The Psychology of Money
Doing well with money has little to do with how smart you are and a lot to do with your behavior.
4 min read
Money is one of those things that we all think about. It is often a source of anxiety and stress. We are constantly bombarded with messages about how we should save it, spend it, and earn it. But how should you think about money so that you can make the most out of it?
In his book, "The Psychology of Money," Morgan Housel writes about a set of behavior you can use to achieve financial success. He argues that financial success is not hard science. It is a soft skill. Doing well with money has little to do with how smart you are and a lot to do with your behavior. This article summarizes the most helpful tips on how you should think about money and some helpful tips on managing your money effectively.
How to think about money
Humility and Compassion
Handling money is hard. We all have wildly different views on how to handle money. The world is complex. Luck and risk are hard to identify. Know that when making decisions regarding money, sometime you will be correct, sometime you will be wrong. Find humility when things are going right. And do not beat yourself up when things are going wrong. Be compassionate when judging yourself and others. Things are never as good or as bad as it looks.
Control Over Time
Ultimately, we all want to be happy. One of the most potent ways that affect your happiness is having control over your time. To be able to do what you want, when you want, with who you want, and for as long as you wish will significantly boost your happiness. Instead of chasing money, you should see money as a means to gain control over your time.
Reasonable > Rational
You should aim to be mostly reasonable rather than trying to be coldly rational. Reasonable is more realistic. It may be rational to take more risk on a certain decision. And some people are fine taking a higher risk if it means they are earning the highest returns. But others will only get a good rest if they invest more conservatively. To each their own. Learn to manage your money in a way that helps you sleep at night.
Time is your friend. Time is the most powerful force in investing. It makes little things grow big, and big mistakes fade away. It can not neutralize luck and risk, but it pushes results closer to what you deserve. Consider this: $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday.
Play Your Own Game
Define the game you are playing and ensure your actions are not influenced by people playing a different game. A short-term trader has a different mindset than a long-term investor. Once you know which game you play, define the cost of success and pay it.
Respect the Mess
A lot of things can and will go wrong. You will make mistakes. And it is okay to make mistakes. Believe that you can be wrong half the time and still make a fortune because a small minority of things account for most outcomes. There is no single right answer when it comes to handling money. There is just the answer that works for you. Smart, informed, and reasonable people can disagree in finance because we all have different goals and desires.
Saving money is the path to wealth. Wealth is created by suppressing what you could buy today to have more stuff or options in the future. No matter how much you earn, you will never build wealth unless you can limit how much fun you can have with your money today.
Be Nicer and Less Flashy
No one is impressed with your possessions as much as you are. Nobody cares about your sports car or your watch. What you want is to be respected and admired by others. But using money to buy fancy things does not help. You gain respect and admiration through kindness and humility.
Getting money is one thing. Keeping it is another. There are a million ways to get wealthy, but there is only one way to stay wealthy: some combination of frugality and paranoia. The world is full of surprises, and the future is impossible to predict or define. Having a survival mentality is essential with money. Having a survival mentality means more than big returns; you aim to be financially unbreakable. It means you have a plan, but also prepare when things are not going according to plan. It means you have hope for the future but are paranoid about what will prevent you from getting to that future.
These are lessons we can carry with us as we go about our lives, making minor tweaks to how we think and behave around money. Remember, money is just one piece of the puzzle – do not let it become your entire life.