“The Psychology of Money” by Morgan Housel is not your typical personal finance book focusing on budgets, savings, or debts. Instead, this book explores the beliefs and habits surrounding money.
It clearly explains how changing your financial mindset can help you build wealth and learn to enjoy it.
Here are some important insights from the book that can help you think smarter about your finances.
Everyone has their own reasons
Housel explains that people make financial decisions that make sense to them, even if they seem foolish or irrational to others.
Being in different situations makes it easy to misunderstand someone else's perspective. This aligns with a common saying in personal finance: personal finances are personal.
What works for one person might not work for others.
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This doesn't mean all decisions are correct—there will be mistakes—but it doesn't mean those choices were irrational; things simply didn't go according to plan.
Margin of Error
Things often don't go as planned, but this shouldn't ruin your finances.
A margin of error means planning with the understanding that things might not happen as expected.
By practicing this, you become more conservative in your projections and better equipped to handle unexpected events.
If you always include a margin of error in your plans, occasional setbacks won't derail your goals because you've already protected them.
This margin of error is a slightly pessimistic scenario that helps you figure out how to reach your goals even when things don't go exactly as planned.
Wealth Is What You Don't See
What does Housel mean by this? He explains that we often get impressed by material possessions like cars, houses, clothes, and even non-material things like vacations, among other things that might catch the eye.
But if you think about it, what do you really know about who’s buying all that stuff?
The only thing you can be sure of is that they spent money, but this doesn't mean they have a lot of it.
For example, if you see someone driving a $100,000 car, the only thing you know for sure is that they have $100,000 less than they did before buying the car or that they took on $100,000 of debt.
Owning luxury items isn't an indicator of wealth.
This is one of the book's most powerful lessons, as it's easy to be dazzled by material goods and appearances.
Some people never feel they have enough, no matter how much they have, leading to a never-ending cycle.
Never Enough
With several examples, Housel discusses people with significant fortunes who ended up broke because they never felt they had enough.
These people made a critical mistake: they risked what they had and needed for something they didn't need.
They aspired to more than just money—a great fortune brings power, status and recognition.
However, studies show that these aren't the things that make people happy. Happiness comes from feeling in control of your life.
Control Your Time
Housel mentions that the greatest symbol of wealth is the ability to wake up in the morning and do whatever you want.
Investing your money in regaining control of your time is the best dividend you can receive.
Instead of focusing on ways to make more money, you should think about using your money to reclaim your time.
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This way, you can spend more time on things that bring you satisfaction and joy.
Conclusion
I believe this book should be a must-read for everyone, regardless of where they are in life.
It helps you reflect on your views about money and think about what truly matters for your happiness.
The Psychology of Money by Morgan Housel in 5 Points
Here's a brief summary of the book's key points:
- - Wealth is what you don't see.
- - Always include a margin of error in your plan.
- - Everyone has their reasons; what works for one person might not work for another.
- - Don't risk what you have and need for something you don't need.
- - The best investment you can make is in reclaiming control of your time.
