Financial experts are heralding this as the potential "comeback year" and are coming out with financial strategy books to prove it. There are many people and books telling you what to look for in an outstanding investment. But Paul Heys' new book, Spending Your Way to Wealth, is different. It tells you what to look for in yourself-to help assure that you are an outstanding investor-making it one of the best financial books of 2021.

2020 was a year when traditional financial planning and investing activity was subordinated to mere financial survival. But 2021 promises to be different. If the financial experts are right about a strong recovery, then we can start planning for the future once more. We'll turn our attention to books on spending and investment, including retirement investment books, highlighting the lessons we've learned in the post-Covid environment. 

Most of these will be excellent roadmaps for the "what" part of investing. But, as with scores of others over the years, the best financial books of 2021 will miss a major piece of the puzzle-the "how and why" part of spending and investing. They won't focus on our human nature and how that nature drives us to make reactive, short-sighted, and often unwise spending and investing decisions.

Fortunately, one book in this genre addresses the issue head on. Paul Heys' concise, sometimes humorous Spending Your Way to Wealth, contains not only practical steps for investors of any age, but also the key to understanding the psychology of spending and investing. As it turns out, we are all normal, but when it comes to spending and investment, our normal responses can be (and often are) wrong.

Heys begins the book, as he often does when speaking to groups, with a question whose most-frequent answer reveals a lot about ourselves:

"The total cost of a bat and a ball is $1.10. The bat costs $1 more than the ball. How much does the ball cost?"

If, like most of us, you say the first thing that comes to mind-ten cents-you would be wrong. That answer feels intuitively right but is mathematically wrong, as explained at the back of the book. His point is that we are all normal, but that normal can be wrong. When it comes to spending, he says, most of us act out of normal, human intuition, allocating our money towards things that depreciate in value rather than the opposite.

Of course, there are other books that delve into human behavior as it relates to financial decisions. The most notable of these is Daniel Kahneman's bestseller, Thinking, Fast and Slow. (Kahneman, a psychologist, was the first non-economist to win the Nobel Prize in economics for the ideas explained in his excellent but lengthy 500-page book.) 

Heys is clearly aiming for a wider audience. He draws on Kahneman's work and other authorities to draw the distinction between normal (and too often wrong) spending behavior and a practice he calls "normal PLUS." The result is a book that is not only science-based but also practical-financially speaking-and fun to read. For those who lack the patience for Kahneman's original work, Heys even includes a summary of Thinking, Fast and Slow in an appendix.

The Trouble With Normal

Using familiar and often amusing examples, Heys explains that normal humans do things more or less automatically-what Kahneman calls System 1 behavior-like driving a car but having little or no conscious memory the trip. While this is usually not a problem, it can lead to bad results when the circumstances change unexpectedly. When that happens, we need to employ conscious reasoning-or what Kahneman calls System 2. Unfortunately, with spending as with other ingrained behavior, we humans are remarkably reluctant to make the shift.

The main problem, according to Paul Heys, is that people naturally tend to spend money, time, and other forms of wealth on things that decline in value. Because their future needs seem less real than present ones, we resist making the mental shift required to (for example) allocate money towards assets that will predictably rise in value.

The book does not cut corners when it comes to practical financial realities. It discusses basic questions, such as why we spend (spoiler alert: to meet our needs), the difference between price and value, and the true nature of wealth. In this regard, the book is as informative as it is entertaining.

The Forward-Looking Rearview Mirror

Another aspect of normal, Heys notes, is our perception of spending in general. We tend to make small purchases more or less without thinking. The immediate gratification of a need-however valid-just seems more real than its likely, long-term consequences. Throughout the book are illustrations of "spilling" (his term) small amounts of money on things that decrease in value and forfeit future potential wealth. For example, spending ten dollars per day-on things that do not meet true needs-represents a forfeiture of over $1.3 million if allocated differently.

