“The Psychology of Money” by Morgan Housel is an insightful and thought-provoking book that offers a fresh perspective on a subject that affects us all. Whether you’re struggling to manage your finances or simply looking for a better understanding of how money works, this book is definitely worth reading.
Here are my top lessons from the book.
But first, I need to say this >>
Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behaviour is hard to teach.
Let’s be real, not many of us make financial decisions with just a spreadsheet. Instead, we make them during dinner, or during a company meeting. These are places where our personal histories, our unique views of the world, our ego and pride, marketing influences, and strange incentives all blend into a story that feels right for us.
We all do some unexpected things with money, mainly because this whole game is still somewhat new to us. What might look a bit zany to you could totally make sense to me. But hey, no one’s losing their marbles — we all make decisions that are influenced by our unique experiences and that seem perfectly logical to us at that moment.
Ever thought about how luck and risk play a role in our financial success? It’s quite the game, isn’t it? Well, here’s the thing- when we are assessing financial success, ours or others’, it’s never as black or white as it may seem.
The more extreme the outcome, the less likely you can apply its lessons to your own life, because the more likely the outcome was influenced by extreme ends of luck or risk.
The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.
Managing finances can be tricky, especially when the finish line keeps shifting. Don’t let comparisons get you down. Remember, ‘enough’ isn’t the same as ‘too little’. Keep in mind, some things are too precious to risk, regardless of the potential reward.
Think of compounding like a snowball. A little growth that keeps fuelling future growth. It might start small, but over time, the results can be so OMG huge, that it seems almost magical!
Sometimes, compounding isn’t our first thought. We overlook it, focusing on other solutions. It’s not that we’re overthinking, it’s just that we often forget to pause and consider the amazing potential of compounding.
Let’s assume you start saving $200 per month at a 6% annual interest rate. If you start saving at 20 years old, by the time you reach 60, you will have saved $96,000 from your own pocket. However, due to the magic of compounding, the value of your savings will have grown to approximately $502,810.
In contrast, if you start saving the same amount at 40 years old, by the time you reach 60, you will have saved $48,000 from your own pocket. But due to the shorter time frame for compounding to work its magic, the value of your savings will only be approximately $70,400.
This example clearly demonstrates the power of compounding — the earlier you start saving, the more time your money has to grow.
Holding onto your wealth isn’t about daring adventures; it’s about humility and a healthy dose of fear, reminding you that fortunes can change quickly. It’s about embracing a modest lifestyle and recognising that some of your success comes from good fortune, and that past victories don’t guarantee future ones.
Growing your wealth isn’t about chasing the highest returns. It’s about achieving solid returns, consistently and uninterrupted over time — even, and especially, during the stormiest of times.
Being conservative is about sidestepping certain risks. Having a margin of safety boosts your chances of success at a given risk level, helping you stay in the game. The beauty of it is, the bigger your safety net, the less of an edge you need to come out on top.
Embrace a ‘barbell personality’ — be hopeful about what the future holds, but stay vigilant about the barriers that could keep you from getting there.
You know, a lot of things in business and investing work in a fascinating way. These things called long tails — the distant ends of a distribution of outcomes — hold a tremendous sway in finance. It’s here that a minuscule number of events can account for the majority of outcomes.
Imagine this: most public companies are duds, a few do well, and just a handful become extraordinary winners that account for the majority of the stock market’s returns.
So, when you embrace the idea that tails drive everything in business, investing, and finance, you find it perfectly normal for many things to go wrong, break, fail, and fall. It’s all part of the game!
Embracing the wonderful feeling of steering your own life is a more dependable way to spark joy and well-being than any of the objective conditions of life we’ve considered.
Seriously, what else is better than having a life where you can have the freedom to make the choice?
It’s a funny thing, isn’t it? We often find ourselves wanting more and more wealth, thinking it’ll make us more likable and admirable to others. But here’s the twist, those very people we want to impress might not be admiring us. Not because they don’t appreciate wealth, oh no! It’s just that they’re too busy using our achievements as their own personal goals for admiration and likability. Isn’t that something?
