Learning about personal finance is a must, you’ll be doing yourself a huge favor if you invest your time and money in learning about personal finance. The Psychology of Money by Morgan Housel is different than the other finance books out there. The book ‘Psychology of Money’ doesn’t give you a step-wise methodology on how to become rich but focuses on what makes you rich or poor.
The book studies people’s behavior with money over time hence, the name of the book. In this book, the author has explained the human psychology of money in a very creative way. Why some people are poor and the other rich is beautifully written with examples. Today, we’re going to learn about it as well.
Key takeaways from “The Psychology of Money”
Here we’re going to discuss 10 top takeaways from the book.
1. True wealth is what you don’t see
Our true wealth in life is to live it freely. The most important thing we can’t buy from money in our life is time. If you have all the money in the world but do not have the time to enjoy it then what’s the point of having money.
The author also says that most people spend their money on luxury items either to impress people or due to the peer pressure of society. But what we do not see is the EMI, loan, or tension that the person might be dealing with. So rather than buying and dealing with such things, invest money in yourself to gain skills which will be more helpful in the long run.
2. Money and Behavior
Your behavior with money is more important than intelligence. Even if you don’t have a diploma from Harvard or work on wall street, you can still become rich by behaving in a sound way. People usually show off their money and spend it like crazy but they forget it’s volatile. Today you’re rich but tomorrow you can be poor if you don’t handle it wisely.
“Financial success is not a hard science. It’s a soft skill where how you behave is more important than what you know.”- Morgan Housel.
3. You pay a price for everything
Let’s say that you want a new watch, you go to the store to see the offerings. You’re after something that will impress your friends and partner. Now you’ve two choices, either to pay for the watch or steal it and run. My guess is you’ll choose the first option. The point is you know having a new watch comes with a price. It’s the same with investing, it comes with a price too. Before investing your money into anything for example index funds, stocks, etc. you might wanna study and learn about them. That’s the price you’re paying to invest.
4. Investment Risk
In investing lies risk. If you don’t have the stomach to stay in course when your net worth decreases by say 20% during a single week then don’t aim to maximize your returns. Because the higher the returns the higher the risk. For example, if you would’ve invested in Netflix 10 years ago then you would be quite rich today. However, could you afford the price for this journey because during the period of 10 years Netflix had many major downfalls? They lost around 80% of their customers in 2011. This is an extreme example but even if you have something less extreme, you’ll still have to pay the price of volatility. Take it as the price to pay for a brighter future.
5. Never Enough
Capitalism is great at doing two things- generating wealth and generating envy. The urge to surpass your neighbors, peers, and friends can help energies your handwork, gets you more productive, motivated, etc. And that’s a good thing but social comparison can also cause us to feel like we are never enough. There’s always a bigger fish. The type of envy which has emerged from the comparisons of this kind has caused a lot of people to do foolish things throughout history.
6. Crazy lies in the eyes of beholder
At a first glance, it seems like a lot of people do crazy things with money. Some spend a ridiculous amount on ridiculous items, others hide them at different places. What we need to understand here is that every human comes from different background with different values, life experiences, education, etc. so what might seem crazy to you can make total sense to me. All this adds up to different perspectives.
The author uses the example of lottery tickets in the book, the lowest-income household in the U.S spends around $400 every year on the lottery. Combine this that more than one-third of Americans cannot come up with $400 in time of emergency. Do they spend their emergency money on lottery tickets? Seems crazy, right. But again, we do not have the same perspective as these individuals. For them, buying a lottery ticket is the only way out of their poor lives. So how this makes you a better investor? Through this example, we can acknowledge that we all are different and be less tempted to copying an investment portfolio that doesn’t suit our own goals.
7. Getting wealthy v/s staying wealthy
As discussed above, we shouldn’t copy someone else’s investment strategy because the end goals are different for different people. Our risk profile might be higher than that of billionaires as more of our focus is on getting rich and not much on staying rich. The author gives us an example to understand this point better.
Do you know Ronald Read? He was a janitor who had $8 million in savings when he died in 2014. No, he didn’t win a lottery or inherit the money either. He just saved his money throughout his life while letting the compounding do its magic. Whereas Richard Fuscone was Harvard University Graduate and worked at one of the top companies in the U.S but in 2008 he became bankrupt due to heavy debt. He got rich but didn’t stay rich.
8. A good plan leaves room for error
We should always be optimistic with our investment plan but if somehow it doesn’t work then what’s plan B? Always leave room for errors, create a portfolio of 10-15 companies, or have some emergency funds in situations like that. Always prepare yourself mentally and financially for situations you cannot foresee.
“Be optimistic about your future but paranoid about your obstacles to success.”
9. Savings and Financial freedom
There are three types of people in the world- one who can save, one who thinks they can’t save, one who thinks they don’t need to save. I hope you’re not from the third category. We have always been told to save y our elders, but why is it important? Because the money that you save and invest helps you to buy your time in the future. So, according to the author, even if you’ve less salary you can still become rich by saving your money.
10. Timeless advice on money
In the end, the author gives some timeless advice on money which will help us achieve our financial goals.
- Independent decision- Don’t make decisions because of society, or to show off. Take decisions for yourself and by yourself. Do what you think is right.
- Live below your means– The worst thing that you can do is to spend your future money today.
- Derive please from low-cost activities- The author says to derive please from free or low-cost activities like exercise, reading, listening to podcast, learning a new skill, etc.
- Pick a strategy- According to the author, every investor should pick a strategy that has the highest odds of successfully meeting their goals.
Do let us know in the comments down below if you liked the article and also what would you like to read next. Your suggestion and recommendation would mean a lot to us.