“The Psychology of Money”: The Best Money Book I’ve Ever Read

The Psychology of Money by Morgan Housel

I consider myself something of a personal finance nerd.

After all, I’ve written freelance on the topic, have my own blog, built my own spreadsheets, used all the tools, and read a bunch of books.

When it comes to Personal Finance, my standards are pretty high. That makes it all the more refreshing when I come across something that truly blows me away. And I’m happy to say that The Psychology of Money by Morgan Housel blew me away.

Instead of talking about the book in general terms, I think it would be more helpful to dive right into some of the big ideas that make The Psychology of Money such a worthwhile read.

Personal Finance is a Soft Skill

In the books introduction, Housel contrasts the stories of two men: Ronald Read and Richard Fuscone. These two men were as different as it gets. Ronald Read spent part of his career working at a gas station and part working as a janitor. Richard Fuscone was more traditionally successful: MBA from the University of Chicago, went to Harvard Business School, became an executive at Merrill Lynch.

Who do you think declared bankruptcy and who amassed a personal fortune of $8 million?

If you guessed that the janitor built huge wealth and the executive went under, you’re right. But the insightful point that Housel brings to the table is that there really isn’t any other field in which and uneducated, untrained person can beat an expert.

This brings Housel to the conclusion that building wealth has less to do with what you know and is more about what you do. It’s about behavior, not knowledge.

Math =/= Behavior

You can know the math like the back of your hand, but it’s how you actually behave that determines your outcomes.

I completely agree, but it’s a bit of a humbling lesson. After all, I write a blog where I post articles with titles like these:

I still stand by these articles. Housel also points out that this kind of analysis can give you a picture of what is reasonable. But knowing the numbers and living out a plan are two very different things.

If you want to get ahead financially, the most important thing to learn is how to change your own behavior.

Two Topics That Impact Everyone

Two topics that impact everyone, whether you are interested in them or not: health and money

The Psychology of Money, pg. 5

This quote is a big reason why I believe in teaching personal finance. Money matters, whether you want it to or not. There are many things you can go through life safely ignoring, but money isn’t one of them.

But I also love the fact that he mentions health as well. We often put these two topics into their separate silos, but there is a lot of overlap between the two. I explored a small sample of the connections in this post:

The Extremes Don’t Apply To You

One thing that I’ve learned during my time producing self-help content is that if you have an opportunity to mention a billionaire, you should probably do it.

A headline like “How to Invest Wisely” won’t get many clicks. But “Warren Buffet’s Simple Rule For Evaluating Companies is Actually Brilliant” could seriously take off.

Everyone wants to read about how they can emulate Jeff Bezos, Elon Musk, or any of the other richest people on Earth.

Here’s the unfortunate truth: There’s probably very little you can learn from mega billionaires. Yes, Mark Zuckerburg are smart. Yes, they are hard workers. And yes, they certainly did a lot right. But there are a lot of smart, hard working people doing the right thing that didn’t build Facebook or Microsoft.

It turns out that extreme success usually is the result of extreme luck. Out of all the people doing things well, some complex set of factors tipped to benefit one person or company. That’s not something you can control.

The big success stories and the massive failures are the ones that get our attention. But what we should really be looking for is broad patterns among the normal range of success and failure.

The Hardest Financial Skill Is To Get the Goalposts to Stop Moving

Here’s the problem in a nutshell: Right now you have some sort of story in your head like “Everything would be better if I could just double my salary.”

What you can’t see is what the story will be in your head if you are successful. I hate to spoil it for you, but it will probably be something very much like “Everything would be better if I could just double my salary.”

Why aren’t you happy when you get what you want? Because in between the wanting and the getting, the goalposts are moving. Your life is getting better, but the gap between reality and expectations is staying constant.

It’s hard to emphasize how important this is.

The Upside of Earning More

On this site, I contend that the main idea of personal finance can be summed up as “Spend less than you earn and invest the difference.” Historically, people who wrote about personal finance spent more time writing about the “Spend Less” side. Now it’s far more popular to hear about the power of earning more.

A big reason why is that simple math shows that turbocharging your earnings can be way more powerful than cutting your spending. Let’s say you’re both making and spending $50,000 a year. You have nothing to invest. You could have $50,000 to invest if you could either double your income to $100,000 or cut your spending to zero. The first is difficult. The second is basically impossible.

The Catch

But here’s the catch: Chances are if you double your income, you’ll double your spending.

You might not think that’s a problem. Maybe for some reason you don’t need your money working for you and intent to work yourself until the day you die. For you, spending twice as much money is twice as much fun.

Except that’s not how the hedonic treadmill works. Spending more is a little more fun at first, but soon you realize that life is the same as it has always been just with more zeroes at the end. You still want more. You still worry about not having enough.

There’s no way around it: You have to get the goalposts to stop moving. This is one of my absolute favorite points in The Psychology of Money.

Another great book that covers the importance of this skill is Your Money or Your Life

How Investing is Like Flying a Plane

There’s an old quip that pilots use to decribe their job: Hours of boredom punctuated by minutes of sheer terror.

As Morgan Housel points out in The Psychology of Money, that might as well apply to investing.

He breaks down how most of the time, the market goes up. But sometimes it crashes. In the 1,428 months between 1900 and 2019, about 300 of them were during a recession. So most of the time, everythings fine, but every so often it seems like the financial world is crashing down around you.

One of the most important skills in investing is to stay cool when this is happening. What happens to far too many people is that they buy when the market has already started its downsing. They buy back in after they can see the market is in recovery. They do exactly what you should do: Sell low and buy high.

He points out that what you did (or didn’t do) between late 2008 and early 2009 likely had more impact on your investment returns than anything you did between 2000 and 2008.

Most of the time, you don’t need courage. But when you need it, you really need it.

Controlling Your Time is the Highest Dividend Money Pays

All I’ll say on this one is that I agree:

“The Man in the Car Paradox”

I had actually Morgan Housel share this concept on a podcast before I read The Psychology of Money. I like it so much that I wrote a post on it before I had even read the book.

The idea is that when a guy sees a nice car, he thinks “if I had that car, people would admire me.” Except people wouldn’t admire you, they would just be imagining themselves with your stuff. Just like you ignore the driver and admire the car.

Be careful about spending money to impress people.

Not everyone is Playing the Same Game

Some people want to become rich to gain status. Others want to do it to gain freedom. Some people are buying stock based on what they think the price will be 40 minutes from now. Others are buying based on what they think the price will be 40 years from now.

You have to be careful when you encounter financial advice, because even if the advice is right (and it might not be), it might not apply to people playing your game. And of course, everyone offering advice takes it for granted that you are playing their game.

This is part of the reason why you need to learn about personal finance. You need to figure out what game you’re playing so that you know what applies to you and what doesn’t.

“Cash is the Oxygen of Independence”

Most of the time, you don’t need a huge cash cushion. But in that rare instance that you do need it, it’s really nice to have.

I’m well aware that cash that you have sitting in a savings account is losing purchasing power due to inflation. In The Psychology of Money, Morgan Housal makes it clear that he knows this as well. But he doesn’t want to ever be forced to sell the stocks he owns. Having a huge cash cushion allows him the peace of mind of knowing that he can cover a large, unexpected expense without selling off his investments or going into debt.

There’s something incredibly liberating about having a huge chunk of change in the bank.

My Final Verdict on The Psychology of Money

The title of the post probably already gave it away. I loved The Psychology of Money and am happy to recommend it far and wide.

Get the book here.

Listen to the audiobook with a free trial of audible

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