You can be wealthy, even if you’re not rich. That’s the takeaway from Paul Sullivan’s The Thin Green Line: The Money Secrets of the Super Wealthy. His book is a peek behind the curtain that separates the much-discussed, much-loathed “1 percent” from the rest of us. Sullivan, who writes the “Wealth Matters” column for The New York Times, describes this world with both the insight of an insider and the freewheeling zest and fascination of a gatecrasher.
The book might be described as a blueprint for a “get rich slow” scheme, one that prizes planning ahead, cultivating good spending habits, and interrogating and adjusting one’s matrix of needs, wants, and expectations, in order to achieve that bliss that is, in the book’s schema, true wealth. To cross “the thin green line” is to ascend to a rarefied plane of calm where you no longer worry about money. As Sullivan demonstrates, you can be filthy rich and still fall short of that goal.
So the book could just as easily be described, perhaps a tad bombastically, as a guidebook for living, for understanding the choices we have and the choices we make, and finding value in places other than a bank balance.
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Before I knew anything about Thaler or his research, I was a shrewd mental accountant. It wasn’t because I was an aspiring economic theorist or a copycat Alex P. Keaton. As a teenager, I didn’t have enough money to pay for all the things I wanted. While I didn’t use cookie jars to physically separate money—it all sat in a passbook-savings account—I did create separate funds in my head for the things I needed and wanted, such as gas, food, rounds of golf, dates. I honed this practice through college, and it continued when I started working full-time after graduate school. I could have looked at my paycheck and assumed that I would spend it perfectly and run out of money on the last day of the month, having bought what I needed and wanted. But I had learned from experience. Without bucketing, I might run out of money on day 28 only to find that there was something I needed on day 30, which would cause me to regret having bought something I didn’t need on day 2. But if I put money into mental buckets—for rent, food, gym membership, dates—I could make a plan. It worked pretty well. I stopped running out of money and I became more disciplined about spending and saving.
The process also gave money a physicality it hadn’t had for me. I had a well-developed sense of money in terms of scarcity or abundance.But I hadn’t thought much about saving, spending, and giving it away. All of this was happening to me when money was still tangible and not something transmitted electronically through credit and debit cards. That’s where buckets come in. Anyone who hopes to get on the wealthy side of the thin green line will know where his or her money is and what it will be used for. That person is going to have a goal for the money. On the other side are people for whom money comes in and goes out without any set plan for its use—or worse, with the assumption that the money will always be coming in. That group doesn’t think how money should be parceled out into fictitious buckets until it isn’t there.
Thaler began thinking about the choices people made around money when he was researching something seemingly unrelated: the price of death. As a graduate student at the University of Rochester, he was trying to calculate how much a person’s life was worth, in the same way someone might try to value a used car. He was asking these questions without thinking about any of the fuzzier things humans think about when they think about valuing themselves and others—such as love, compassion, humor, kindness, greed, selfishness, or lethargy. He was looking at life as if a person were a refrigerator with a replacement cost. His way of quantifying the price was to measure how much more someone would ask to be paid to do a risky job, such as being a miner. “I realized people were not behaving how they were supposed to behave,” Thaler said. “They weren’t behaving like rational economic agents.”
He came up with two questions that he put to various people. How much would you pay to eliminate a one-in-a-thousand risk of immediate death, and how much would you have to be paid to accept the same risk? The answers astonished him. They made no sense. The typical answer for how much people would pay to get rid of the risk was about $200, while they would need to be paid $50,000 to accept the risk. This disparity was illogical or, in the parlance of economists, irrational. It was the same risk, just phrased differently. People were tallying up costs and benefits in their head, but their answers differed based on how he asked the question. To them, taking on any risk of death should cost more money than getting rid of that risk. This question has many permutations. An easier one to grasp might be, would you rather go to a doctor who had a 90 percent success rate in the operating room or one who had 10 percent of his patients die? The one who killed 10 percent of his patients, of course, since 90 percent of them lived.
Once Thaler grasped the ramifications of our flawed reasoning, he started thinking about how those biases skewed our thinking about money. That’s when he came up with bucketing. “Putting labels on these buckets is a charade but a helpful one,” Thaler told me. He outlined an example. Someone worth $10 million with $1 million of that in a home might put $3 million in an emergency fund in case something goes wrong. A different person could also ask that her portfolio be invested 10 percent in real estate, 30 percent in cash, and the rest in equities. It’s the same allocation. “Just putting a label on that cash as emergency money doesn’t make any difference,” Thaler said. “But at some level it makes all the difference. It calms them down.”
Decades after Thaler first came up with this, advisers are latching onto the idea of bucketing. Largely, it’s good for them to tell a client who is complaining that his portfolio just dropped 10 percent that all of that money was in a bucket the client didn’t need—say the one for charity or heirs. The other buckets—for living expenses, travel, what have you—are safe. For wealthier people, an adviser can take this a step further. He can put the living expenses in cash, the vacation money in something a little riskier, and the money that won’t be needed anytime soon into the riskiest investments. With the least volatile investments in the bucket for short- and medium-term living expenses and the most volatile ones in the bucket that you won’t need for a long time, the client should be able to sleep at night. “Whether or not financial planners have ever heard of mental accounting,” Thaler said, “they’ve intuitively figured out this makes people comfortable.”
Mental accounting shows that the stories we tell ourselves about money matter. Budgeting makes perfect sense: it ensures that you can pay your bills or afford something before you buy it. But talking about a budget is dreary. It’s like a diet. Mental accounting takes a budget and slices and dices it into more digestible pieces, which you can shuffle and reshuffle to make it more palatable. It’s a plan more like Richard Simmons’s Deal-A-Meal cards, which allow people to count calories as if they were playing a card game, not sitting in math class. Mental accounting certainly violates the basic principle of economics that money is fungible, that it flows like water. But our behavior also violates those same principles. If we were rational, we’d never buy a home we couldn’t afford or save too little for college or fail to put away enough for retirement. But we worry about all of these things, and for good reason: if we haven’t screwed them up, one of our friends has.
From The Thin Green Line: The Money Secrets of the Super Wealthy by Paul Sullivan. Copyright © 2015 by Paul Sullivan. Reprinted by permission of Simon & Schuster, Inc.
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