Business Book Club: The Psychology of Money
I've set myself a goal to blog the books I read. I will extract wisdom from the best business and personal development books I've read and share it with you.
This time around I’m reading The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness Author: Morgan Housel
The book was a gift. It was given to me by my friend’s cousin who had received it from someone else. He said if you read a good book you should pass it on. I’m grateful he did. I love that idea and I’ll be sure to do the same.
About The Book:
The Psychology of Money by Morgan Housel is a fascinating book that delves into the complex relationship between people and money. Housel explores various aspects of money, including its history, how it affects our lives, and how we can develop a healthier relationship with it.
He doesn't provide any quick-fix solutions, but rather, he offers insightful observations and valuable lessons that will help readers to develop a more thoughtful and mindful approach to money.
Each chapter covers a key insight into how we think about money, there’s a chapter towards the end pulling it all together, and a final chapter where Housel shares how he applies this knowledge to his own money. There’s also the added bonus of a postscript where he gives an insightful history of the modern US economy, and explains how this has shaped the way Americans think about money.
What I learned
Our personal experiences shape our relationship with money: Housel calls this chapter ‘No One’s Crazy’. He emphasises that people's experiences, such as their upbringing, cultural background, and personal financial history, can significantly impact their attitudes and behaviours towards money. Understanding our own financial background can help us make better decisions about our money.
Long-term thinking is key: The author emphasises the importance of thinking long-term when it comes to money. Short-term thinking can lead to impulsive decisions and missed opportunities, while long-term thinking can help us build wealth and achieve our financial goals. He points to examples where investors have become incredibly wealthy by simply investing money regularly from a young age and just letting the interest compound over time. A sentiment echoed by my financial advisor, who reminded us of the nature of bull markets and bear markets recently. It is tempting to panic in difficult times, but taking a long-term view pays dividends (literally) over time.
The Seduction of Pessimism: Housel also explains how forecasters and financial journalists get more mileage out of negative forecasts. He points out that no one gets attention when they offer optimistic perspectives, but thanks to our in-built negativity bias, we tend to give more prominence to negative views. This can distort our perspective.
Investing is not just about numbers: Housel argues that investing is not just about numbers and formulas, but also about psychology and human behaviour. Understanding the emotions and biases that influence our investment decisions can help us make better choices. He also acknowledges that we change over time. Your needs and desires now will not remain consistent. You can’t pick one strategy and assume it will serve you forever. You will change over time and you should allow for this in your financial planning.
Nothing is free: It is human nature to look for certainty. Everyone wants the wins but we are desperate to avoid loss. Housel points out that there wherever there is risk, there is always loss. Provided that your money grows over the long term, we shouldn’t panic when we experience short-term losses. He explains that nothing is free, and if you want the gains, we should see losses as the cost of doing business. I think this is a healthy attitude and one that applies to life in general as well as money.
You can’t be rich AND wealthy: As well as exploring attitudes that help you grow your money, Housel also highlights the importance of keeping hold of it. He uses the phrase, “You can’t be rich AND wealthy”. It took me a while to figure that out but in simple terms, it means that being rich involves spending money on the trappings of wealth, but wealth is about what you have in the bank. Once you’ve spent your money like a rich person, it is gone and it reduces your wealth. A sobering thought.
Money is not the most important thing in life: Finally, the book reminds us that money is not the most important thing in life. While it is important to be financially secure, our relationships, experiences, and sense of purpose are also essential for a fulfilling life. I like how the book isn’t about getting rich, but about using your money to facilitate the life you want.
What do I think of the book?
Whether you are a savvy investor or someone who is just making their money last month to month, this book offers useful insights. Each chapter causes pause for reflection and helps you think about your relationship with money. I like that the book doesn’t view money as the be-all and end-all. The author views money more holistically and appreciates that the way money should be used is different for each individual. I also l like that the author is honest about how traditional investors might view his financial choices as ‘boring’ or ‘safe’, and how he points out that his choices give him the most important thing money can ever afford anyone-freedom over your time.
Overall, The Psychology of Money is an insightful and thought-provoking book that offers a fresh perspective on a subject that affects us all. Whether you're struggling to manage your finances or simply looking for a better understanding of how money works, this book is definitely worth reading.
