fear
Greed and fear seem like innocent emotions, but they can lead to money mistakes, regrets, and embarrassment. To avoid greed, we must keep a beginner’s mindset, which means being open to trying new things or studying new ideas without past preconceptions. Greed makes you delusional, but you can only maintain that for so long. In the end, the best thing you can do is accept you’re wrong. Fear is painful, too, but it teaches us valuable lessons to avoid making similar mistakes in the future.
How to Be Miserable Spending Your Money
Identifying what will make you miserable is much easier than identifying what will make you happy. Similarly, while the path to success isn’t always clear, you can succeed by knowing what to avoid. With that in mind, here are some ideas about how spending money can make you miserable:
- Assume that making more money will bring you lasting happiness
- Pursue status instead of independence
- Let money become an integral part of your identity
- Let others dictate how you should spend your money
- Think that making more money will solve all your problems
- Think that money can’t save any problems or that it’s evil
- Focus so much on saving that you never treat yourself
- Assume your success is the result of hard work, and your failure is the result of bad luck
- Associate net worth with self-worth
- Treat all financial decisions as math, completely disregarding emotions
- Let your expectations grow faster than your income
- Risk what you need to get what you don’t
- Overestimate the attention that having nice things will get you
- Assume you’re always right when it comes to money
The Luckier You Are, the Nicer You Should Be
The most valuable financial lessons are:
- Spend less than you make
- Quietly compound
- Money serves you, not the other way around
- No one is thinking about you
- Independence means wealth
- Health also means wealth
- Try to be a good ancestor
- Love your family
- Be kind to everyone
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