4 lessons I learned from “the psychology of money” by Morgan Housel
When it comes to money, a lot of people focus on hard numbers and simple truths, but they ignore one key point: how you think on money matters.
I’ve always been interested in learning how to change my financial mindset and examine the relationship between money and mental health, so when I heard about Morgan Housel’s book “The Psychology of Money”, I read it. devoured.
The book is nicely divided into tangible lessons that you can apply to your own finances. For me, four lessons from the book have helped me improve my money mindset and invest more.
1. The magic ingredient in preparation is time
Compounding helps investors build wealth by generating returns on investments over time. These returns then continue to accumulate and contribute to asset growth. The composition is sometimes referred to as “earning interest on interest”.
Many of us know that composition works, but we can’t really figure it out on a large scale. Housel offers perspective as he glances at Warren Buffett.
Buffett is well known as one of the richest investors of all time, but it’s not just because of his skills as an investor.
Buffett started investing when he was a kid, at the age of 10, so his money has had decades to accumulate. Most of us can’t go back in time and fill out investment accounts that we never had, but we can start investing now. The longer your money stays in the market, the more it will grow.
Housel writes, “Warren Buffett is a phenomenal investor. But you are missing out on a key point if you equate all of its success with the meaning of investing. The real key to his success is that he has been a phenomenal investor for three quarters of a century.
What I take away is that time is our best friend, and starting today – and staying the course for the long haul – is the best way to build wealth.
2. You want to focus on being reasonable with money rather than being rational
One of my favorite parts of the book is when Housel writes that being reasonable with your money is more powerful than being rational.
He admits that we are humans with emotions, which will inevitably affect the way we feel and deal with our money. He writes, “You are not a spreadsheet. You are a person. An emotional and fucked up person. ”
In other words, while something might look good on paper just based on the numbers, it might not be the best long-term strategy.
He shares an example of how having a fever is actually good for fighting an infection. This is what makes sense rationally. But no one wants to suffer from the pain and chills or hot flashes of a fever. It is reasonable to take medication to feel better.
Housel writes: “My own theory is that, in the real world, people don’t want the mathematically optimal strategy. They want the strategy that maximizes the quality of their sleep at night.
This is in line with some advice I offered in my book “Dear Debt” regarding debt repayment. Many people recommend snowball or avalanche methods, focusing on paying off the smaller balance or debt at the highest interest rate first. But I also recommend paying off debt that will help you sleep better at night or debt that makes you angry. We’re emotional creatures, so making financial decisions that make us feel better isn’t so bad, even if it’s not the “right” option on paper. As long as you do Something, that makes a difference.
Housel suggests that choosing the reasonable over the rational helps us stay the course. He writes: “Reasonable investors who like their technically flawed strategies have an advantage because they are more likely to stick to those strategies.”
Focusing on our own risk tolerance and what is reasonable for you can be your compass in guiding your finances.
3. Find out what “enough” is
For many people, it is as if there is never enough money. Housel notes that the goal post always seems to be moving, and that we compare ourselves to others all the time.
I think about myself and how the old me would have liked to earn the income that I am making now. Still, I still feel like it’s not ‘enough’, and now the goal has changed.
In the book, Housel shares stories of greed and risk and how they can upset progress and be the downfall of all success, and notes that it’s important to find what’s “enough” for you when managing. money and investment.
Housel writes, “If expectations increase with results, there is no logic in wanting more because you will feel the same after putting in the extra effort. It becomes dangerous when the taste for more – more money, more power, more prestige – increases ambition faster than satisfaction. ”
4. Luck and risk affect everything
In personal finance, it’s easy to focus on our individual actions and forget how our privileges – or our luck and risks, as Housel describes them – can affect our bottom line.
Housel shares a story about Bill Gates. Gates went to high school with one of the very first computers, changing the course of his life and career. One of his friends, Kent Evans, was his classmate and was also good at computers. Sadly, he died in a mountaineering accident.
In this example, we see the chance and the risk very clearly. These are the invisible puppet strings that can affect our lives, our careers, and our money.
Housel writes: “Both luck and risk are the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you cannot believe in one without respecting the other as well. too complex to allow 100% of your actions to dictate 100% of your results. ”
By recognizing the role of luck and risk, we can move away from the temptation to put it all on our own when it comes to managing money and investments.
Reading “The Psychology of Money” was very rewarding for me and helped me change my mindset about money from anxiety and scarcity to a feeling of “complacency.” The book inspired me to save and invest more depending on what makes me feel good and sleep better at night, while sticking to it for the long haul so I can let the makeup do its magic. It also showed the importance of playing your own gambling game and not getting too caught up in what other people are doing. After all, it’s your life, your money.