THE PSYCHOLOGY OF MONEY 10 WEALTH LESSONS
“The Psychology of Money” by Morgan Housel is a new book published in September 2020
that has become extremely popular in a short period of time.
The book recognizes that the decisions that people make concerning money are not always data-driven.
Instead of following the math-case approached laid out in traditional personal finance books,
Housel looks to uncover the way that real money decisions are made.
The behaviour of individuals in relation to their finances will have a big impact on their financial
future. In this video we will see 10 Lessons that we can learn about money from this book.
Lesson #1 : We all have different experiences with money
Our current relationships with money are based on our past experiences.
Housel uses the example of people who lived through The Great Recession (between 2007 and
2009) and are now scared of reinvesting. Many of us won’t have lived through The Great Recession.
So, the author recommends avoiding judging others for their financial decisions as no one is crazy.
We have all simply had different experiences of investing.
He also explains that we must learn to make investment decisions based on our goals and
investment options rather than experiences. The world is always changing and relying on
your experiences means you are basing your decisions on knowledge of a different world.
Lesson #2 : Money is never enough
Rich people are often the ones who make crazy financial decisions.
Housel explains the goalposts seem to move the more you earn. There are countless rich
individuals who have lost everything because they felt the millions they had were not enough.
It’s easy to have a goalpost that keeps moving. Once you achieve your goals, you look toward the
next goal. And the cycle never ends. This is often driven by comparing yourself to others,
and you’re often comparing yourself to someone who is above you in the
ladder that you benchmark yourself against. When it comes to money, someone will always
have more of it than you. That’s okay. It’s fine to pursue more money, but don’t start
making risky bets that put what you have at risk for something that you don’t need.
Lesson #3 : Patience and discipline Compound interest can bring you financial
freedom. That said, the human brain struggles to understand the power of compounding. Housel
uses Warren Buffet as an example. Many believe his wealth is entirely due to his knowledge
of sound investments. More importantly, he has been making good investments since a young age.
His current net worth is $84.5 billion, but he accumulated $84.2 billion after his 50th birthday.
This shows the power of compounding. The key to compounding isn’t about earning the highest
returns. You want pretty good returns that you can stick with for the longest period of time.
As Warren Buffet always says, you don’t need a particularly high IQ to make money,
but you need to be patient and disciplined.
Lesson #4 : Getting Wealthy vs. Staying Wealthy
Housel doesn’t describe effective investing as making sound decisions. Good investing is about
consistently not screwing up. He believes that financial success can be summarized by one word:
survival. The most financially successful are those who have been able to stick around for
a long time. You can only grow your wealth if you have given an asset time to compound.
Getting money requires risk taking, optimism and putting yourself out there. Keeping money requires
the opposite: humility. So, try to make yourself financially unbreakable rather than focusing on
big returns. Humility is also about planning with the expectation your plan won’t go according to
plan. This is your margin of safety and is one of the most underappreciated forces in finance.
Lesson #5 : People Believe Wealth Will Make Them Popular
People rarely think somebody is cool if they see them driving a nice car. Instead, people
imagine how cool people would think you are if you had that car. This is a paradox because others
would have the same thoughts and not consider you cool. Housel applies this more broadly to wealth.
People buy mansions and fancy cars because they want respect and admiration from others.
What they don’t realize is that people don’t admire the person with the fancy house or car;
they admire the object and think of themselves having that object. So, buying impressive items
to gain admiration and respect from others is a fool’s pursuit – these things cannot be bought.
“The ability to do what you want, when you want, with who you want,
for as long as you want, is priceless. It is the highest dividend money pays. “
“The highest form of wealth is the ability to wake up every morning and say,
‘I can do whatever I want today.’ People want to become wealthier to make them happier.
Happiness is a complicated subject because everyone’s different. But if there’s a common
denominator in happiness—a universal fuel of joy—it’s that people want to control their lives.”
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control
over your time. To obtain, bit by bit, a level of independence and autonomy that comes from
unspent assets that give you greater control over what you can do and when you can do it.”
Lesson #6 : Stop Judging People By Their Visible Wealth
Some people use newfound wealth as an opportunity to show off. Housel suggests you stop judging
people’s wealth by what you see. Remember that people’s true wealth is what you do not see.
Those who decide not to buy something now to buy something later will stay wealthy for longer.
Wealth’s value lies in offering you options, flexibility, and growth to one
day purchase more stuff than you could right now. Warren Buffet himself drives an 8-year old car,
which according to his words is perfect for his needs.
So, are you really sure you really need that 80,000$ brand new BMW you are driving?
Lesson #7 : Reasonable > Rational Being coldly rational with your financial
decisions will lead to burnout. So, you are better off being reasonable and realistic about your
financial decisions. Adopting a financial plan, you can stick to over the long run
is more important than being completely rational about every financial decision.
A rational investor makes decisions based on numeric facts.
A reasonable investor makes these decisions in a conference room surrounded by co-workers
who want to think highly of you. Investing has a social component
that’s often ignored when viewed through a strictly financial lens.
Lesson #8 : Leave Room For Error You should always leave room for error when
estimating your future returns. Housel calls this planning on your plan not going according to plan.
So, the author assumes his future returns will be ⅓ lower than the historical average.
This simple decision means he saves more than he usually would. This is his margin of safety.
A big gap in most people’s understanding of room for error is accepting that there is a
difference between what you can technically endure vs. what you can emotionally endure.
For example, maybe you have enough money saved up to last you two years.
So maybe you quit your job to pursue your dreams, assuming that you can always get a job when you
get closer to $0 in savings. Technically, you can do this, and you won’t even be in debt.
But perhaps emotionally, you start getting nervous after you’ve burned 30% of your savings,
and all of a sudden, you’re depleted psychologically. If that’s the case,
you may ditch your dreams and go back to a day job even if you had another year+ in financial runway.
So, if you don’t account for your emotions in your models, you may end up in suboptimal situations.
Lesson #9 : Find Your Personal Financial Identity You can speak to knowledgeable friends or read
books from financial experts to develop your understanding of finance. That said,
you should always avoid taking financial advice from those who have different quantities of money
and end goals. Try to find your personal financial identity and you can then listen
to those who complement this identity. If you have a buddy who’s making lots
of money trading short-term options and you start getting FOMO and want to play that game,
you really need to consider if that aligns with your goals. If you have a 20-year time horizon
and like the simple nature of passive investing, it would be stupid for you to start playing your
buddy’s game. You may be able to profit, but at what cost? Know the game you’re playing,
and know the game others around you are playing as they tell you about their latest tactics.
Lesson #10 : Be a Financial Optimist
Finance has a knack for bringing out the pessimist in everyone.
If tomorrow I publish here on YouTube two videos, one titled “10 Type Of People To
Avoid At All Cost” and the other titled “10 People To Spend Tim With”, I can tell with
certainty that the first video will get 10 times more views that the second one. People love drama.
Pessimists often extrapolate present trends without accounting for how markets adapt. Housel
believes that true financial optimism is expecting things to be bad and being surprised when
they’re not. Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
Pessimism often sounds smarter and more persuasive than optimism. If something is not going well,
it’s easy to think that it will continue not going well. And that sounds very plausible. But what
this line of thinking misses is that problems often create demand for change and solutions.
And this leads to ingenuity that creates changes that only the optimist might believe in.
If you want to be a good investor and be successful with money,
don’t let the pessimism around you affect your decisions, try to always keep positive!
If you liked this video, don’t miss the book summary of “The Intelligent Investor” by Benjamin
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