This is the fourth in a series of articles that deal with our relationship with money. (You can read the other ones here). Most of this is based on the work of Morgan Housel, the author of The Psychology of Money.
4. You have an emotional attachment to large purchases, particularly a house.
It would be nice if my wife and could make unemotional financial decisions. We currently live in a desirable neighborhood where builders buy the houses for the land value, tear them down, and build huge homes.
I’m saying they’ll buy an 1800 square foot ranch-style house for $1.5 million, tear it down and build a 4000 square foot house that will sell for $5 million.
Morgan talks about a few years ago when he and his wife were in the market for their first house. They found one online that they liked, and as they headed out for a tour they promised themselves they wouldn’t do anything rash – they would just gather information.
Then they pulled into the driveway and his wife gasped, “I love it!” He did too. They had an infant son – their first – and there was a kids’ tree swing in the front yard. It was perfect!
And that was it; emotion was involved and there was nothing they could do about it.
They have zero regrets – the house really was great. But no one should pretend that you can make life-changing decisions that will massively impact you and your family and treat it like a math problem.
Regardless of how much money we could get for our house, there are so many memories tied to it. Her daughter was raised here. We’ve had countless family gatherings; engagements, baby showers, holiday parties, weddings and more. We can’t attach a dollar figure to those memories.
If you were asked, “How much does staying in your current city impact your income?” You could probably come up with a dollar figure.
If we were asked, “How much is the home worth where you formed your memories?” We could probably spit out a dollar figure with ease.
Understanding the difference between the value of your memories and the value of a physical object can explain a lot of spending decisions.
To Your Prosperity,