10 Key lessons from ‘The Psychology of Money’ for financial success
The Psychology of Money is a top-notch book written by Morgan Housel. The book is shedding more light on an underappreciated approach towards money, investing and forecasting, stating that “Financial success is not a hard science. It’s a soft skill, how you behave is more important than what you know.” It focusses on how people view money, why they take debt, and how they can create and save wealth. Unlike other books that talk about interest rates, stock markets, etc., Morgan’s book says — “To grasp why people bury themselves in debt, you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.” Morgan Housel shows that the essential topic of money is influenced by emotions and one’s personal experiences, family history and the times they were brought up in. He surprisingly points out that only few people make financial decisions purely with a spreadsheet, while a greater number make them at the dinner table being influenced by emotional and unique variables. His insights touch areas such as our approach to money in general as well as spending, investing and saving. Here are the top takeaways that are mind blowing in terms of how people think of money in their everyday lives. WE JUDGE A BOOK BY ITS COVER We should be less judgemental and more understanding when looking at other people’s seemingly terrible or odd financial decisions. We should realize that we all have different reasons for making our financial choices. We all have a completely different approach to money in general – we were all raised by different parents who passed on different values and set an example of different ways to make income. When adding various cultures, traditions, and a country’s economy, it becomes very clear that one’s perception of actions and behaviour required to take care of one’s family is tremendously different from another’s. How one feels about making, investing, saving, and spending money depends on where and when one was born and in what circumstances one was brought up in. An individual investor’s willingness to bear risk depends on personal history. If you grew up when inflation was high, you invested less of your money in bonds later in life compared to those who grew up when inflation was low. If you happened to grow up when the stock market was strong, you invested more of your money in stocks later compared to those who grew up when stocks were weak. Your perspective on money and how you approach it depends on your personal experiences, including your family’s financial situation. WE UNDERESTIMATE THE POWER OF LUCK AND RISK It is reality that every outcome in life is guided by forces in addition to the individual effort one puts when trying to achieve their goal. As Bill Gates once said ”Success is a lousy teacher because it seduces smart people into thinking they can’t lose.” Regardless of your effort and preparation, things tend to spin in their own unpredictable ways, so as a result both luck and risk can happen even to the smartest person. We tend to explain someone else’s failure as a bad decision while our own failure is considered a calculated risk. You could be lucky in buying stock in a game production company just before the world premiere of a new game edition, which was promoted everywhere, so then you’re luckily at 20% higher stock price. On the other hand, as Housel says you could buy stock, and 5 years later it’s gone nowhere or even dropped. It’s possible that you made a bad decision by buying it, but it’s also possible that you made a good decision because you had an 80% chance of making money, but happened to end up part of the 20% of unlucky ones. In both cases you can fail or succeed, but there are many different variables and circumstances that influence the outcome other than just your individual effort and preparation. This is why you should learn to deal with failure and plan your financial life in a way such single decisions don’t wipe you out so you keep making new ones. WE NEVER HAVE ENOUGH As Housel pointed out, once we reach our goal we can’t stop and always thrive for more. “The hardest financial skill is getting the goalpost to stop moving”. You could call such an attitude towards money very ambitious, because who wouldn’t want to earn more money, get nicer and more expensive stuff, and buy a bigger house? This can be a very tricky approach to making money as well as spending money. Not knowing when to stop can become dangerous once we get a taste of having more. It can mean many things – either sacrifice your family life to earn more money and work longer hours, but it could also mean committing crime in order to make your business earn more money. Either way, there are definitely certain things like your family, reputation, or just sleeping well at night, that you just don’t risk. The example of Rajat Gupta, how he rose from the slums of Calcutta and rose to the higher positions in McKinsey, all this did not stop him from carrying out a well-planned insider trading scam. This happened as he lacked the sense of enough. TRY TO GET WEALTHY AND STAY WEALTHY Everyday we search for new possibilities to get closer to a general dream of getting wealthy. This is great, but have you ever considered what it means to be wealthy? What is the ultimate outcome we look for and what happens when we get there? Well, the author draws a line between being wealthy which is invisible and being rich which is more artificial and to show off. We can earn more or have big returns, but if we spend proportionally more we probably don’t get to keep what we could. It is important and very underappreciated to keep in mind that getting more money is one