The Psychology of Money: Book Summary
This post is the summary of The Psychology of Money, a masterpiece written by Morgan Housel.
A lot of people earn good money in their lives. But only a few end up financially successful. The art of money management rests not on bank spreadsheets and income statements. Rather, it relies on human psychology.
This is one of the first big lessons from the bestselling “The Psychology of Money” written by the former financial columnist Morgan Housel.
In it, the author has dissected the habits of financially successful people and made them accessible to everyone.
The book lays the fundamentals required for investment and saving your money, and it does so in an easy-to-understand language without pushing with a lot of jargon or technical terms.
It’s an eye-opener that provides valuable insight into how smart money management can allow you to live the life you always desired.
This post is a collection of important insights learned from the book “The Psychology of Money” by Morgan Housel. If you’ve ever sought financial advice but were too terrified to read a full book on it, don’t worry. This summary will make sure you have everything you need to know to get started on your journey towards financial freedom.
“Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”
― Morgan Housel
The Downsides of Unguarded Ambition
We can run behind earning more money all our lives, but would it ever be enough?
The ambition of having more money, power, and prestige gets dangerous when we’re not satisfied with what we have. Knowing when you have enough gives you stability. It keeps you from running the unnecessary rat race.
How do we go about setting our ambition in check? Here are a few ways Morgan Housel suggests:
Have a finish line in sight
“There is no reason to risk what you have and need for what you don’t have and don’t need.”
— Morgan Housel
It’s human nature to want more. To avoid falling into that trap, it’s important to have a finish line in sight beforehand. One way to do this is to plan when to retire. This will give you an excellent idea of how much you’d need to live your dream life and work to achieve that amount.
Invest what you can, whenever you can
One doesn’t become rich overnight.
The success we see has a long tail of hard work, effort, and consistency backing it. Warrant Buffet’s wealth results from compounding over three decades, which could happen because he got the return of his investments. It’s no hard science if you look at the impact of money compounding over the years.
Getting Wealthy vs Staying Wealthy
“Planning is important, but the most important part of every plan is to plan on the plan, not going according to the plan.”
— Morgan Housel
According to a study, an American spends $400 to buy lottery tickets on average. Many of them even win the lottery, but very soon, they bounce back to the same financial stage from where they started.
This might sound implausible, especially taking into consideration the huge bounties won at lotteries. But it happens because these people haven’t managed their money well.
Getting wealthy vs staying wealthy is different. Earning money is easy, but growing that money is difficult. And that’s where people go back into financial crisis again.
In investing and earning more money, we often miss the fact that nothing always goes as per our plan.
Always keep room for error
You can’t be perfect all the time. You have to give yourself enough opportunities and chances to get the results.
After all, nothing happens overnight. The stock market can’t be controlled or tracked. But if we’re okay with losing, that’s our advantage and keeps us in the race. Diversifying your investment helps you do that and gives you an edge over other investors.
“You can be wrong half the time and still make a fortune.”
— Morgan Housel
The Most Valuable Resource at Your Disposal
While reading the book, I realized that time is the most significant wealth one can have. Your time gives you power and influence over your happiness.
Financial freedom gives you control over time. This ultimately gives you the freedom to do things that you love- this could be your hobbies or passion or your dream project.
The freedom to use your time wherever and however you want to use is the incredible power money can give you. Then, you no longer have to work to earn money. You only work because you want to work, and that’s something which you enjoy doing.
“Controlling your time is the highest dividend money pays.”
– Morgan Housel
Know Your “Why” Before Spending
Think consciously as to why you want to earn money.
If your answer is that you need a Ferrari to show off to your friends, or a big house to show off to your relatives, you might be in trouble. If you want to be rich so you can impress other people with your extravaganza, you’re a part of a treadmill that will never stop.
The greed of earning more money and getting richer will never let you become satisfied. No matter how much you earn, the wealth will never be enough for you.
