The Psychology of Money Book Summary I Morgan Housel

September 23, 2023March 13, 2021 by Muzammil

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Book – The Psychology of Money (Summary)

Author – Morgan Housel

Genre – Self-help Book

Published in – 2020

We all Know mathematical facts about Money, but the problem is that knowing what to do tells you nothing about what happens in your head when you try to do it.

The psychology of money talks about what goes on in our heads when we read and apply what we learn about Money, which is way more important. We are not as rational as we like to think when it comes to Money.

Morgan believes that we think about and are taught about Money in ways that are too much like physics (with rules and laws) and not enough like psychology (with emotions and nuance).

To grasp why people bury themselves in debt, you don’t need to study interest rates; you need to check the history of greed, insecurity, and optimism, and that’s what The Psychology of Money discusses and teaches valuable money lessons.

About the Author –

Morgan Housel is a partner at Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He has also written other books 50 years in the making, and everyone believes it.

About the Book –

The Psychology of Money is less about the technical aspect of Money and more about how we make decisions when it comes to Money, which has less to do with facts, numbers, and logic.

The premise of this book is that doing well with Money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to brilliant people.

The Psychology of Money is a detailed version of a 20-point report Morgan published in 2018 about essential flaws, biases, and causes of deviant behavior he has seen affect people when dealing with Money.

A few Key Points From The Book

1) No One’s Crazy –

They say we are best judges of other’s actions and lawyers of our own. We judge people based on how we perceive things. And what looks extravaganza to some may look normal to others.

We go through life with different beliefs, goals, and forecasts than others. That’s not because one of us is brighter than the other or has better information. We’ve had different lives shaped by diverse and equally persuasive experiences.

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.

2) Never Enough –

Unless you know what is enough, you’ll never have enough. This is very personal, and you should take your own time to decide what is enough for you. Please note that it’s your life, and you don’t want others to tell you what is enough.

You may consider a couple of points while working on what is enough.

Don’t let the goalpost move as soon as you reach there.

Social comparison is a problem – Don’t set your goal to be better than anyone else.

Enough is not too little – we often mistake enough for too little. However, enough means you are comfortable with others judging the way they want.

More valuable things like family, friends, reputation, Freedom, and happiness exist. It’s not worth risking these, no matter what we gain.

3) Getting Wealthy vs. Staying Wealthy –

Getting Money is one thing. Keeping it is another. Most of us who have worked for a while can resonate with this, especially if you have increasing consumer debt with the income increase.

Getting Money requires taking risks, being optimistic, and putting yourself out there.

But keeping Money requires the opposite of taking a risk. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.

4) Tails You Win –

We underestimate how normal it is for many things to fail, which causes us to overreact when they do. What seems like overnight success has had many causes and effects in creating overnight success.

Finance is no different, be it venture capitalization, mutual funds, other investments, and non-finance matters. Most of the projects fail, and few that succeed make up for all losses and make enormous fortunes.

Don’t wait for hacks and tricks. Every big success is the tail of a lot of failed attempts. That’s where we learn to make good decisions and recognize opportunities.

Warren Buffett has been quoted many times in the book. He had around 400 to 500 stocks in his lifetime and made most of his money from 10 of them. That’s the tail effect.

5) Freedom –

This is my favorite point from the book.

The ideas explained the level of Freedom –

A small wealth can enable you to take a break from work when you are sick without breaking the bank.

A bit more means waiting for an excellent job when you get laid off. This can be life-changing.

Six months’ expense in saving accounts means not being terrified of your boss, as you won’t be ruined if you lose your job and get time to find a better workplace. This can be liberating and can save tons of stress and anxiety.

Then there’s retirement when you want to, rather than when you need to.

Loved these two lines from the book on Freedom –

Using your Money to buy time and options has a lifestyle benefit few luxury goods can compete with.

Doing something you love on a schedule you can’t control can feel the same as doing something you hate.

6) Save Money –

This one has been drummed in our ears since we started earning, yet few can save. Whoever saves also has some goal in mind for keeping, like putting a down payment for a house, car ch, child education, marriage, etc.

Morgan offers a different viewpoint (Don’t wait for any reason to save) and convinces with amazing simplicity to keep for the sake of saving. Only saving for a specific goal makes sense in a predictable world. But ours isn’t.

You can build wealth without a high income, but we cannot create wealth without a high savings rate.

Consider the three points below when you think of saving –

Savings can be created by spending less.
You can spend less if you desire less.
And you will desire less if you care less about what others think of you.

Benefits of savings without specific Reason –

Saving is a hedge against life’s inevitable ability to surprise you at the worst possible moment.
Savings without a spending goal gives you options and flexibility, the ability to wait, and the opportunity to pounce.
It gives you time to think. It lets you change course on your terms.
The flexibility and control over your time is an unseen return on wealth.

7) Few Lines for Starting or Boost Saving Money –

Morgan summarizes a couple of general rules to handle Money, and it applies no matter what your goals –

Less ego, more wealth. Saving Money is the gap between your ego and your income; wealth is what you don’t see.

No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your Money today.

If you want to do better as an investor, the most powerful thing you can do is increase your time horizon.

Time is the most powerful force in investing. It makes little things grow big, and big mistakes fade away.

Use Money to gain control over your time because not having power is such a powerful and universal drag on happiness.

Respect the mess. Intelligent, informed, and reasonable people can disagree in finance because people have vastly different goals and desires. There are no single correct answers, just the answer that works for you.

I have also created a video of a few quotes from the book – I hope you like it. Please subscribe to my YouTube channel – Myread4change.

Conclusion –

This is the best book I have read on Money so far. It helped me understand why I behave like I do with Money and get better at it.

I highly recommend this book to everyone who knows money rules yet is not improving.

You may consider following Morgan Housel’s work on his Website.

If you like this book, you may also like Mind Over Money.

Thank you for reading.

Muzammil