The Essential Lessons I Learned From Morgan Housel's 'The Psychology of Money'
đź“ş Have you ever wondered why some people seem to effortlessly build wealth and achieve financial success, while others struggle?
Today I’ll be exploring some of the lessons learned from Morgan Housel's 'The Psychology of Money' and how improving your relationship with money can help you build the life you truly want.
Money has little to do with how smart you are, but rather, it’s all about your mindset.
Instead of just focusing on financial formulas and ratios, Housel shows how our behaviours and attitudes towards money play a crucial role in our financial success. With 20 insightful stories, he explores how these "soft skills" can help us make better financial decisions and build long-term wealth.
“The world is filled with people who look modest but are wealthy and people who look rich who live on the razor’s edge of insolvency. Keep this in mind when quickly judging other people’s success and setting your own goals.”
1/ wealth is something you don’t see
Generally, we tend to define success based on our consumption, or the accumulation of visible symbols of success like big houses, expensive cars, and designer bags. Social media certainty doesn’t help with all these comparisons.
While material things may provide a temporary sense of happiness or status, they don't lead to long-term fulfillment or financial well-being or happiness.
True wealth lies in things that aren't immediately visible to others, but that still have a big impact on our quality of life.
For example, having savings, being debt-free, feeling like you have a purpose in life, a fulfilling career or passion project, and having good relationships with loved ones.
We often compare ourselves to others when it comes to money, but our financial situation and goals are only OURS, and shouldn’t be compared to others.
It’s about being able to focus on our personal progress and financial decisions that align with our values and priorities, rather than trying to keep up with others or seeking external validation.
Money should not be viewed as the end goal but rather a means to an end. It is a tool that can help us achieve our goals and values in life.
The value of money is in the control it can give us over our time. By shifting our focus towards what truly matters, we can use money as a tool to create a life that aligns with our values and brings us happiness.
"By putting aside ego and focusing on building wealth, you can use money to gain control over your time."
2/ saving money provides an advantage
Morgan Housel argues that saving is an edge in an unpredictable world because it provides us with a financial cushion. Life is unpredictable, we may lose our job, have a healthcare issue or face an unexpected expense - so having an emergency fund is a good idea as it will help you avoid getting into debt and feeling stressed about unexpected expenses.
Saving money can also give us a sense of control.
It can also help us achieve our goals, like starting a business, taking a trip to a dream destination or paying for your kids' education.
You may feel like focusing on saving restricts you or makes you not live your life fully in the present, but saving for the long term is important as building a nest egg of savings is essential for achieving financial independence — which is a brilliant thing to have!
Saving for the long term doesn't have to be a sacrifice or a burden. Remember to always have a “fun” fund to spend on yourself too - if you restrict your spending too much you’ll end up resentful!
To make saving a little easier, you can start a habit of automating your savings each month - even if it’s only a small amount.
Saving is an edge in an unpredictable world because it allows us to build resilience, reduce anxiety, and achieve our goals or new opportunities.
3/ What are the pros and cons of pound cost averaging?
In chapter 4, Housel discusses the power of compounding as a key factor in building wealth over time.
Compounding is the process of earning interest on top of interest over a long period of time.
It's like a snowball rolling down a hill, growing bigger and bigger.
The power of compounding cannot be overstated, and I try to apply this principle to learning and doing, where consistent effort over time can lead to significant progress and growth.
Housel uses the example of a glacier during the last Ice Age to illustrate how compounding works in investing. As the glacier picked up more snow and ice over time, its mass and weight grew exponentially, just as investments can grow significantly over time through the power of compounding.
When investing money, I used to focus on short-term results and forget that it's better to wait for a long time to see my money grow.
There is always the temptation to make quick profits by buying and selling frequently or by choosing more risky investments, but this strategy can make you lose money.
4/ What if I invest and the next crash is coming?
In Chapter 6, Morgan Housel talks about how to invest. While cash savings are crucial, once you start building some savings and repay your expensive debts, you want to make your money work a little harder for you to at least keep up with inflation and benefit from compounding.
After making the mistake of selecting individual stocks myself and trying to beat the market, I like House’s approach of investing regularly in a low-cost index fund and holding it for the long term, as this can provide a much higher probability of success.
Attempting to time the market or pick individual stocks is risky and unlikely to consistently outperform the market over the long run. Also remember the phrase that investing should be boring!
If you want to build up your investing confidence you can watch back our video How do I get started investing?
By investing in a broad-based index fund that tracks the overall market, we can benefit from the long-term growth of the economy while minimising fees and other expenses.
The key will be to be patient and disciplined in sticking to this investment strategy, rather than trying to chase short-term gains or react to market fluctuations.
Investing can be overwhelming, but it's important to have a strategy that gives you the highest chance of success. For most people, that means investing in a low-cost index fund and not trying to beat the market.
“Most good investing isn't about making great decisions. It's about consistently not screwing up.
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Overall, it is evident that financial success is not a one-size-fits-all proposition. What works for one person may not work for another, and it's important to find a financial approach that aligns with your values and goals. But the ultimate goal is to achieve financial security and peace of mind. That's why it's crucial to prioritise your long-term goals, stay consistent in your savings and investment habits, and avoid comparing yourself to others. It seems daunting at first but once you get things going, especially if you start with automating your investments, you’ll see that you have nothing to fear after all!
The "Psychology of Money" explores the intersection of psychology and personal finance, highlighting the powerful role that emotions, biases, and behavioral patterns play in our financial decisions. You will learn valuable lessons on understanding and managing the psychological aspects of money to achieve long-term financial well-being. Let me know if you've read it and please do share your thoughts!
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