The Psychology of Money
The Psychology of Money by Morgan Housel provides 20 chapters on how to view money through short stories from strangers sprinkled with lessons throughout. Housel focuses on insights surrounding behavior and how that affects finances, rather than viewing it from an analytical perspective.
Good decisions aren’t always rational. At some point you have to choose between being happy or being ‘right’
This book took about 3-4 hours to read from front to back. Housel breaks down chapters in a way where each idea is independent, leading to easily digestible content with strong real-world examples. A takeaway from the book was to focus more on becoming wealthy rather than becoming rich. The following quote depicts the difference between the two:
“Rich is a current income. But wealth is hidden. It’s income not spent. Wealth is an option not yet taken to buy something later. Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”
Trampoline Analogy
Imagine a trampoline in your backyard where the size is proportional to the amount of money you have saved. Whenever you jump on the trampoline, the size decreases as you are spending a small amount on a current need such as groceries, gas, or a paid activity. As we continue jumping on this trampoline at a young age with fewer assets and income streams, the trampoline may become smaller and bigger. As those streams increase over time, the decreasing effect of each jump will not be noticed as much, since there is always continual growth of the trampoline. Eventually, you’ll be able to jump freely on the trampoline and it will grow indefinitely - this time is where you are able to retire.
With this in mind, income streams take many years to develop as they build off themselves. Reaching the point where one is sustainable requires a long process of building a solid foundation similar to how buildings are made. You need to plan, edit, and refine before you build it. Then, after the initial building has been created, how do you continue to refine it over the years? These questions, along with many others, are the ones I am taking into account after having years of exploring different methods to develop income streams such as affiliate marketing and e-commerce.
Top 3 Lessons:
The best compound investments are ones that take years and decades to grow.
Put someone’s safety in question and they will listen
Wealth itself is what you do not see
Lesson 1: The best compound investments are ones that take years and decades to grow.
In 2014, Fidelity conducted a study where the best performing investment accounts were the ones that people forgot about and developed over many years. The accounts did not have any change and as a result, there was no bias from human intervention to buy or sell when the prices were high or low.
Similarly, when you view bonds, the ones that are the “best” are the ones where you have spent years talking and crossing paths with each other in life. This is how we define family and marriage as typically the hallmark of the best relationships, since we dedicate years to them.
Lesson 2: Put someone’s safety in question and they will listen.
Maslow’s hierarchy of needs places safety needs as the second pillar above the physiological needs (food, water, warmth, and rest). Once safety is put into question, this leads to a change in priorities for the human mind, as that pillar is not satisfied to focus on the pillars above, such as belonging and love needs, esteem needs, and self-actualization. Therefore, when you put someone’s safety into question, this alarm brings their attention to the forefront.
As an example, whenever you watch the news they highlight words such as “cancer”, “bomb”, or “war”, which are safety words. They bring more people into the story since they’re wondering how this may affect them. Similarly, with prices rising in the economy today, everyone has their eyes on what may happen to the changes in inflation that may endanger their own wellbeing.
Lesson 3: Wealth itself is what you do not see.
Wealth is the freedom and independence to do whatever you want without worrying about how this may affect your finances. You can never see every choice someone makes and only see the byproduct out of it which may amount to a publication or a luxury investment.
Building more wealth is the ability to see long-term and short-term investments in a way where you have a minimal risk factor of what today’s decisions will make. Fully eliminating the risk of today’s decision affecting tomorrow’s is near impossible as anything and everything can happen as we are writing new history every day. The unknown is a mystery and we can do all in our power to increase our wealth and to focus more on the present.
Conclusion:
In summary, the psychology of money is a book that lets you see how to change your behaviors to build more wealth over time rather than focusing on changing one short-term purchase. The book provides different tips and viewpoints to help you to relearn how to view money and wealth.
Want to learn more about how to change your view of money?
Read the book here: Kindle | Hardcover | Audiobook
I’d love to hear your learnings from the book! Tag me on an Instagram story once you finish at @kevintptran.
