The Psychology of Money by Morgan Housel explores the various ways that people view and approach money, and offers insights into how to make the most of your financial situation.
Below you you find my main takeaways from the book:
1 . Each person views money differently
Different life experiences and cultural influences can shape an individual’s attitudes toward money.
For example, coming up from a family with financial struggles may lead people to view money as a scarce resource and be more focused on saving. Additionally, they could be more inclined to choose a steady, reliable income over a higher-paying but potentially unstable job.
People from wealthy families may have different attitudes regarding money. They could think of money as being more abundant and be less concerned about spending and taking risks with their money. They might also have access to financial tools and education that have given them a solid foundation in financial literacy, which would have given them more confidence in their ability to make sound financial decisions.
Understanding and being conscious of your own attitudes toward money is crucial since these attitudes might affect financial behavior and decision-making.
2. Don’t underestimate the importance of luck
Luck can play a huge role in our financial success.
Bill Gates is known as one of the most successful business leaders and entrepreneurs in history. He is super talented, but he was also very lucky to attend one of the few high schools in the United States that owned a computer in 1968.
We should look less at what individuals did to be successful, and instead, look for general patterns. Things that worked for a majority and can be replicated.
3. Learn to say “this is enough”
We should stop comparing ourselves with others. There will always be someone who has more money than you do. That’s alright. It’s okay to look for extra income, but don’t start taking chances with what you already have in exchange for something you don’t need.
“There is no reason to risk what you have and need, for what you don’t have and don’t need”
4. Don’t forget that Compounding is king
It’s important to start investing early and doing that constantly.
At the time the book was written, Warren Buffet’s net worth was 84,5 billion dollars out of which 84.3 billion actually came after his 50th birthday, and of that amount, 81 billion of it came after his 60th birthday.
There is a really nice quote from the book, describing Warren Buffet’s success:
None of the 2000 books picking apart Buffet’s success are titled “This guy has been investing consistently for three-quarters of a century”. But we know that that’s the key to the majority of his success. It’s just hard to wrap your head around that match because is not intuitive.
5. Savings = Income – Ego
Housel emphasizes the value of saving as a crucial element of achieving financial stability and success. Building a financial safety net or an emergency fund is one of the key benefits of saving money. You can use this fund to weather financial turbulence and unplanned needs like a car repair or hospital bill.
“Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.”
The ability to make decisions about your job and personal life while knowing that you have a safety net in place is another benefit of having a financial cushion. In the end, what’s the point of having money if you are doing a miserable job every day?
6. Focus on not making big mistakes
Instead of believing that you need to chase after the new trend, think long-term and avoid losing money.
“A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality”
7. Use the money to buy freedom
Time is the best currency. The real value of money comes from the flexibility and the options it gives us rather than the fact it helps us buy fancy things we don’t actually need.
“Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”
8. Being rich vs. being wealthy
“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
This means being cautious and not taking unnecessary risks, and instead focusing on preserving and growing your wealth slowly.
This means being diversified across different asset classes and not putting all your eggs in one basket, even if one particular investment has the potential for significant returns.
9. Don’t buy things to impress people
Buying things to gain respect and admiration almost never works, because respect and admiration cannot be bought. Instead, people tend to just admire the objects themselves and imagine themselves having them, rather than admiring the person who owns them.
Another explanation is provided in a letter that Morgan addressed to his newborn son:
“You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. You want respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does—especially from the people you want to respect and admire you.”
10. Leave room for mistakes
Morgan Housel advises that it is important to leave room for error in your financial planning. This means considering not just your financial survival, but also your emotional survival.
For instance, you can have a strategy to set aside the costs for two years as a safety net if you intend to quit your job and start your own business.
It’s crucial to take into account the emotional cost of watching your funds go over time and the risk that you might not be able to endure the emotional strain of failing in your adventure.
11. Stay away from making large financial commitments for the future
It’s crucial to make an effort to stay away from extreme financial commitments for your future self. This is because it’s difficult to predict how our goals, values, and desires will change over time. We often have what psychologists call the “end of history illusion,” where we think we won’t change much in the next 10 years. However, this is not always the case.
For example, if you’re sure you’ll never retire, it might be tempting to spend a lot of money now without considering a retirement fund. But, if you change your mind later and decide you want to retire, you could be in a difficult financial situation.
12. It’s better to be reasonable than rational
Even if you find the perfect investment strategy, it won’t be effective if it causes you anxiety or keeps you up at night. It’s important to find a balance between making financially sound decisions and considering your personal goals, experiences, and risk tolerance.
For example, it might not be the most financially optimal choice to pay off your mortgage early. However, if living debt-free is important to you, it might be a reasonable decision to make if you have the extra funds.
While rationality is important when it comes to making financial decisions, it’s also important to consider your own feelings and values. A reasonable decision is one that is both financially sound and aligns with your personal goals and priorities.
In conclusion, the book offers valuable insights into how we think about and behave with regard to money. It emphasizes the importance of understanding and being aware of our own attitudes toward money, as well as the role of luck and consistent investing in financial success.
The necessity of conserving money, creating a safety net for our finances, concentrating on avoiding costly errors, and adopting a long-term perspective are all emphasized in the book.
The freedom and control it affords us over our time and decisions are ultimately where the true worth of money lies.