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Money is not all about numbers and strategy. The Psychology of Money teaches what the real driving forces of finances are.
I’ve listed some of my favorite lessons and quotes from the book to help you up-level your monetary mindset.
Read also: 11 Things You Should Not Spend Money On
Read also: Think Again Book Review | 19 Lessons + Actionable Ideas + Quotes
Reading Experience
I really liked this book.
The lessons were short and precise, without wasting pages on lengthy explanations, and still, there was enough room to write about real-life examples.
Even though this is not the first financial book I’ve read, it did teach me quite a few new things and changed my outlook on the financial market and monetary decisions that are being made.
A word of warning: The book is heavily focused on America, its financial system, and history. So that might be bothersome for non-Americans, though I didn’t mind too much. The lessons still matter for everyone.
Lessons
1. The way you treat money depends largely on when and where you grew up
The Psychology of Money opened my eyes to how important our adolescents’ circumstances are to how we treat money throughout our life.
Different generations can vary drastically in their opinion about spending, debts, stocks, and income.
The reason for that is that once we have had certain experiences and developed a mindset on the topic, we don’t easily change our opinions and expectations even if reality changes.
I’ve often noticed this in my own approach towards bank accounts.
Many adults older than me still look at their bank account as a place to store their money, so it earns interest.
Therefore they are always understandably annoyed by the almost non-existent interest rates many banks offer nowadays.
I’ve grown up like that. I never consciously experienced a time in which my savings would get high-interest rates.
Therefore, I’ve always viewed my savings account as a secure place to store my money and not as a money-increasing machine.
A difference in understanding like this can impact financial decisions, like how much you save, how much hard cash you keep, or at which point throughout the month you pay your bills.
The Psychology of Money gives an interesting overview of how the Great Depression, WWII, and the housing bubble-shaped different generations’ financial beliefs.
Reading about it will make you look differently at other people’s financial decisions.
2. You don’t have to act rational, just reasonable
“Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.”
– Morgan Housel (The Psychology of Money)
“Good decisions aren’t always rational. At some point you have to choose between being happy or being “right.””
– Morgan Housel (The Psychology of Money)
It always seems like every decision we make should bring us the biggest returns or save as much money as possible.
And while it is certainly rational to aim for these things that will increase your fortune, sometimes irrational behavior is better if it is reasonable for you.
A financial decision is reasonable if it lets you sleep better at night because you worry less.
This could be in the form of you not taking the money out of your savings account to purchase your new car. Instead, you go for a more expensive financing plan because without that safety of your savings, you’d feel vulnerable to unexpected bills.
Humans are not driven by rationality but by emotions.
As rational as a decision might be, if it causes you to worry and stress, it might not be worth it.
Allow yourself to act reasonably with money, even if it is irrational.
3. Don’t follow people playing a different game!
“When investors have different goals and time horizons—and they do in every asset class—prices that look ridiculous to one person can make sense to another, because the factors those investors pay attention to are different.”
– Morgan Housel (The Psychology of Money)
“A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.”
– Morgan Housel (The Psychology of Money)
The financial crisis of 2008 showed how detrimental it can be for long-term investors to copy the actions of day traders.
Just like how there will be chaos if you try to play Monopoly with UNO rules, you won’t achieve your financial goals if you copy a strategy with an entirely different aim.
You need to be aware that not everyone who seemingly does the same thing as you do, has the same goal.
You might invest to prepare for your retirement in 40 years; others might want to sell that stock the same day for a higher price.
You might be looking for a house to settle in for the rest of your life; others might do it to renovate and sell the house for a higher price.
Your strategy should always suit your goal. So make sure that you only follow the advice that applies to your goal.
4. Nobody is crazy; their decisions make sense for them
“People do some crazy things with money. But no one is crazy.”
– Morgan Housel (The Psychology of Money)
As the previous points illustrate, many invisible factors influence other people’s financial decisions.
Unless you ask them and let them explain their reasoning, you will never be able to grasp why exactly someone acted as they did.
Therefore it’s high time that we stop calling people dumb for making financial decisions that blew up in their face.
