The Psychology of Money - by Morgan Housel

Morgan Housel’s ‘The Psychology of Money’ forces you to take another look at personal finance, investing, and business success through the lens of psychology and behaviour. These fields of study have their roots in math, data, and calculations. However, in this book, Housel highlights how everything, from your personal history and experience to your unique world view, ego, pride, marketing, and odd incentives work together to help you finally form a financial decision.

 Key Takeaways

• When it comes to earning money and building wealth, it really doesn’t matter how smart you are. Instead, what really matters is how you behave.
• Even the smartest people can lose control of their emotions and plunge into financial disasters while ordinary people with no financial education, but robust behavioural skills, can become wealthy.
• It is not enough just to know how to do something. You must be able to fight with internal emotional and mental turmoil in order to make the best financial decisions.
• Considering the lack of accumulated wisdom in terms of modern finance, many of the poor financial decisions that you end up making arise from peoples’ collective inexperience.
• You must not risk what you already have and require for things which you do not have and do not actually need.
• Creating wealth and maintaining wealth are two different things. Creating wealth is easy, but keeping it is very difficult.
• While there are many ways to accumulate wealth, there is only one way to maintain it, and that involves being frugal and paranoid of potential losses.

Experience can be a boon and a bane

“Your personal experiences with money make up maybe 0.00000000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

Stop the goalpost from moving

You should know when you have enough wealth and then stop wanting more. Throughout history, greed or a craving for ‘more’ has been the downfall of many of the rich and famous. When you keep running after more, you inevitably start taking more risk than you should. Know when to stop. Good investing is not about earning the highest returns. Instead, it is about making good enough returns for the longest period of time. Compounding is the way to create long-term wealth. 

Savings is the dealmaker

The rate at which you save is far more important than your income or your investment returns. Generally, beyond a certain income level, you will find three types of people. First are the people who save. Second are the people who don’t think that they earn enough to save. And, third are the people who think that they don’t need to save. However, over a longer period of time, it will be the people belonging to the first category who will end up successfully creating and maintaining their wealth.

Leave a room for error

When you are investing, always remember that you are dealing with probabilities and not certainties. Thus, you should always leave a room for error, the best way of doing this is by avoiding single points of failure and spreading your investments. It is also a great idea to always have a good emergency fund.