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📗Psychology of Money: Key Ideas, Notes and Summary
💸 Timeless Lessons on Wealth, Greed, and Happiness | Wisdom Letter #177
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Today we’re talking about Morgan Housel’s book The Psychology of Money 💸
The book explores the emotional and psychological aspects of personal finance and investing.
It delves into the various biases and emotions that influence people's financial decisions and how they perceive money.
It’s a must read for anyone looking to improve their relationship with money (so basically everyone!)
So let’s get into it 🚀
1. Money isn’t about the Math
One of the main themes of the book is the role that emotions and biases play in shaping people's financial decisions.
Many of our financial mistakes stem from our emotional reactions to money, and that understanding these emotions and biases can help us make better financial decisions.
When it comes to finances, behavior outperforms intelligence.
A lower IQ person can be way more wealthy compared to a higher IQ person only if they can manage their emotions and money responsibly.
Personal experience drives financial decision-making.
Someone who has grown up during a recession is far less likely to trust the market and hence NOT invest his savings.
While someone who has grown up during a booming economy and growing markets is way more likely to invest their money and see great returns.
It’s not as straightforward as the laws of Physics.
2. Money Mindsets
Long Term Thinking
Most people don’t realise that 99% of Warren Buffet’s wealth was generated after the age of 68.
The biggest reason for his success in the investment world is the reason that he has been “in the market” for more than 75 years now.
Starting his journey at the age of 11 gave him an incredible headstart.
When you start that early, the compounding can do mind bending stuff.
That’s why we must maintain a long-term perspective and discipline when it comes to personal finance and investing.
Staying sane in the face of trouble and not screw up can get great results.
Also - Give compounding enough time to do it’s magic.
Start investing TODAY!
The book also recommends having a high savings rate.
I loved this equation -
Savings = Income - Ego
Savings rate is the only thing you control when it comes to your personal finance. You don’t always control your income, and of course, you can’t control the market returns.
“This is enough”
I also loved the idea that the real value of money is not in the luxury cars it can buy, but instead in the freedom it can buy.
Freedom = High Savings rate + Low expenses
Having more money will make you happier only if having more money means more control over your time.
Don’t go after more money just for the sake of it, instead look at money as a tool to buy freedom.
3. Be Humble
Luck plays a huge role in getting rich.
You have to be at the right place at the right time doing the right thing to get rich.
If you get rich, don’t throw it away chasing bigger houses and fancy cars. Recognie the role of luck in any financial success that you achieve, and be prepared for the unexpected in order to be successful in the long run.
Don’t Flash Your Money
We often fall for the “Man in the Car” paradox.
We think that we will gain respect from other people if buy an expensive car.
The fact is, that when someone looks at your car, and they desire that car, they’re just imagining themselves in that car, you’re not gaining respect from them.
You get respect and admiration from people for the work you do, the values you live by and the impact you can have on their lives.
Favorite Quote from The Psychology of Money
“Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.”
There are more insightful gems and ideas mentioned in the book. Do read it, or at least read it’s 15 minute summary on Blinkist.
I’ve been enjoying these summaries a lot lately.
They are especially great when you want to go back to a book you read a while back, or you want to filter your next book to read.
Do check it out -
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Thank you for reading.
Hope this post gave you a few ideas about how to be more focused this year.
Next week, we’ll return with one of the most interesting personal development books of our time - The Subtle Art of Not Giving a F*ck
We will distill the most important ideas from that book in less than 5 minutes of reading time for you.
So keep an eye out for that email.
And if you missed it, make sure to read last week’s post -
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