This is a comprehensive summary of the book The Psychology of Money by Morgan Housel. Covering the key ideas and proposing practical ways for achieving what’s mentioned in the text. Written by book fanatic and online librarian Ivaylo Durmonski. Supporting Members get full access and a downloadable/printable version of the summary.
Managing your money is not easy. But here’s how the author of the book thinks you should approach cash: It’s not about what you know about money, it’s about how you behave with money. Financial freedom is not about learning everything related to the stock market. It’s about patience and persistence. In this book, Morgan Housel walks us through the major behavior patterns we should adopt if we want to become good with our cash flow so we can finally develop financial literacy.
The Core Idea:
Our behavior patterns prevent us from having good financial health. We accumulate debt and fail to meet our investment goals not because we don’t know what to do, but because we’re too greedy or deeply involved in social games where we compare ourselves to the people around us. To become better and smarter with your money, you don’t need to study new investment strategies. You need to examine how you behave with your money and make adjustments.
- Adjusting how you behave with money on a daily basis is far more important than adjusting your investment strategy.
- Don’t strive only on becoming wealthy. Learn also how to stay wealthy.
- Everything that can break will break. Create plans that will help you when your plans are not going according to plan.
5 Key Lessons from The Psychology of Money:
- Lesson #1: Don’t Mimic Specific Successful Individuals. Adopt Broad Patterns
- Lesson #2: Earning Enough Is Better From Constantly Striving For More
- Lesson #3: Staying Wealthy Is Different From Getting Wealthy
- Lesson #4: Have A Plan On Your Plan Not Going According To Plan
- Lesson #5: Better Discipline On How You Manage Your Cash
Lesson #1: Don’t Mimic Specific Successful Individuals. Adopt Broad Patterns
If you are not sure how to manage your money, you’ll do what everyone else in the world is doing: You’ll check how the wealthiest people are using their cash. You’ll read the big covers. Check the famous sites. Digest the stories covered by the news.
Sadly, this is not a very good strategy for two main reasons:
Firstly, different people have different backgrounds. If you were raised in a middle-income family, you will have a very different approach to the way you handle your money than someone who grew up in a mansion, for example. For you, spending $1000 on a seminar might seem like a crazy idea. For others, though, that’s a lifestyle.
Secondly, we rarely consider the role luck plays in other people’s lives. As the author writes, “The line between bold and reckless can be thin.” Sometimes, turning your small company into a big corporation can be caused by events you can’t predict nor measure. Or in other words, you simply got lucky.
How do these two points translate to us?
Don’t obsess over super successful people and don’t try to mimic their every move. In most situations, their fame and “greatness” is pure luck – something you can’t emulate – or something caused by their social circle – something that depends on many things. Focus on the common behavior patterns that are present in most people. Things like patience and self-control.
Look at different people. Observe situations where individuals and companies did good and adopt the repeatable patterns. Usually, these are patience, avoiding reckless behavior, and focusing on the long-term goal.
“When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly.” Morgan Housel
Lesson #2: Earning Enough Is Better From Constantly Striving For More
The hardest, yet most important financial skill you’d want to adopt is a sense of enough.
It sounds unproductive, yes. After all, we live in a world where doubling, tripling, or even 10xing your cash seems like the right thing to do. However, the constant pursuit for more will either make you risk everything you currently have or make you emotionally unstable. Both things that will, at some point, make you act recklessly with your cash.
As the author writes, “Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.”
The higher you rise in the social hierarchy. The bigger your goals will become. And sadly, the more you will want to present yourself as better than the people surrounding you. For example, you will start thinking about purchasing a bigger house or getting a more expensive car. Or in other words, you will want to signal to others that you are, too, rich.
However, trying to keep up with other people’s wealth is a game you will never win. There will be always someone who has more than you do. Someone whose presence will make you feel like you’re earning pennies.
So how do you approach this?
Let’s look at what a Las Vegas dealer replied to the question “How to earn most in Las Vegas?”. He said: “The only way to win in a Las Vegas casino is to exit as soon as you enter.”
Similarly, the only way you can win the game of “who’s the richest person in the room?” is to simply ensure that you don’t play the game.
This is hard to do in practice. Eventually, your mind will make associations, whether you want it or not. That’s the way we think. After all, we are social animals. Survival-addict creatures. We want to ensure that we have a stable present and a blossoming future. We want to matter. But more importantly, we want others to view us as people who matter. And in the 21st century, the number of your possessions is a direct representation of where you stand in the social hierarchy. If you have more, you are more. Or at least that’s what we are told.
Contrary to popular belief, more money and more things will never make you happier. They will simply make you desire even more things and even more riches.
The two things you’d want to focus on are freedom and independence. Both dismiss the idea that more should be pursued.
“Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.” Morgan Housel
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