We are always wiser afterward. But back then, it could very well have been a reasonable decision to make for one specific person.
Don’t judge harshly what you don’t understand.
And don’t be so naive as to expect to know and understand everything.
5. Financial developments are less about calculations and more about emotions
Unsurprisingly the book The Psychology of Money deals much more with the emotional and mindset level of finances than concrete strategies.
Finances are not governed by strict rules like physics are.
Most of the financial markets’ development can be better understood if one looks at it from a psychological perspective.
You need to consider people’s hopes, fears, and expectations into the mix of facts and cold numbers to understand why things developed as they did and roughly predict how they will develop in the future.
You should also always consider your own emotions when making financial decisions.
Recognize your current emotional state and anticipate how the emotions caused by future events could influence your behavior.
Starting an investment strategy that will make you feel nervous as soon as times get bad might be an absurd idea no matter how rational it seems right now.
Don’t disregard the power your emotions have over your monetary decisions!
6. Don’t get seduced by pessimism
“Pessimism isn’t just more common than optimism. It also sounds smarter. It’s intellectually captivating, and it’s paid more attention than optimism, which is often viewed as being oblivious to risk.”
– Morgan Housel (The Psychology of Money)
“Real optimists don’t believe that everything will be great. That’s complacency. Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way.”
– Morgan Housel (The Psychology of Money)
“The historical odds of making money in U.S. markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and (so far) 100% in 20-year periods.”
– Morgan Housel (The Psychology of Money)
Dare to be optimistic.
This doesn’t mean disregarding risks and expecting the world to be all sunshine and rainbows. But expect things to work out well in the long term.
Humans are immensely adaptable and have overcome so much already; the chances are very high we will also turn the next challenge around in our favor.
So be very careful when confronted with the advice of preachers of doom.
If they are unrealistically pessimistic, who is to say they are not also drastically wrong about their financial advice?
7. Don’t try to outplay the market
“More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”
– Morgan Housel (The Psychology of Money)
If outplaying the market would be easy or just mildly challenging, everyone would do it.
Even hedge fund managers who spend decades of their working life trying to win big with their investments only manage to do so maybe a couple times.
The chances that you or I will ever manage that are very slim. And trying to do so is costly.
Luckily, there is no need to outplay to market. You can get solid investment returns if you create a more conservative investment plan and stick with it over the long run.
If you simply put aside a small portion of your salary and invest it, you will be surprised at how much can compound over the years!
8. Consistency is key to unlock the mind-boggling 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.”
– Morgan Housel (The Psychology of Money)
“Compounding doesn’t rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time—especially in times of chaos and havoc—will always win.”
– Morgan Housel (The Psychology of Money)
The Psychology of Money illustrates some mind-boggling numbers that can be achieved by investing tiny amounts consistently for many decades.
As mentioned before, if you invest for the long-term into a broad portfolio, you are pretty much guaranteed to make some good returns.
But then why are so few people doing it that way?
Well, one reason is that they are trying to outsmart the market. They want to make big bugs quickly and find the next Facebook, Netflix, or Tesla.
When that inevitably fails for 99,99999% of people, they lose courage and give up.
Another reason is that they get cold feet when the market is going down.
It’s easy to invest in good times. However, if you have to watch your investments dwindle away, losing 5%, 10%, or even 30% of their worth, it’s only natural to get a fight or flight instinct and try saving whatever you can instead of putting more money into the market.
However, if you manage to stay patient and determinedly continue investing, then the compounding effect will work its wonders and reward you accordingly.
Small but consistent investments can compound to more than you’d ever expect!
9. Expect to fail in a good portion of your investments
“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”
– Morgan Housel (The Psychology of Money)
“Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.”
– Morgan Housel (The Psychology of Money)
“Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes.”
– Morgan Housel (The Psychology of Money)
It is so easy to believe that the best investors have such a keen eye for the market that their investments are a raging success.
Most people absolutely hate failing.
Even more so if that failure is costing you money.
No surprise, therefore, that many investors try not to lose money and only to make good investments.
The reality is, however, that losing money is to be expected. It is the price you have to pay for being in this investment game.
