The Psychology of Money

The Psychology of Money
Photo by Alexander Mils / Unsplash

Genre: Non-fiction/Self Help/Finance/Psychology

Author: Morgan Housel

“The Psychology of Money” by Morgan Housel delves into the relationship between human psychology and financial decision-making. Often, we may think of money and finances in terms of complex math or technicalities, but the author makes the point that, in fact, when it comes to money, human behaviors, biases, perceptions, and emotions are more crucial than the formulas and rules.

This book consists of 20 chapters. Each chapter is short but filled with real-world examples and anecdotes that keep you engaged with the book. I have walked away with some lessons about money management from this book and I am going to share them with all of you.

People do crazy things with money. But no one is crazy.

Everyone has their own lens through which they perceive how the world works. This lens is shaped by various factors, including the time, location, and economy in which one is born, their upbringing, their experiences in different job markets, and the degree of luck one encounters. These factors significantly influence the way people view the world and their financial decisions.

Let’s consider two individuals as an example: one who grew up in a financially challenging household but managed to secure a decent job in adulthood, and another who grew up in abundance and works alongside the first person. Their perspectives on taking financial risks later in life could vary considerably based on their life experiences. Since we are all the products of our unique life experiences, the money decisions one makes may not make sense to others. So, we should not rush to judge people without knowing where they are coming from. No one is crazy when it comes to money!

Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control. You’ll also have a better chance of finding the right role models.

In 1968, among the 303 million high-school-age people in the world, only 300 of them had the opportunity to attend Lakeside School in Seattle, Washington, which had purchased a computer at that time. Bill Gates was one of those fortunate 300 students. At the age of 13, Bill Gates had access to a computer when the rest of the world did not. The unique combination of exposure to computer at a young age, hard work, creativity, and vision later led to the founding of Microsoft. Bill Gates was one in a million to experience such luck; he is an extreme example and an outlier. Therefore, you cannot simply look at Bill Gates’ life and wish for the same outcome for yourself.

We often encounter extreme examples of success or failure and either try to replicate them for success or avoid the risks to prevent failure. However, relying on a single exceptional story is not ideal when making financial decisions. Luck and risk coexist in life and the extreme financial outcome may have been influenced by extreme ends of luck or risk. Hence, it is more prudent to look at the broader patterns of success and failures to derive actionable financial insights, rather than trying to emulate someone else’s life.

It gets dangerous when the taste of having more-more money, more power, more prestige- increases ambition faster than satisfaction.

Human wants and desires are limitless. Naturally, humans want more than what they have right now. The author points out that the ability to determine how much is enough for you is one of the most important money skills to have. For example, imagine you are eating your favorite food. You will enjoy your food until the point you get full. If you still continue to eat past that point, it won’t bring joy to you anymore, you will probably feel sick. Unfortunately, this logic does not seem to translate when it comes to money, business, or investing and many people reach a breaking point. The author shares some tragic stories of people who could not determine their “enough” and ended up with negative outcomes in their lives. This reminded me of Mark Manson’s book “The Subtle Art of Not Giving Fuck”, where he makes a similar point that the constant pursuit of positive experiences like success and wealth can make you chronically unhappy. Hence, determining what “enough” looks like for you in your life is crucial.

If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing.

If you are reading this you probably know Warren Buffet, a phenomenal investor. His net worth as of 2023 is approximately 121 billion dollars. While one may attribute his success to investing skills, the real secret, however, is time. He began investing at the age of 10, and he is now 93 years old. Most of his wealth accumulated after his 50th birthday. By leveraging the power of patience and compounding, Buffet reached the point where he is today. Whether it’s creating healthy habits or managing money, compounding is the secret to success. Understanding the power of compounding and consistently investing over a prolonged period can result in a desirable financial outcome. As mentioned earlier, managing money is not just about rules, it’s more about one’s behaviors and attitudes.

Getting money and keeping money are two different skills.

You may have heard plenty of stories of people winning millions of dollars in the lottery, but also returning back to their initial financial position in no time. Acquiring money is the result of taking risks, maintaining an optimistic attitude, and putting yourself out there. However, retaining money is the art of avoiding risks, maintaining humility, and cultivating a healthy paranoia that you may lose everything you have. The author suggests that you should always keep in mind that things can go wrong. Just because things are going well now doesn’t guarantee they will continue to do so in the future, so always leave room for error. While optimism is great, when it comes to money and finances, fear and frugality are also necessary.

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.

If you are financially independent, take a moment to recall a time when you were not and reflect on the difference between then and now. I believe most of you will agree that financial independence brings freedom in different aspects of your life, enabling you to exert a certain degree of control over it. For example, a few years ago, when I was still a student, taking a vacation was something beyond my imagination because I was broke. However, if I were to go on a vacation tomorrow for a few days, I could do so without breaking the bank.

Financial independence, reduced financial stress, time for personal growth, work-life balance, and more are some of the dividends that money pays. Money doesn’t just offer monetary wealth, but also the freedom, flexibility, and opportunities to shape your life the way you want. The true value of money doesn’t solely lie in what it can buy but in how it can provide you with time and autonomy to lead a more fulfilling life. Money is merely a tool, and instead of just focusing on accumulating wealth, you should also consider using this tool to improve your quality of life and leverage the freedom to pursue your dreams and passions.

The only way to be wealthy is to not spend the money that you do have.

The author emphasizes the concept of delayed gratification when it comes to money management. Often, people indulge in extravagant purchases to look rich by spending a fortune. However, if you are aiming for long-term wealth, you could redirect your money into investments and savings. The core idea is prioritizing financial assets over liabilities, as these assets can provide you with financial security, freedom, and opportunities.

Modern capitalism and social media have convinced people to try their best to look rich by spending beyond their means, but the real wealth is concealed in the things you have not purchased. Think about it- Are you trying to look rich or are you on the path to becoming wealthy?

Manage your money in a way that helps you sleep at night.

This is my favorite lesson that I’ve gotten from this book. Your financial decisions are directly linked to your mental and emotional well-being. When making any major financial decision, asking the question, “Will I be able to sleep at night?” is crucial. For example, if you purchase a house beyond your financial capacity and go to bed each night worrying about how you are going to pay for it while balancing other aspects of life, is it even worth it? That same can be true for a fancy car or any major purchase if they are not within your financial means. Therefore, it is necessary to reflect on your values and priorities in life and make financial decisions that align with them. There’s no point in living in a fancy house, driving a fancy car, and projecting an amazing social media life if you are struggling to sleep at night.

If you have made it to this point, I am sure you will enjoy reading this book as well. There are several pearls of wisdom in this book that could guide you in making wise financial decisions in life. However, as the author mentioned himself, what makes sense to one person might not make sense to another. So, it depends on the readers to analyze the information and digest it in their own way.

If you have already read this book, please share what you liked the most. If you have not read it yet, let me know if anything mentioned above resonated with you.

Happy Reading!

I will “see” you in the next blog post.

If you want to read more book reviews/summaries, you can find them HERE!