Who does not love Money? We often find ourselves on Google ‘How to make money ‘And how to have passive income. But let’s understand the psychology of money which will help to understand how money works. Here are 18 lessons from the popular money book The Psychology of Money by Morgan Housel. Texts highlighted in bold are quotes from the book.
In today’s world, with all the information available to us readily, people make investments based on other people’s experience and their goals. They do not plan out their investment strategies but try to copy other people’s strategies thinking it would benefit them. We should make decisions based on our own unique experiences that makes sense to us in the given moment
Risk and luck are the same forces working in opposite directions. It’s hard to know everything. Your decision can lead you to either side of the coin. When judging our failures we often create a narrative justifying our decisions and what contributed to the risk whereas judging someone else failures we think “Your bad outcome is because of the bad decision you took”. The truth is we are all trying to learn what works and what not works with money. But here are two things the author says that can help:
- Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming
2. Focus less on specific individuals and case studies and more on broad patterns
In the greed of making more money, don’t lose out on what you already have. People usually make bad investment decisions when they are in greedy for money. The best example is gambling. You need to set your goalpost for your money journey and make sure it stays there. There will never be enough money for you to show off. There is always going to be someone who is wealthier than you. Stop comparing yourself to others.
Let us take an example, when we start working out, we do not see the results in one day. Slow changes in our body gradually build up to the healthier and fitter version of us. The same goes for money. Start as early as you can in your investing journey. It will gradually lead you to a better outcome than the present version.
Making money and keeping money are two different skills. You can make money over a period of time but how to sustain that money? Always keep room for error. Plan out the plan if things will not go according to your plan.
Have you heard of the butterfly effect? Small causes have larger effects. In principal you do not have to make a whole lot of investments. You can be wealthy by maintaining good small investments.
The freedom to do whatever you can want with your time. Most people do not have this luxury that they can quit their jobs and do whatever they want with their life. Some of us have family to provide to, and have debts or loans that need to be repaid. Everyone has the same 24hrs in a day. Some manage it efficiently, some do not. Make the most of your time. Other than your job provide time for your passion or side hustle that fulfils meaning to your life.
The unsaid and harsh rule of society is people with a luxurious car or expensive houses gets more respect or are admired by others. People who gawk at such things or are in pursuit of these things subconsciously think that owning these things will make them respected person or that people around them will be aspired by them. Instead, the writer encourages people to be humble and kind. It will help to earn enduring respect and admiration
There is a saying in my native language that goes ‘We can imitate people’s personality or behavior but we cannot imitate people’s money’ Well, I will like to replace that with wealth. Wealth cannot be imitated. Richness is buying expensive things or cars. Wealth is the flexibility that comes from having money. Its income not spent. People often get confused between being rich and being wealthy. Being rich means your income, the amount of money you generate, but being wealthy means having options and flexibility that come with money
The writer focuses on these points when he talks about saving money:
- The first idea-simple but easy to overlook-is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.
- The value of wealth is relative to what you need.
- Past a certain level of income, what you need is just what sits below your ego.
- You don’t need specific reason to save.
- Flexibility and control over time is an unseen return on wealth.
Do not invest your emotions while investing money. Make reasonable decisions that will give higher returns. Plan out your investment’s basis on a technicality instead of rationally
History is basically the study of surprising events. People consider it as facts. When thinking about worst-case scenarios we often take history as a guide like the Great Depression. But when these events occurred, they were not considered that important or as precedent. The world is full of surprises and investors must learn to anticipate that sometimes past investment history will not drive your future investment returns. The writer here shares two things that happen when we are heavily dependent on investment history as a guide:
- You’ll likely miss the outlier events that move the needle the most.
- History can be misleading guide to the future of the economy and stock markets because it doesn’t account for structural changes that are relevant to today’s world
Keep room for error. Always have a plan B if your plan A does not go according to your plan. No one in this world is 100% master when it comes to investing. A wise man always keeps his options open and supplemental. Your backup should have a backup. There is a reason that people have started earning through multiple sources and are not just completely dependent on one paycheck. You have to realize if you have no backup for your source of income or for your future, no matter how much money you make it will always be at risk.
One thing we are sure of in this life is change is inevitable and constant. Not only do our life changes around us we also have to evolve with time and with that our mindset changes as well. We always want to live our lives on our own terms but let’s be real it does not happen. People are poor forecasters of their future selves. We plan a goal for ourselves and then have to change it according to current circumstances. Here the writer gives us two tips to keep in mind while planning your goals:
- We should avoid the extreme ends of financial planning
- We should also come to accept the reality of changing our minds
We often look at people with great bodies and their abs thinking they are so lucky and it’s so easier for them. But certainly, it’s not the case. The hours of the gym they put in, the self-control they had to have to eat meals according to their diet, and the discipline to take care of themselves every day. Everything has a price to pay. Similarly, your investing journey will too. Obviously, it’s also the money that goes in but the hidden factors that contribute here are patience, fear, uncertainty, and doubts. Let’s be real, nothing is free
Everyone is on a different journey. You cannot take financial lessons from intraday traders when you are looking for long-term investment returns. You cannot compare your lifestyle to a businessman when you are living from paycheck to paycheck. It will only lead to disappointment
We, humans, are the ancestors of people who used to live in caves. The only fear that they had at that time was getting killed. But as humans evolved, that fear still exists. It’s commonly known as a survival instinct. So, when someone will say to me “This particular stock is definitely going to blow this month” We act all corny and will write them off but if someone tells me that the stock, I own is going to collapse I will give them my undivided attention. The fear of losing my money will not leave my mind until I am reassured. Negative thoughts or pessimist thoughts come to our mind more often than Positive or optimistic thoughts.
Let’s be real, the world is not always a better place. All the things which we want to be true, will not happen all the time. Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps. Instead of trying to control everything lean more on statistics and facts. Always keep room for error. Do not be cocky when it comes to money.
In the last chapter of the book, the writer shares his investing journey and what worked for him.
Hope this post helps!
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