We generally wish to be respected and admired by others. Using money to buy fancy things may not bring as much satisfaction as you imagine. If you feel the inherent need to seek admiration and respect, practice humility, kindness and empathy.
“No one is impressed with your possessions as much as you are.”
— Morgan Housel
Just because someone has a big bungalow doesn’t necessarily mean they’ll be wealthy. What if the house is on loan and the person is struggling to pay the EMIs?
A person’s financial status can’t be judged by what we see in front of us. True wealth is what you don’t see.
“Spending money to show people how much money you have is the fastest way to have less money.”
— Morgan Housel
The Importance of Saving
“Past a certain level of income, what you need is just what sits below your ego.”
— Morgan Housel
While growing up, we hear our parents stating the importance of saving money. Without doubt, it’s a good practice to save money and only spend on the necessary things that we can’t live without.
After all, you don’t need a Rolex to see the correct time. You can survive without overspending on that latest phone. It’s important that we start cutting down on unnecessary expenses that aren’t needed. Limit your spending on the liabilities and invest in building assets that give a long-term return.
“So people’s ability to save is more in their control than they might think.”
— Morgan Housel
Plan For The Future, Not Just The Present
Work on creating a financial portfolio that will support your future needs. This way, you can retire early. There’s a difference between desire and needs. Your desires stem from your ego. Work on your ego, rise above the showing-off game, and live in the moment with happiness.
Cutting down on expenses doesn’t mean you stop enjoying your life. Rather, it means enjoying below your means by thinking about your future.
Live below your means and limit your liabilities. Save as much as you can and keep a tap on your needs and desires.
“The first idea – simple but easy to overlook – is that building wealth has little to do with your income or investment returns and lots to do with your savings rate.”
— Morgan Housel
But always make room for errors
Life is full of surprises, and so is the investment portfolio.
Just because something hasn’t happened in the past doesn’t mean it will never happen. You can learn from past mistakes, but they need not be accurate every time.
The strategies that worked for a successful investor then might not work now. The author, Morgan Housel emphasizes that luck exists. But the sad part is you would never know when it will turn in your favor or against you.
“History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes relevant to today’s world.”
— Morgan Housel
History can be a great teacher but isn’t a perfect predictor of investing. You can’t prepare for what you can’t envision. Always keep room for error and space for failures. Embrace them like you would with the success and profits.
You may say that keeping room for error means it’s okay to fail. That doesn’t mean you stop evaluating, calculating, and taking risks with closed eyes.
There’s no guarantee that you’d win every time. Taking calculated risks is an important aspect of securing your financial future.
“You can be risk-loving and yet completely averse to ruin.”
— Morgan Housel
You might have heard the phrase- “Change is the only constant.”
As people change, so do our plans, dreams, and our financial goals.
We often underestimate how much we’ll change in the future. Today we feel that this is the XXX income with which I can survive and be happy. And to earn that XXX amount, you work moderately and have a low investment portfolio. This will give you less return in the future.
Suppose you say you want to live a classic and luxurious life, and for that, you work very hard. You build a great portfolio but miss to enjoy your present and live in the moment.
You don’t see your friends anymore and hardly spend quality time with your family. What fun is a life of impeccable financial status but hardly any time to spend on the things that matter?
“Long-term planning is harder than it seems because people’s goals and desires change over time.”
— Morgan Housel
There are downsides to both situations, so try and make sure you don’t compromise on your present. Take care of your future by creating a portfolio that meets your future needs. You can always modify and update the investment portfolio based on your needs and desires. But always know when is enough.
“The Psychology of Money” Summary – Final Words
Manage your money in a way that helps you sleep at night.
Use that money to gain control over your time. Be friendlier to people and less flashy.
Define what success is to you and what cost you’re ready to pay for it.
Try and avoid extreme ends of financial decisions. Sometimes, moderation in all aspects is the only secret to a healthy, happy life.
These were some of the biggest lessons I learned from “The Psychology of Money” by Morgan Housel.
Do you resonate with any of these? Do let me know your thoughts in the comments.
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