An economist’s guide to getting rich - the right way
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Erik Angner is a Swedish-American author and moral philosopher, who explores how people should live and how economics can help us achieve not just our financial goals, but our life goals as well.
He's written a book about the fact that economics is a vehicle to building a better world and a better life.
Economics has a big PR problem – people think it's about finances and stock markets, and it is, but it's also about how we make choices.
Economics can't tell us what our goals should be, or what it means to live a good life – those questions are for the philosophers, and vary person to person.
But once you decide where you want to go, economics can help you get there.
Erik (like us) believes that a root problem is a lack of financial literacy and education, particularly with so much active disinformation floating around.
Think money can't buy happiness? Economists say otherwise – money can buy you happiness, if you're already poor. But the question is what happens when you become rich… what's the marginal effect on your happiness of your last quid?
It's a mistake to try and keep getting richer, because the marginal effect of that quid on your happiness goes down – the more money you make, the smaller the impact on your happiness.
This is critical for knowing when to quit, when you should stop making money and spend your cash.
Ultimately, Erik believes that last quid might be better spent on time with your loved ones.
But if you do want to invest, and you don't know much about it, an index fund is generally the right choice. You can expect a pay-off in the long term, and you don't need to look or even think about it.
The story of Erik’s father
He was an unbelievably educated, accomplished man: a fighter jet pilot and an engineer.
But when he passed away during the pandemic, Erik found he'd invested in three different stocks.
As a strategy to build or maintain wealth, Erik says it was an absolute disaster – possibly the worst thing you can do after investing in actual scams or cryptocurrency (no disrespect, T). That said, if you're determined to look at crypto, make sure you catch our old "We need to talk about crypto" episode.
Erik's father could have built so much more wealth if he'd been just a bit savvier… or if he'd had access to our content, obv.
But this is where lack of financial literacy comes in, even among educated people.
Highly educated people tend to be overconfident – they go into investing like they go into their professional lives, and opt for a complex approach based on training and education.
But unlike in the professional world, a simple, ready-meal investment (like index funds) is generally the best way forward.
How can we use economics in a practical way?
Erik suggests leveraging social pressure to build wealth – so let's say you get a group of friends together and commit to saving a certain amount every month.
That way you get the short-term benefits (i.e. your mates' approval) in the interest of a longer-term goal.
You can sweeten the deal on small sacrifices with small indulgences, AKA temptation bundling.
So let's say you bring food in from home, so you've spent less than you would in the pricey, unhealthy cafeteria from Monday to Thursday. Then you treat yourself to lunch at a decent restaurant on Friday.
It still costs less than eating at the cafeteria every day – you've saved money overall – but you've had a better experience with what you've spent.
Erik stresses that if you want to start saving, don't be intimidated by the number you think you should have in your bank account. It's never too late to get started.
Consumption smoothing can help: what this means is, save more when you need to spend less, and save less when you need to spend more, so that over the course of your life your outgoings and savings stay relatively stable.
As an example, save as much as you can in your early twenties, when you have zero responsibilities, but if you end up with (outrageously expensive) kids in your thirties then drop your savings level down.
Another example is that it's fine to take on debt or bigger loans when you're young with a low income – particularly if you're investing in yourself long term, like in an education – because you will likely have a far bigger income when you're older.
(If you want to learn more about how to change your habits and invest in yourself as well as a fund, we've got a great episode with Dr Grace Lordan, a professor in behavioural science at the London School of Economics.)
