Mastering The Psychology of Money: Insights from Morgan Housel’s Book
Psycho Money, huh?
Normally, I like writing book summaries in the form of articles because it keeps me from going off on tangents that just make the text longer. But, this time I think the article warrants a bit of length, so here we are.
Today I’ll discuss — hopefully briefly enough — the gist of Morgan Housel’s The Psychology of Money (TPM).
If you haven’t read the book, I definitely recommend it. It is an easy read that is full of relatively easy and actionable knowledge bits that you can incorporate in your life to have a better relationship with your money
A Tale of Two Financial Journeys: Ronald Read vs. Richard Fuscone
In TPM, Housel tells the story of Ronald Read. Read is a blue-collar worker who spend a big chunk of his life fixing cars at a gas station and sweeping floors at JC Penney for 17 years. Read lived humbly and bought a house for $12,000. When Read died, however, he had a net worth of $8 million, which baffled everyone. Turns out, Read had been saving and invested in blue-chip stocks. He waited patiently and the patience paid off.
Housel then contrasts Read’s story with the story of Richard Fuscone. Fuscone was a Harvard-educated financier who lived a lavish lifestyle and borrowed heavily to expand and maintain his already-expensive properties. The financial crisis of 2008 forced Fuscone into bankruptcy and he had to sell a lot of his properties.
The contrast here is sharp. Fuscone was literate in finance, yet ended outperformed by Read, a blue collar worker with little-to-no formal financial education. Housel attributes this to a soft skill: the psychology of money. Housel argues that the psychology of money is more important than the technicalities of money.
Understanding Luck and Risk: A Blueprint for Success
Housel believes that luck and risk are two sides of the same coin and that you can trace any outcome in life back to both luck and risk. Housel uses Windows founder Bill Gates as an example. Gates, one of the few high-school students who had early access to a computer in the late 60s, resulted in the tech behemoth we are familiar with.
Bill Gates believes that:
“Success is a lousy teacher. It seduces smart people into thinking they can’t lose.”
Harnessing the Compound Effect: Growing Wealth with Patience
Housel also pushes the compound effect, by insisting that you should grow your money by observing the lessons taught by the ice ages. I’ll spare you the science details, but the main point is that even a thin sheet of ice is enough to create an ice age and freeze the entire planet, overtime. Something similar happens when you decide to grow your investments by making use of the compounding effect of money.
Housel says that “if something compounds” (i.e., a little growth serves as the fuel for future growth) a small starting base is enough to bring extraordinary results “that seem to defy logic.” The main point here being that the size of returns on your investment are not the key to wealth. They key is patience.
Wealth Creation vs. Preservation: Two Sides of the Coin
Another principle that Housel presents is the dichotomy of becoming wealthy and staying wealthy. It should be clear that these are two completely different things, but they are still noteworthy.
The key to becoming wealthy lies on taking risks and being optimistic and patient. The key to remaining wealthy is to combine frugality, humility, and paranoia. It takes 10, 20, or even 50 years for the magic of the compounding effect to grow your money, but it can take days to blow it all away.
Saving Money
Lastly, Housel talks about the importance of saving money.
Housel believes people fall into one of three groups:
People who save money.
People who think they are unable to save money. And
People who think they don’t need to save money.
Regardless of which group you fall in, Housel says that saving money is a crucial pillar in building wealth. After all, building wealth depends on your ability to save and at which rate you are able to save money, not on your income or the returns of your investment.
Instead of earning more money, Housel recommends you focus on spending less money (i.e., saving money). The latter being something you can have more control over than the former. In the end, however, your perception of happiness will impact your success. If you are happy with less money, your ability to save will be automatically increased.
Think of money in the bank as the freedom you have to decide what you want to do with your time, not as a status symbol. This will get you on the right path to understanding the psychology of money, and applying it in your favor.
If you want to check out Housel’s book, click here.
Let’s do this.
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