Wealth is like a secret treasure, tucked away for future use. It’s not just about what you can buy now, it’s about the potential it holds! It gives you the power of choice, the freedom to be flexible, and the ability to grow your wealth to splurge on something big in the future!
Remember, appearances can be deceiving. There are modest folks out there with a hidden wealth, and flashy folks who are just a step away from insolvency. So next time you’re sizing up someone’s success, or setting your own goals, keep this in mind!
Building wealth isn’t just about your income or investment returns, it’s mostly about your savings rate. And guess what? That’s something you have control over.
Sure, investment returns can help you get rich. But, there’s always a bit of unpredictability when it comes to investing. The markets aren’t always going to play nice and the strategies that work now might not work forever. It’s a bit of a guessing game, right?
Here’s a little secret: Learning to be happy with less money can create a gap between what you have and what you want. It’s kind of like getting a raise, but it’s easier and you have more control over it.
Think of savings as your personal safety net. Life has a way of throwing curveballs when we least expect them, but if you’ve been saving, you can handle whatever comes your way.
If you don’t have control over your time, you’re at the mercy of whatever life throws at you. But with some flexibility, you have the time to wait for those golden opportunities to just fall into your lap. It’s like a hidden return on your savings!
With that flexibility, you can wait for the perfect opportunities in your career and your investments. You’ll be in a better position to learn new skills when necessary. There won’t be any need to chase after competitors who can do things you can’t. You’ll have the freedom to find your passion and your niche at your own pace.
Choosing a reasonable approach is more reliable and you know you can count on it long-term. This is especially true when it comes to handling your finances.
Those savvy investors who stick by their slightly imperfect strategies? Well, they have a secret weapon. Their commitment to these strategies plays a big part in their success!
Think of market volatility as a friendly toll gate instead of a scary fine. This little shift in perspective can make all the difference, helping you hang in there and let investing work its magic!
Isn’t it interesting how investors can view the same situation so differently? It’s all about perspective, really. When investors have different goals and time horizons — and let’s face it, they always do in every asset class — what might seem like an outrageous price to one person can be perfectly reasonable to another. That’s because every investor pays attention to different factors.
Ever wondered how bubbles form? It’s when the allure of short-term returns is so strong that it pulls in a lot of money. This changes the investor makeup from being mostly long-term focused to being mostly short-term focused.
And here’s where bubbles can cause some real trouble. It’s when long-term investors, who are usually focused on a completely different game, start taking their cues from those short-term traders who are playing an entirely different game.
When you really want something to be true, you are more likely to believe a story that says it might be? It’s a fascinating thing about human nature!
We all see the world through our own unique lens, and it’s only natural that our view is a little incomplete. But don’t worry, our minds are fantastic at filling in the gaps and forming a complete narrative, without us even thinking about it!
Be mindful of this. It’s all part of the learning process!
In conclusion, “The Psychology of Money” is a profound exploration of the intricate web of factors that influence our financial decisions. From the unpredictable role of luck and risk to the undeniable power of saving and compounding, the book presents a nuanced examination of the concepts of wealth and success. It emphasises the importance of managing behavior for financial well-being and encourages a shift from wealth acquisition to wealth preservation. The lessons I’ve learned from this book have not only broadened my understanding of finance but have also provided valuable insights into human behaviour and our perceptions of wealth and success.
About me
I’m a passionate solopreneur on a mission to help other solopreneurs get more done and earn more with Notion and AI! I believe solopreneurship is the future for many businesses, and I’m excited to help these independent go-getters thrive by leveraging the power of systems and AI.
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I wasn’t always a Notion whiz! In fact, when I first encountered it in 2019, I quickly got overwhelmed by its features. However, my experience running multiple businesses has taught me the importance of systems and efficiency. So, I doubled down on learning Notion, and now I use that knowledge to create user-friendly templates that help entrepreneurs, solopreneurs and freelancers get more done in less time.
My secret weapon? AI! I incorporate AI features into my Notion templates, giving users access to prompts and tools that can generate additional information and further enhance their productivity.
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