5 Lessons from The Psychology of Money
No question this week, so we're diving into some of the best lessons from Morgan Housel's best-selling book, The Psychology of Money.
(If you have a personal finance question you'd like answered within this newsletter, submit it here)
And one cool thing to note about this book and Morgan's writing: In October 2020, Cavalry Media acquired the book with the goal of turning it into a movie. A true nod to how well this book is written because I'm still trying to wrap my head around the fact that a personal finance book is going to be on the big screens.
But let's dive into some of my favorite lessons:
No one is crazy
“Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”
Everybody makes different decisions and has different beliefs around their money. For example, imagine the different relationships these two people would have with money:
- Grew up poor, with two loving parents, but money didn't stop them from enjoying life
- Grew up upper-middle class, roof over their head, but parents always argued over money
Our environments and relationships, both physical and emotional, with money play a role in how we view it and how we manage it. With knowing this, you may begin to understand why you view money in a certain way and if it's an unhealthy viewpoint, you can then begin taking necessary actions to correct the behavior.
Getting wealthy vs. Staying wealthy
“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.“
Getting wealthy requires some risk, such as starting a business. But staying wealthy is more about risk management and preservation, while still playing offense. If you're going to play offense, be smart and don't risk it all.
Another quote from Morgan in this section - “More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”
Continually build your nest egg, protect what you've earned, while also pushing for more (if you decide that you need more), which leads me into the next point.
Define your enough
“Life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.”
Jordan Belfort, the Wolf of Wall Street, is the perfect example of a person who could never have enough. After earning $49 million in his first year of Stratton Oakmont, he was pissed because he was 3 shy of a million a week and decided that it wasn't enough. So he continued pushing for more and more, leading him to make unethical decisions, which ultimately led to him losing it all.
Now, I'm not saying that you have any similarities to the Wolf of Wall Street, but it's important that you know what "enough" is to you.
Be aware and grateful for what you have, and be mindful of the amount of risk you're taking and what you're sacrificing if you're always striving for more.
As Morgan puts it - “The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.”
Leave room for error
“The most important part of every plan is planning on your plan not going according to plan.”
Morgan's quote states it perfectly. Expect the unexpected.
I've learned this the hard way, firsthand. Last year, a few months after starting my business, my car was stolen and at the time I was using it to do Doordash to help cover some bills. I had very, very minimal room for error in my budget back then and that one instance almost put me in debt and would've put the business in a less than ideal situation.
So even if everything's going great right now and you're getting by, make sure you have some buffer built into your plan for when the music inevitably stops.
Man in the car paradox
“No one is impressed with your possessions as much as you are.”
One of the coolest things about living in Kansas City compared to the small town I grew up in is seeing all the expensive cars. Not a day goes by that I don't either see a Maserati, Ferrari, Porsche, or a slightly less fancy, Tesla.
But the thing is, I've never once cared about who was driving it. Only what I would look and feel like driving it myself.
Which means that even if I was able to afford one of those cars, other people are probably thinking the same thing as I am right now - "cool car". They wouldn't care that I own the car, they would just wonder what it's like to have it themselves.
All of that to say: nobody cares what you drive, what you live in, or what you wear - they care the kind of person you are and no material possession makes you better or worse than anyone else.
And final quote from Morgan: “It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.“
As I'm sure you can tell, I'm a fan of his book, highly recommend it, and you can read more of Morgan's weekly writing at the Collaborative Fund here.