The Psychology of Money gives insights into how people make financial decisions and talks about the link between money and happiness. Morgan Housel teaches that people make financial decisions more based on emotions than pure logic. The study of finance is not all about numbers and spreadsheets. It’s about connections between people. More business decisions happen in coffee shops and in meeting rooms than from come from formulas and equations.
Housel teaches simple lessons on how to use wealth to gain happiness. Rather than buy material things, use your money to give you freedom with your time, make you feel secure, and let you sleep soundly at night.
I really enjoyed The Psychology of Money because it is short, simple, and reasonable. Most books on financial mindset have an intense work-till-you’re-rich type attitude. This is not that. It reminds me of The Wealthy Barber by David Chilton in that it is calm and reassuring. Housel takes the mindset that all you have to do is consistently make a few good choices and you will never have to worry about money.
Top 5 Takeaways
1. Finance is as emotional as it is logical
The study of finance is not just all numbers and graphs.
The emotions of a person play a huge role in the financial decisions they make. If you try to understand finance by only looking at the logical side, you will never see the full picture. This is why it is so hard to predict what will happen with stocks and financial trends. It’s not purely just a numbers game. When emotions get involved, things get complicated, and much less predictable.
2. Money is freedom and freedom is happiness
Your goal should be to have enough money that you have freedom, you have options.
The best thing you can do with your money is to use it to give you freedom. Even if you love what you do for work if you feel like you are forced to work, eventually you will hate it. You should always have enough money on hand to cover a few months of expenses for the day when you decide to change jobs. If you give yourself enough time to find a good job that you will enjoy, you will end up much happier than if you are forced to take the first job that comes up.
3. Don’t copy the outliers, look for trends
It is tempting to look at our role models and say “I’m going to do exactly what they did to succeed.”
The issue with that is that the opportunity has already come and passed. The situation today is different than when they were first starting out, so copying what they did is probably not going to work out. A better approach is to look at general trends. Take a look around and say “A lot of people are making money at this right now.” That is a much more realistic approach to finding a reasonable path to success.
4. Stack the odds in your favour
You don’t need to win every time, you just need to win more than you lose.
Let’s say you are playing heads or tails with a rigged coin to make you win 51% of the time. Would you still play knowing that you are going to lose a little under half the times your play? Of course, because you know that if you play enough times eventually you will come out on top. The same goes for investing. All of your stock picks don’t have to be huge winners, you just need to win more than you lose to get ahead.
This lesson seams simple but it has huge implications. You can’t be so afraid to lose that you never play the game and you can’t be so focused on a huge win that you ignore all your little loses. Take a look at the big picture and see if you are winning more than you are losing.
5. Never risk it all
Why risk things that you need for things that you want?
It takes a certain amount of risk to get ahead in life. That being said, you should never take a risk so big that if it fails you’ll never catch up again. Always make sure that you have something tucked up your sleeve so that if things don’t work out at least you will be able to recover. Never put yourself in a situation, where a loss would totally wipe you out.
The Psychology of Money is a great book. It’s straight to the point, tells a wide range of lessons, and is well written. For anyone looking to get more into investing, I would recommend that you give it a read. It helped me think clearly and realistically about finances and left me feeling calm and confident that I am on the right track to becoming wealthy.
Have you read The Psychology of Money? Let me know your thoughts in the comments below!