“The Psychology of Money” By Morgan Housel

In a world where our relationship with money shapes our aspirations, dreams, and even our identities, “The Psychology of Money” peels back the layers of complexity surrounding financial decisions.  Have you ever stopped to think of the relationship you have with money? Or sat down with your spouse or significant other and asked them their views and feelings about money? We’ve been conditioned to think that the accumulation of money and personal items will lead to happiness. Is that true?

One of my favorite lines in the book is “Money’s intrinsic values is its ability to give you control over your time.”  Happiness in life comes from achieving autonomy, the ability to do what you want, when you want, with whomever you want to do it with.  In other words, if you have control over your time, and can decide how to spend your time, in the words of Morgan, that is the best ROI that money can provide.

Getting back to your relationship with money, have you ever pondered what makes you happy when investing your money?   I was raised to be a saver, having two immigrant parents who were always concerned with saving for that rainy day. Morgan states that your investments should support your happiness, and I agree wholeheartedly.

We all go through life with our own personal experiences, and this will affect how we decide to invest and spend our money. If you were living during the Great Recession, you may tend to be more risk averse and adopt a more scarcity mindset. But, if you were raised during a boom time, then you may have a more positive outlook on the markets and be willing to assume more risk in your investments.

These are some of the examples that Morgan has laid out for you to create wealth:

Save, save, save! I love this quote from Morgan in the book:

Saving money is the gap between your ego and income, and wealth is what you don’t see. So, wealth is created by suppressing what you could buy today in order to have mor stuff or options in the future. No matter how much you earn, you’ll never build wealth unless you put a lid on how much fun you can have with your money right now.

The only thing I would add is that I now save money to buy assets that pay for my lifestyle, instead of buying assets that pay for an event. For example, I save money to invest in apartment buildings, which generate cash flow, produce amazing tax benefits, and appreciate over time, while the tenants are paying down the mortgage. I am not investing my money in a retirement plan, an IRA, or the various educational savings accounts. My asset will continue to produce yield, while these other vehicles will be depleted once the event is over. I just continue to save the cash flow and purchase more assets, continuing to grow what we call our cash flow snowball.

Understand your psychology or relationship with money.

This helped me out with my own personal relationship with money, and at times, why I was employing a scarcity mindset and not enjoying spending money.

Creating wealth should be boring.

It is a long-term endeavor. In the book, Morgan shares Warren Buffet’s no so meteoric net worth rise.  In fact, 81.5 billion of 84.5 billion of Buffet’s net worth was AFTER the age of 65 years old. He was extremely wealthy, but the vast majority of his wealth was created due to his patience and long term mindset.

You can still be wrong half the time and still make a fortune.

Here are some other key takeaways from the book:

• Time is a Powerful Wealth-Building Tool:

One of the central lessons of the book is the significance of time in wealth accumulation. The compounding effect, where money grows exponentially over time, is a cornerstone principle. The earlier one starts saving and investing, the greater the potential for substantial gains.

• Emotions and Biases Impact Financial Decisions:

Morgan delves into the psychological biases that affect our financial choices. He discusses how emotions like fear and greed can lead to impulsive decisions, highlighting the importance of maintaining a long-term perspective and avoiding reactionary behavior.

• The Difference Between Being Rich and Looking Rich:

The book emphasizes that true wealth is not just about appearances or flashy displays of affluence. Many millionaires lead relatively frugal lives, focusing on growing their assets rather than showcasing them. This insight challenges societal notions of wealth and status.

• The Power of Flexibility in Planning:

Financial plans should be adaptable rather than rigid. Unpredictable events can derail even the most meticulous plans. Housel emphasizes the need to remain flexible and open to adjustments, allowing for better adaptation to changing circumstances.

• The Joy of “No” and the Freedom of Simplicity:

Saying “no” to unnecessary expenses can be liberating. Morgan discusses how financial freedom comes not just from maximizing income but also from minimizing desires and living within one’s means. Simplicity reduces stress and allows for a greater focus on what truly matters.

• Building Wealth vs. Keeping Wealth:

While earning money is important, knowing how to retain and manage it is equally vital. Housel suggests that avoiding costly mistakes and maintaining financial discipline contribute more to wealth preservation than chasing high returns.

One of my favorite parts of the book is the Postscript and the history of the U.S. consumer’s mindset. You see and feel the shift amongst the demographics on their view of money and how it was impacted depending upon the time they lived. Those in the Great Depression would have never dreamed of accumulating personal debt to live a certain lifestyle, while most of us in this generation have embraced it.

Thanks to Morgan for spending countless hours writing and researching the book.  I’ve read it twice already, and I’m on my third go around. Every time I read it, I learn a bit more about my relationship with money and how my thoughts impact how I spend and invest my money.

Don’t take my word for how impactful the book will be. Buy a copy and dive in!

Click HERE to buy the book.