Book Summary : Psychology of Money by Morgan Housel

Psychology of Money by Morgan Housel

What is behind people’s minds when it comes to money? The answers of course can be different for every person. Just like the author says, nobody is crazy when it comes to money. Because every person acts upon their money according to what they know, based on what they are thought about money. Some people might find it crazy that poor people spend their money on buying lottery tickets but never won any of them. It might be crazy for you. However, to them buying lottery tickets is like buying a tangible dream of getting the good stuff you already have and take for granted. You might not understand because you already living the dream.

People do crazy things with money. But no one is crazy; we all make decisions based on our own unique experiences that seem to make sense to us in a given moment.

Risk and luck are doppelgangers

When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.

Failure can be a lousy teacher; because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of 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.

Never enough, when crazy people do crazy things

The hardest financial skill is getting the goalpost to stop moving. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction. In that case, one step forward pushes the goalpost two steps ahead. You feel as if you’re falling behind, and the only way to catch up is to take greater and greater amounts of risk.

            The problem of social comparison is feeling envious of other people’s wealth and constantly comparing what we have to what they have. Accept that you have enough and stop comparing yourself.

            Having enough does not means you only have “a little”. Greed can lead you to serious regret. Sometimes we don’t realize that we have enough and keep chasing money from a greed point of view, which can direct you to do things you will regret. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

Compounding

We all know that Warren Buffet is a wealthy man. But we often forget that Warren Buffet’s $84.2 billion net worth was accumulated after his 50th birthday. His skill is investing, but his secret is time. That’s how compounding works.

Staying Wealthy

Getting wealthy and staying wealthy are two different things. There’s only one way to stay wealthy: some combination of frugality and paranoia. Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

Wealth is what you don’t see

Wealth is the nice cars not purchased. The diamonds were not bought. The watches were not worn, the clothes were forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

Save Money

Saving does not require a goal of purchasing something specific. You can save just for saving’s sake. And indeed you should. Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment. Savings without a spending goal gives you options and flexibility, the ability to wait, and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.

Reasonable or Rational?

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.

These are some of my favorite keys take away from Psychology of Money. We often portray wealth as the expensive sports car we see on commercials, the nice big mansion, the lavish lifestyle and all branded stuff people own. The truth is wealth is an asset, and you can’t see it grow if it continues turning into stuff. When you keep spending and buy stuff, you will end up with stuff, not money, not wealth. Thus, even if you are rich but don’t have the necessary self-control over your money, you will not be able to stay rich.  Wealth is something we create over time which requires patience, time, frugality, and knowledge.