These examples are supported by a unique aspect of the book and its companion website-a simple Investorship Calculator based on regular spending behavior. The user simply enters a dollar amount and specifies how frequently it is allocated. The calculator returns the results-from short-term to fifty years. Up to three separate trends are projected. They include one based on the inflation rate, another based on an optional, user-selected percentage, and a third based on the average return rate of the Standard & Poors Index, which is ten percent, including dividends.

Heys is quick to point out that an index fund tied to the S&P 500 may not always be a means of immediate financial gratification. Indeed, on any given year, the S&P 500's return has been as high as thirty percent and, in 2008, almost minus forty percent. The book explains that short-term investor strategies (more like speculations) are likely to underperform the overall market, particularly over the long term. Heys' "Investorship Calculator" is not offered as an absolute guarantee. Rather, it is a rational, calming look at the most probable outcome for long-term investing.

The book addresses many of our impulsive tendencies when it comes to spending and investing. Besides using the calculator, he recommends a practice of "turning off the noise" related to market volatility. This does not mean willful ignorance. Rather, it means keeping the "urgent, breaking financial news" at a healthy distance, reducing the likelihood of making a sudden move where none was warranted. 

This can be as simple as turning off or disabling daily alerts on your phone or choosing to review your portfolio status on a quarterly basis, rather than every day or even every week. Heys notes that constant day trading, based on sudden price shifts, is not intended to benefit average investors, since it is based on price, not actual value. (Indeed, even among professional traders specializing in "buying low and selling high," actual success rates are quite low.)

An intriguing example of confusing price and value is Heys' hypothetical example of someone being offered a price for his house:

"...imagine a stranger coming to your door, offering you money for your house or condo right now. If his price is ridiculously low, you will probably close the door-and perhaps call the police (or suggest counseling). If it is ridiculously high, you might accept it as a windfall-if he is not actually mad. But if the price is anywhere in between, you will almost certainly just say no... [The house] has value worth more to you than any price he has to offer...

"Now, relate that unlikely scenario to investments. If a stock or fund has value in the long term, and you have no immediate need to sell it, then almost no price will be acceptable. However, with investments there is a 'stranger at the door,' quoting a different price every day. Whether it's a mobile investment app, a too-frequent portfolio review, or a cocktail party conversation, the price message is persistent, and almost always unrelated to a portfolio's long-term value."

Throughout the book, Heys ties our tendency to buy and sell impulsively, usually against our long-term interests, to our all-too-human tendency to oversimplify, frame issues narrowly, and our tendency to follow the herd. These and other cognitive errors are perfectly normal, he explains, but also a threat to meeting our needs in the future.

Wealth and Well-Being

Heys begins with the premise that wealth means far more than money. It includes things like a wealth of relationships, physical and emotional health, and positive memories. He also ties spending to Maslow's hierarchy of needs or wants, ranging from basic subsistence and security to belonging, esteem, and self-actualization. To meet these, he notes, we must expend effort, usually represented by money.

The problem comes when we can no longer earn the means to meet those needs. Heys deftly points out that, even relatively late in the game, small changes in spending behavior-specifically allocating funds towards assets that increase in value-can improve ones' ability to meet those human needs after the paychecks stop coming. In his view, failing to spend in such a way is tragically normal. But with some simple mindset adjustments-what he calls "normal PLUS,"-the likelihood of future wealth and well-being is enhanced.

Hope College Psychology Professor David Myers described Spending Your Way to Wealth as a "wise and lucid guide to financial and psychological wealth. By applying and simplifying economic and cognitive science, [Heys] shows us the path to both fiscal fitness and human flourishing." Another reviewer noted, "I wish someone had given me this book when I was younger. It would have directed my spending and investing in ways that would have made me re-think my career, relationships, and what I truly wanted out of life... [It] is the kind of book that changes lives."

Clearly, Heys is providing what's missing in today's flood of financial books. He does not state merely what constitutes an outstanding investment, but he describes-with wit and warmth-our own, normal human nature, and what it takes to become outstanding investors. Spending Your Way to Wealth is a concise, well-written financial book everyone should read in 2021, whether you're still in school, pursuing your career, or even nearing retirement. If you could read every financial book printed, this might well be the one to read twice: first and last.