The Psychology of Money by Morgan Housel is like a friendly guide through the maze of our financial minds. It’s not just about dollars and cents; it’s about the stories we tell ourselves about money and how they shape our lives.
Housel serves up a buffet of eye-opening lessons that make you nod your head and say, “Ah, so that’s why I do that!” From unraveling the mysteries of our financial biases to showing us the power of patience and humility in building wealth, this book is a game-changer.
It’s not about fancy formulas or complicated strategies; it’s about understanding ourselves and our relationship with money. Whether you’re a seasoned investor or just dipping your toes into the world of finance, The Psychology of Money is a must-read that will leave you feeling empowered and ready to take control of your financial future.
Key Takeaways from The Psychology of Money
Here is a list of the key takeaways from Morgan Housel’s “The Psychology of Money”:
- People have different attitudes towards money. No one is crazy
- Don’t underestimate the role of luck
- Learn to say: “This is enough”
- Appreciate the magic of compounding
- Plan on your plan
- Tails drive everything
- Reasonable > Rational
- Leave room for error
- Don’t make extreme long-term financial commitments
Further explanations for each lesson are provided below, so keep reading!
People Have Different Attitudes Towards Money
We all make financial decisions based on our experiences in the world which could make zero sense to other people who lived completely different lives from ours. A person’s circumstances, upbringing, and period of history they were born in affect their financial decisions.
We’re not crazy. We’re all just newbies.
Morgan Housel
This lesson from The Psychology of Money teaches us not to judge other peoples’ way of managing money and spending habits, but rather try to understand the reasons that pushed them to behave the way they do with money.
Don’t Underestimate the Role of Luck
Sometimes we get really involved in studying the characters of wealthy and successful individuals, overlooking a much more important aspect to study, and that is the patterns all wealthy individuals experience.
Don’t underestimate the importance of luck. Luck, skill, and unfair advantages play a huge role in how we get money. Instead of looking at individuals, we should look at the patterns that rich or successful people share, and one of these patterns is how they got lucky over time.
Focus less on specific individuals and case studies and more on broad patterns.
Morgan Housel
We learn therefore that luck happens unexpectedly and plays a role in our financial gains, so instead of studying Bill Gates’ character, study the patterns of luck in his life, starting from his school years when he had the chance to study in one of the few schools that had a computer during his school years, allowing him to explore coding and found Microsoft.
Learn to Say “This is Enough”
Housel teaches us that it is important to know when you have enough and not risk the things you have for the things you don’t really need.
One of the reasons why we are continuously tempted to have more and more money is social comparison. We desperately try to climb this invisible social ladder of becoming wealthy, forcing ourselves to participate in a rat race with others, not realizing that staying in his mad race will cost us more than understanding that we have enough.
It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.
Morgan Housel
Appreciate the Magic of Compounding
In his book, The Psychology of Money, Housel argues that compounding works when you give it time. Sadly, we rarely stop to realize the potential and power of compounding. If you want your investments to grow exponentially, give them time, and don’t interrupt them for the sake of short-term desires or fears.
You don’t need tremendous force to create tremendous results. You just need time.
$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.
Morgan Housel
Plan on Your Plan
“You plan, God laughs.”
You should always plan, but also plan on your plan, so you don’t be surprised when things don’t work according to your original plan. This is one of the most important lessons from The Psychology of Money by Morgan Housel because it is so realistic, and it applies to both our personal and financial decisions.
Again, the book shows us the role that psychology and mindset play in the way we manage our money and finances.
A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality… A good plan emphasizes room for error.
Morgan Housel
Another great idea that is connected to this one is the type of mindset you have. Housel mentions that:
A mindset that can be paranoid and optimistic at the same time is hard to maintain because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
Morgan Housel
Tails Drive Everything
What are tails? “The farthest ends of a distribution of outcomes”, as Housel defines it in his book The Psychology of Money. “A small number of events can account for the majority of outcomes.”
We don’t always see the failures and losses behind someone’s success, we only look at the end product, completely neglecting the fact that it had to go through various issues to reach the end result we admire.
Don’t forget that all successful people make mistakes and you are allowed to make yours too.
Be Reasonable Over Rational
Be reasonable rather than rational. Good decisions aren’t always reasonable but rational. We are emotional creatures, not machines.
You’re not a spreadsheet. You’re a person. A screwed up emotional person.
Morgan Housel
Housel advises that we act reasonably when making financial decisions because this will help us stick to our goals long enough and not quit early. Also, being reasonable helps you make decisions that are aligned with your personal preferences even if they don’t make sense logically.
A great example of this is paying your house’s price in cash rather than deposits because you like to feel secure and sleep well at night, knowing that you own this property and nothing threatens your ownership of it.
If it helps you sleep well at night, then it’s the right thing to do.
Leave Room for Error
Our list of The Psychology of Money lessons includes an essential point that’s connected to planning. It is making room for mistakes because we are emotional beings.
Housel mentions that even when we take risks in investing or life, we should think about our survival plan when things still need time until they succeed. “You need to survive to succeed” is an important lesson to keep in mind when planning on taking risks in professional careers, such as quitting a lousy job and becoming a YouTuber. Ask yourself: how will you survive before your videos start actually paying well? And what will you do if they don’t?
Remember: plan on your plan, not according to plan.
Avoid Extreme Long-Term Financial Decisions
The final lesson to learn from The Psychology of Money by Morgan Housel is to try to avoid extreme long-term financial commitments at an early stage of your life. We are really bad at predicting how our own goals will come out, and how our values and desires will change over time. We aren’t the same people who made these decisions a couple of years ago.
People are poor forecasters of their future selves.
Morgan Housel
Settling for a low-paying career and not saving for retirement is an extreme financial plan you should avoid. Also, working 24/7 and not enjoying your life is another extreme financial plan you should avoid. Balance and endurance are the key.
We reached the end of our blog post on some of the best lessons to learn from Morgan Housel’s The Psychology of Money, and we provided you with concise easy-to-digest pieces from his book on Read & Blog.
