The Psychology of Money

Happy New year everyone. I hope you are all well in these tough times. The Psychology of Money by Morgan Housel is the first book of 2022! A great way to start the year by analyzing and understanding the mindset that comes with investing. Often we hear about the strategies to invest money but not the psyche behind it. Below are what I have gathered while reading the book.

Save Save Save!

"Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today." - Morgan .H, pg 167

The more efficient you are with your money, the less you will need. The less you will need, you more you can save and invest. It boils down to psychology. If you desire less, you will spend less. However, that is easier said than done. To desire less means you are only focusing on the essentials and discarding the fluff that comes with consumerism. Often we find ourselves consuming more than we need, buying things to impress people we don’t like aka keeping up with the Jonasses. If we can be in control of the emotions that make us buy unnecessary stuff, we will be far better off.

Our savings rate is what we are mostly in control of. How much you can make from your businesses or investments is hard to control as there are many factors in play. It’s good to save a lot especially for emergencies that are uncalled for. This is one thing I have come to learn ever since I got my first job, moved out and started “adulting”. Unexpected expenses hit you on a weekly basis and you soon find yourself broke. I have come to learn have a good stash saved as your emergency fund makes you sleep better at night as you will be prepared if shit hits the fan.

"Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more". -Morgan H. pg 89

The author also states we should thinking of savings as an extension of our humility. The more humble we are, the easier it will be living frugally. Humility keeps our ego in check otherwise you will find yourself spending money unnecessarily to show people you have money. This feeds the ego but starves the wallet.

Having a concrete savings scheme has a profound but unnoticed benefit. It gives you flexibility. Flexibility in the sense of going at your own pace in this fast paced world of ours. It gives you a chance to experiment with a few business ideas you had in mind without worrying where your next meal will come from. It allows to take a far less paying job but with great amendable working hours. It allows you to patiently wait for opportunities both in career and in investments.

Have a Margin of Safety

"You can be wrong half the time and still make a fortune, because a small minority of things account for the majority of outcomes. No matter what you’re doing with your money you should be comfortable with a lot of stuff not working" - Morgan. H, pg 167

Having a room for error allows us to navigate life without worrying about the things that are way out of control. This is especially true when it comes to money. If you have a margin of safety as Benjamin Graham, a famous investor and mentor to Warren Buffet, says, you can rest assured, you can tolerate a certain level of risk.

Bill Gates also applied this when Microsoft was young. He ensured he had a year’s worth of payroll to tide the ship when the company won’t make money.

We can’t predict the future and we never will. The most important plan for any plan is planning on your plan not going to work

"There is never a moment when you’re so right that you can bet every chip in front of you. The world isn’t that kind to anyone—not consistently, anyways. You have to give yourself room for error. You have to plan on your plan not going according to plan". - Morgan H. pg 114

Time is your best friend

To do better at managing and increasing your wealth, let time be your best friend. It can’t do away with risk and bad luck but it can grow the little that you have to something of substance. So give your money time to compound, leave the ego at the door and watch your wealth grow.

Charlie Munger put it well: “The first rule of compounding is to never interrupt it unnecessarily.”

Compounding is great when you give it time. Time here means 5 plus years going to the decades if you want generational wealth. The same applies to relationships and careers. Given enough time, they can blossom into something great that you can be proud of. 

What can you stomach

"Market returns are never free and never will be. They demand you pay a price, like any other product. You’re not forced to pay this fee, just like you’re not forced to go to Disneyland. You can go to the local county fair where tickets might be $10, or stay home for free. You might still have a good time. But you’ll usually get what you pay for" - Morgan H. pg 134

The price of making steady returns from your investments particularly in the stock market is the volatility that comes with it. What do you do when your portfolio goes below 20%? Do you sell or stick it out through the period?

There is always a price and nothing is free in this world except the oxygen you breath.

Thanks for reading all the way to the end. If you have any comments or suggestions, please let me know in the comment section.