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The Psychology of Money by Morgan Housel | Book Summary, Notes and Best quotes

The Psychology of Money book review

I am sure people who are in search of financial freedom, guide on investing or business decisions and at the same time like to read books, are definitely having this book in their top read list.

We have heard enough about how great this book is for the people who want to understand the money and eventually after reading this book found the same about book, as it is a truly amazing guide to understand the psychology of money.

Morgan House from book “The Psychology of Money” has strongly taught us that there are always data, facts and stats behind our all financial decisions and our understanding of this math turn out as wrong or right financial decision.

If you also want to explore this book, this post might help you to find the all about the Book – The Psychology of Money-


What is The Psychology of Money about

Morgan Housel in his book The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness – has shared his insights about the “why” behind many of our most important financial decisions.

It is indeed a timeless lesson as this book mainly focus on our behaviour and thinking about money with the aim to explain why something another person does might be perfectly rational to them but make no sense to you.

Human actions depend on one’s psychology so the money or financial decisions. This book shares several strategies and ways of thinking about finances that can help you improve your situation and use psychology to your advantage.

With examples of several successful and wealthy persons like Warren Buffet, Bill Gates, Morgan Housel has helped us to understand why the people who are rich are actually rich. Also, how one’s understanding of money can lead to failure by giving the examples of the real world people who were once very successful but end up with miserable life due to their bad decisions.

“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.” 

This book is having 20 short chapters with interesting stories to explain the human behavior and every possible aspect that we can think of about money be it luck, risk, how much to save, our emotional pulse to buy expensive and luxury things, getting wealthy vs staying wealthy and every possible thought a human brain could have about money.


Who should Read It

As the book’s title itself says this book is a timeless guide for one who want to understand more about how money works.

This is not a book to teach you specifics of investing or ways to make money or asset allocation, but it is a book to understand the behavior of money which is more broader concept than ways of earning money.

This book will improve your relationship with money and your attitude towards personal finance.

So, This book is absolutely a great read whether you are a beginner in your journey to achieve financial freedom or you are a teenager who is interested in financial understandings or you are already making money but want to learn more about staying wealthy and profitable.

I think this book is must read for every person as ideas and themes of this book have broad and practical application beyond personal finance.  

“A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.”

 

Key Lessons and Best Quotes from Book

1.      We all have unique attitude towards investing money-

Our understanding about investing money depends on our view towards world and this is unique for everyone of us.

As we all has a unique idea of how the world works and our worldview is influence by a unique set of circumstances, values, and external influences.

For example, person born in 1950’s is not as much influenced with investing one’s money in stocks market as the one who born in 1970’s who evident S&P going 1000% stronger.

“Their view of money was formed in different worlds. And when that’s the case, a view about money that one group of people think is outrageous can make perfect sense to another.”

2.    Luck also plays its part-

Housel says making money is combination of luck and skill and other unpair advantages. Luck and risk play their role in almost all outcomes of life.

With example of Bill Gates, Morgan Housel put his point strongly.

We all know that Bill Gates is highly talented and works extremely hard. But, he also obtained a competitive advantage because he attended one of the only high schools in the world at that time that had a computer in 1968. 

Gates himself admitted by saying: “If there had been no Lakeside [High School], there would have been no Microsoft.”

“Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort…they both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.”

So, writer Morgan Housel has advised us to focus on broad patterns rather than specific individuals and case studies.

 

3.    Learn to say “This is Enough”

This book has given importance to concept of saying “Enough” and know your limits.

Writer has given some examples of famous persons like Rajat Gupta and Bernie Madoff to convince us that it is important to say “enough”.

These are the prime example of people who had everything but wanted more and their greed ruined everything what they earned because they didn’t know when to stop.

“There is no reason to risk what you have and need for what you don’t have and don’t need.”

 

Saying “enough” is realizing that an appetite for more will push you to the point of regret.

The hardest financial skill is getting the goalpost to stop moving. And to do that, we need to stop comparing ourselves to others, and start determining what is “enough” means to us.

 

4.    Power of compound Interest

One of the single most important things you can do as an investor is to extend your time horizon and understand the value of wait. This is where power of compounding will do its magic.

And, Warren Buffet is a prime example to understand the power of compound interest as the simplest fact about Warren Buffett’s fortune is- He wasn’t just a good investor, he was a good investor for 75+ years.

