Most of the times when we talk about finances It more or less revolves around data, rational thinking, financial ratios and what not! But this book, The psychology of money changes the way you look at the world. It tries to explain to you that Personal finance is more about behavior and reasonable thinking rather than numbers, data and spreadsheets!

It explains to you that why people do what they do, why they take the financial decisions which might sound absurd to you, why is it that most people even after becoming rich can’t become wealthy, and many more similar questions.

Morgan Housel says that “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.”

In this article we will talk about some of the most important ideas and lessons from the book. So, let’s dive right in.

No one’s crazy!

There are people in this world who love to live a flashy lifestyle, where they can flaunt their riches, their cars, their big houses, etc. and they consider this way of living and spending money as the right way to live life. And then there are people who don’t spend a penny on themselves but if you check their bank accounts, you wouldn’t believe what you see, they are actually rich but they just love to keep stacking up the cash, this is what they believe to be the right way to live life. And then there are people who say money is evil, and there are few who say money is everything!

Well, who is right amongst them?

The answer to this is that Everyone is right!

People do some crazy things with money. But no one is crazy. The environment and the people around them, their socio-economic backgrounds, the market cycles that they have seen, the country they are living in, all these things impact their way of thinking about money! It’s like people have a unique lens to view the world and though others can try to relate to them, they can not look at the world through the same exact lens.

You see, There’s a reason why Personal finance is “Personal”.

A 2009 paper by Ulrike Malmendier and Stefan Nagel reveals that macroeconomic events early in life impact our financial decisions as adults.

Young households in the 1980’s were less likely to invest in the stock market in response to the poor market returns of the 1970’s. As a result these young adults missed one of the best times to invest, The S&P 500 returned an average of 14.9% from 1980-1990.

Young households in the late 1990’s were more likely to hold a high percentage of their networth in the stock market. They were informed by a hot market in the 80’s and 90’s. Many of them piled into stocks right before the dot com crash, and the so-called lost decade during the 2000’s.

Is success a result of skill or luck?

Well, generally if you are the one who succeeds, you would consider it a by-product of your skills, but if you lose, you will consider it as a result of luck.

We love to put things as black and white, but that’s not how the world is, the truth lies somewhere in between.

The truth is that any financial failure or success is a result of the combination of luck and skills.

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

So it’s really important that we Focus less on specific individuals and case studies and more on broad patterns.

For example, Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it.

If you want to try and emulate Warren Buffett’s success in investing or any famous person’s success, you need to adopt the broad strokes of what made them successful rather than trying to do it the exact same way they did it.

Learn to say this is Enough

As humans we have this unending need of wanting more and more, and to keep moving our goal posts. When we reach a certain level, we want to reach the next level as soon as possible, but this won’t fare good at least in the case of money! Somewhere you’ve got to say this is enough!

Morgen says that “Enough is not too little … ‘Enough’ is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.”

The hardest financial skill is getting the goal post 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.”

But yet greed is one of those powerful forces which controls you in a way that even after having everything, you end up taking actions, which leads to regret!

Always remember, There is no reason to risk what you have and need, for what you don’t have and don’t need. There are certain things which are never worth taking a risk like character, family, friends, freedom and happiness.

Appreciate the magic of compounding

If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.

And who understands the concept of compounding better than the best investor of all time, Mr. Warren buffett.

On his 59th birthday, Warren Buffett’s net worth was only $3.8 US Billion.

In 6 years, his wealth multiplied 4 times!

In 12 years, his wealth multiplied 9 times!!

In 18 years, his wealth multiplied 15 times!!!

At the age of 91 his net worth is $87.5 billion. So, his wealth has multiplied by 22 times in the last 32 years!!!!

One of the reasons Mr. Buffett was able to make so much money is because he started early! He started investing at the age of 10 and till the time he was 30 he had amassed wealth of $1 million.

Morgen says that “None of the 2,000 books picking apart buffett's success are titled “This guy has been investing consistently for three quarters of a century” But we know that’s the key to majority of his success, it’s just hard to wrap your head around that math’s because it’s intuitive“

Jim Simmons, head of hedge fund Renaissance Technologies generated 66% annual returns, thrice of Buffett’s 22%. His net worth is only $21 billion, 75% less than Buffett. This difference is due to the fact that Simmons found his investment stride at age 50. He’s had less than half as many years as Buffett to compound.

You see, starting early is really important to get the most out of compounding!

Getting wealthy is different from staying wealthy!

Getting more money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks, it requires humility, and fear that what you’ve made can be taken away from you just as fast.

When you don’t have money or have less of it, your attitude towards risk and how you see money are different, sometimes you need to take some bold decisions, which might put you in a positions of significant exposure to risk, but because you don’t have much to lose, it might be worth taking the risk.

But, the problem with mist people is that they continue on having the same set of attitudes and beliefs, even when they have amassed a considerable amount of wealth. And this is where things start to go south.

When you have “enough” then you don’t need to tackle high returns, you don’t need to take huge risk which puts you in a position of losing a significant amount of your net worth, but a steady and sustainable growth.

Don’t be a flashy twat!

You might think you want an expensive watch, a fancy watch, and a huge house, but I'm telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it, it almost never does.

Remember “No one is impressed with your possessions as much as you are.”

You might think that when you’ll have a fancy car people will admire you, but the problem is that they really don’t admire you, they admire the car, they admire the positions at which you are, as they imagine being in your place, riding the same car as you.

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.

Use money to buy freedom

The real use of money is not to buy fancy cars or buy big houses, it’s the optionality and the flexibility that it gives us.

Money’s greatest intrinsic value and this can’t be overstated - is its ability to give you control over your time. Using your money to buy time and options has the lifestyle benefit few luxury goods can compete with.

More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.

So that’s it for today from our side, we hope that you learned something new, and if you did then please do share this article with your friends over social media.