The best investors accumulate a fortune not because every investment is spot on. But because they land a few hits that outweigh the many losses and mediocre results.
This realization can take a huge pressure off your shoulders.
You don’t have to be perfect. It’s not even possible.
So anticipate losing money and prepare accordingly.
Don’t put all eggs into one basket, and don’t lose confidence when you inevitably stumble.
Just keep going with the certainty that you will also win here and there.
10. Luck and risk are two sides of the same coin
“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.”
– Morgan Housel (The Psychology of Money)
“But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. 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.”
– Morgan Housel (The Psychology of Money)
Many people like to contribute their own success to hard work and their own failure to bad luck.
However, judging others they often attribute success to luck and failure as entirely the other person’s fault.
The truth is: Nothing is as good or as bad as it seems.
There is always equally as much a chance of you ending up lucky as there is of you failing through risk.
Most success can partly be attributed to luck and most failure to risk.
This means, just because you’ve succeeded once with a strategy, it is not guaranteed to make you succeed again.
Also, just because you lost money once in the financial market doesn’t mean you’ll lose it again.
The key is to be aware of the role luck and risk play and always prepare for the latter hitting.
You need enough of a safety margin in any plan to overcome bad luck and try again until you get lucky.
11. Knowing how to get wealthy is useless if you don’t have the skills to stay wealthy
“If I had to summarize money success in a single word it would be “survival.””
– Morgan Housel (The Psychology of Money)
“There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.”
– Morgan Housel (The Psychology of Money)
Earning money in itself is easy. There are a million different ways to earn money. Some bring you a higher income than others, but you can make money either way.
There are also a million ways to lose money, yet only a few ways to keep it.
Clearly, maintaining your wealth is the more difficult task. Just look at how many rich people end up bankrupt or close to it!
For all the time you spend focusing on earning more, you should spend just as much on keeping what you’ve made.
Have a savings account and investments that you feed with money from every paycheck.
Save without a specific goal. Just save money for future unforeseeable events and to sleep better at night.
Don’t spend everything you earn, or you’ll always need to make more.
12. Regard forecasts with a large grain of salt
“The majority of what’s happening at any given moment in the global economy can be tied back to a handful of past events that were nearly impossible to predict.”
– Morgan Housel (The Psychology of Money)
“The correct lesson to learn from surprises is that the world is surprising. Not that we should use past surprises as a guide to future boundaries; that we should use past surprises as an admission that we have no idea what might happen next.”
– Morgan Housel (The Psychology of Money)
The financial market is heavily impacted by significant events that become benchmarks in human history.
Do you think anyone was able to foresee the world wars or life-changing innovations?
Whether good or bad, significant events are almost impossible to predict.
And since they impact the markets, we can also hardly predict how the markets will develop.
We can make an educated guess that might turn outright, but at any given moment, a surprise could change everything.
So consider forecasts with a grain of salt.
13. Realize that you don’t know your future self
“It’s another to admit that you, yourself, don’t know today what you will even want in the future. And the truth is, few of us do.”
– Morgan Housel (The Psychology of Money)
“We should also come to accept the reality of changing our minds.”
– Morgan Housel (The Psychology of Money)
“Sunk costs—anchoring decisions to past efforts that can’t be refunded—are a devil in a world where people change over time. They make our future selves prisoners to our past, different, selves. It’s the equivalent of a stranger making major life decisions for you.”
– Morgan Housel (The Psychology of Money)
Allow yourself to change your mind.
I’m sure if you look back 5 or 10 years, you will say that your past self has had vastly different interests, opinions, and goals from your current self.
So why would you expect your future self to still have the same goals that you have today?
Don’t make decisions today and expect yourself to stick with them for decades to come.
Life is about evolving yourself.
Don’t feel forced to live inside the boundaries placed by your younger self.
If your lifelong dream of becoming a doctor doesn’t sound so good anymore, that’s ok. Create a new vision.
If living as a minimalist doesn’t fulfill you anymore, then find something that does.
Don’t let your past dictate your future.
What was your favorite lesson?
Do you have any great finance books you can recommend?
I’d love to hear from you!
Sophie