As per Morgan Housel when he written this book at that time total net worth of Warren Buffet was $84.5 Billion but interesting fact is $84.2 bn out of total $84.5 bn came after when Warren Buffet has crossed his age of 50 Years. So, his skill is investing, but his secret is time.

“Good investing isn’t necessarily about earning the highest returns. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”

5.    Save as much as you can

As Housel says, your income or investment returns are less important than your savings rate. A high savings rate means having lower expenses as we cannot control fully our earnings and factors affecting our earning, but expenses can be controlled.

Also, sometimes our expense are higher just because of our ego, Because for some people definition of savings is, savings= Earnings- Expenses Ego as Housel says, “Past a certain level of income, what you need is just what sits below your ego.”

When you define savings as the gap between your ego and your income you realize why many people with decent incomes save so little. 

Solution: Don’t worry about what other people think or feel the need to keep up with the Joneses.

“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.”

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”

6.    Good investing is consistently not screwing up- learn getting wealthy vs staying wealthy

There can be so many ways to get wealthy but, there is one way to stay wealthy: Staying wealthy requires some combination of paranoia and frugality.

Writer has described effective investing as not making sound decisions rather good or effective 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.

As venture capitalist Michael Moritz said- “We assume that tomorrow won’t be like yesterday. We can’t afford to rest on our laurels. We can’t be complacent. We can’t assume that yesterday’s success translates into tomorrow’s good fortune.”

Getting money requires taking risks, optimism and putting yourself out there. Keeping money requires the opposite: humility, and fear that what you’ve made can be taken away from you just as fast.

So, try to make yourself financially unbreakable rather than focusing on big returns.

This is your margin of safety and is one of the most underappreciated forces in finance.

 

7.    Wealth is what you don’t see – Be less flashy and more nicer.

No one is as much impressed with your possessions as you are. Housel has used the heading as “man in car paradox” to help us to understand this-

“Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car.”

Some people use newfound wealth as an opportunity to show off. Housel suggests you stop judging people’s wealth by what you see by giving the actual difference between being wealthy and being appear as rich-

People who live in big homes and drive fancy cars are rich. People with big incomes are rich. They display the fact that they are rich.

But, people’s true wealth is what you do not see as it is hidden. Wealth is income that is saved, not spent. Wealth is optionality, flexibility and growth. Wealth is the ability to purchase any stuff if you needed to.

Spending money just to show people how much money you have is the fastest way to have less money.

Housel reminds us that when people say they want to be millionaires, what it really means is that they want to spend a million dollars.

Spending a million dollars is “literally the opposite of being a millionaire.”

 

8.    Leave Room for Error-

We can’t predict future outlier events. That’s what makes them outliers. So, it is wise to factor these into your plan.

“Margin of safety—you can also call it room for error or redundancy—is the only effective way to safely navigate a world that is governed by odds, not certainties.”

We should always leave room for error or called as margin of safety when estimating our future returns to avoid financial ruin. This is called as the planning on your plan not going according to plan or backup plan.

“The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

 

9.    Avoid financial commitments for your future self

We all are terrible predictors of our future selves. Our present needs, wants and dreams are not the same as our future needs, wants and dreams. Our inability to predict our future selves is called as End of History Illusion.

“The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.”

Accept the reality that individuals are prone to change. What matters to you today, may be viewed as inconsequential in a decade.

“Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.”

 

10. Be reasonable rather than rational

Being coldly rational with our financial decisions will lead to burnout. So, it is better to being reasonable and realistic about our financial decisions.

“Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.”

Historical odds of making money increase over time. So it is advisable to stick to your plans and don’t let short-term volatility force a bad decision.

11.   Use Money to buy freedom –

The highest form of wealth is the ability to wake up every morning and say, –

“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.”

“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.”

Final Words

This book has main idea to help the reader to understand that financial success is far more about how you behave than what you know and how to think positively about wealth and investing. 

Saving, investment strategies, portfolio management or decision-making—mostly these have been known as the key area of personal finance, but the psychological side is rarely explored, and that’s what this book is about.

Morgan Housel through his book The pscyology of Money has taught us that financial wealth just requires discipline, patience, and a handful of constructive behaviours.

A must read for all irrespective of age and geographic location.

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