Money is often seen and compared using numbers and we often neglect that the way we look at money and how we behave and grow affects the way we make monetary decisions.
This is true for me as I always am steadfast about working hard and trying to make the best use of my time just to aim to make more money.
Reading “The Psychology Of Money By Morgan Housel” gave me a breather and shifted my mindset on how I look at money. Let’s take a look at a few core lessons I’ve learned from this book.
1. Endurance Is Key
We all know by now that compounding your money is one of the key ways to grow your wealth fast over time.
If you are new to this concept, Housel talks about how compounding works best if you give it years for your money to grow and why this is hard because we have the tendency to change who we are over time, therefore, we have to find balance in every point of our lives with the aim to encourage endurance.
Housel quoted the famous Charlie Munger in the book
The first rule of compounding is to never interrupt it unnecessarily
Housel also wrote about Warren Buffett and how he compounded his money and started investing since he was 10. We always say that he’s a great investor but no one actually spoke about how he is a great investor for a few decades which he allowed his money to compound.
Housel writes
Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
2. Be Reasonable Instead Of Rational With Your Money
It was an eye-opener for me while I read through this chapter as Housel wrote about how there’s no way we can always be rational with our money as we are emotional human beings. Housel shared an example in the book saying that rationally, having a fever is a great way to fight infections but no one would like to go through the suffering of having a fever and we would rather take medications.
The same goes for our money. What looks good on paper, in the long run, may not be the best decision for us at the moment.
He writes
“My own theory is that, in the real world, people do not want the mathematically optimal strategy. They want the strategy that maximizes how well they sleep at night.”
To bring this perspective into our finances, we all have different risk tolerance and we should stick to what is reasonable for us. He also gave an example of how investors who are reasonable with their strategies often stick to them longer which referring back to point 1 above, is key.
Follow what is reasonable for yourself and as long as you are saving money along the way, you just have to play the endurance game.
3. Save Alot For No Apparent Reason
If you think about it, most of us actually save for a specific reason. We save to buy a car, to buy gifts for a friend’s birthday, the new iPhone or even for medical emergencies which is great, but Housel writes
Saving for things that are impossible to predict or define is one of the best reasons to save
If we are already predicting what we’ll use our savings for, we are assuming we know our future expenses, which is not the case.
Housel further expanded this and writes that money relies more on psychology rather than finance.
Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you
Wealth is something that we don’t see which is our ability to spend when we need to (savings) and it is created by suppressing what we could buy today in order to have more stuff or options in the future.
4. Know What Is “Enough”
Housel wrote, “the hardest financial skill is getting the goalpost to stop moving, but it’s one of the most important”. We often compare ourselves to others which is probably the sole reason why our expectations for ourselves keep rising.
We are affecting our finances and our stress levels with our own psychology.
Throughout the book, Housel shared stories of how greed and risk destroyed the success of many people. This made me think about what makes “enough” enough?
And a lot has to do with our own psychology which I agree with Housel because most of the time, our expectations of ourselves rises whenever we compare ourselves with other people. I wrote about something similar when I first started my blog, about “How much money do we need to be happy”. You can read that article here.
If we are able to overcome this psychological barrier inside us, which is finding out what is reasonable for us, we would probably be much happier.
Conclusion
Reading “The Psychology Of Money by Morgan Housel“ shifted my perspective on the way I look at money, wealth and happiness. I was probably aiming to live up to people’s expectations when I should be aiming to be wealthy which means to save a lot and having the freedom and ability to spend whenever I want to.
It has definitely inspired me to invest my money in places that are reasonable for me and to let compounding do its work while I aim to save more and fix the way I look at money psychologically.
After all, we are playing our own money game and we should focus on ourselves.
Here are my top 3 quotes from the book
Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.”
The most important part of every plan is planning on your plan not going according to plan.
A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
I hope you enjoyed reading this article, cheers to saving more money and being reasonable with ourselves!
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