Psychology of Money: Morgan Housel- A book you need to fine-tune your relationship with Money
Singer Rihanna nearly went bankrupt after overspending and sued her financial advisor. The advisor responded: “Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?
Investor Bill Mann once wrote: “There is no faster way to feel rich than to spend lots of money on really nice things. But the way to be rich is to spend money you have, and to not spend money you don’t have. It’s really that simple.”
These 2 quotes from the book are an opener to the wisdom contained in this short book. The book is a good exploration of the relationship of people with money. It highlights the various fallacies and biases that people develop due to their environment and tip over their financial bandwagon.
In this article, you would find the highlights of the book that I found to be useful and my take on the meaning contained therein.
The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people. A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
This statement gets home an important point that to become rich you don’t need a college degree. What you need is a frame of mind where you know how to interact with fellow humans and control your own emotions. Your IQ is of little importance when it comes to managing your employees or showing patience in adverse situations. How you behave when others are reacting determines your actions and your consequences.
Take the case of Rose Blumkin the owner of Nebraska Furniture Mart which was acquired by Warren Buffet. She managed that business prudently till she was 103 years old with Buffet holding a majority shareholding. She was a Jewish Russian migrant to the US fleeing World War 1 persecution. She never had a formal education and did not know how to read or write but she understood business and the psychology of money.
Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.
Financial education is about understanding the basic concepts of saving a portion of your income by spending less than you earn and putting that savings in an instrument where you can compound the interest earned on that saving. People fail to internalize a concept as simple as this. There is no scientist-level understanding required to grow your wealth.
So all of us—you, me, everyone—go through life anchored to a set of views about how money works that vary wildly from person to person. What seems crazy to you might make sense to me.
Our views get ingrained from childhood memories of how parents behave around money. A person who has never seen parents invest just in bank Fixed Deposits will need exposure to other options to grow his wealth and broaden his views.
Similarly, a family that mostly owns physical assets like gold and real estate believes in these instruments of growing wealth over the stock market. So the views are an outcome of views of near and dear ones and also the era you live in. If you lived in the Great Depression era of the early 1930s you would feel that stock markets can destroy you and in 2008 people felt the same about real estate when the housing bubble burst.
Forty percent of Americans cannot come up with $400 in an emergency.
What about Indians? Rs. 32000 ($400 converted at the existing exchange rate approximately) is a dream for a billion people in India. People are neck-deep in debt and most live hand to mouth. Savings are a foreign concept as people spend before they earn. There is no delayed gratification in terms of money for such people.
Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.
Life is complex and so are the externalities dictating your life situations. I am currently busy with a family obligation that is going to take a long time, maybe years to complete. My energy and time are flowing to get this task sorted which is consuming the attention that I could have given to other endeavors.
On another note, my friend had to pay for his sister’s marriage first and then take loans to send his brother abroad because his family had limited resources and he was the only one earning. He depleted his savings and had to start over after finishing these 2 important life tasks. So he was not so lucky to enjoy compounding his initial savings. The things out of his control dictated his life situation.
The quality of your education and the doors that open for you are heavily linked to your parents’ socioeconomic status.
This is an important factor in determining your future success. What type of school do you go to? What type of resources you have access to and what type of friends you hang out with determines your life situations at a later stage.
Why do we have many candidates from 2nd generation or 3rd generation Bureaucrats clearing the coveted UPSC exam in India? It is because they have been conditioned to the demands of public service looking at their parents since childhood. They are motivated and have the resources to understand the demands of the exam better. They also have knowledge of how public service works in India.
On the other hand, a fruit vendor’s son does what his father did. A fisherman's son follows him to the sea to catch fish. There are exceptions where children mobilize upwardly moving away from the work profile and income levels of their parents. This is due to their inherent capacities and talents that they manage to better their life situations.
The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk.
How many astute financial analysts succeed? Many get down to the most intricate details while analyzing a company’s business. They only invest in companies that pass the rigors of their colossal analysis. Yet when it comes to returns on their investments, they go nowhere many times. The risks of the market and the sentiments sometimes do not reward the stock. Can the investor be blamed for a poor decision? They made absolutely good decisions but the market risk of uncertainty derailed their chance of growing wealth.
Risk and luck are doppelgangers.
"Scam 1992" showcased the life story of ace investor Harshad Mehta. He was playing on the edges throughout his career. He was taking risks and attributing his success to his acumen while he was getting lucky with his moves. The moment his moves were foiled by the agencies, he was caught on the wrong side and eventually leading to his demise.
For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.
This is the ugly truth of the capitalist society we live in where we are fed with infinite ads and pitches on product consumption. People don’t know what is enough as society bombards their minds with concepts of more is better.
One car does not suffice. Another is required for off-roading. One house is not enough, another is required for vacationing. Dresses should never be repeated. There was a page on Instagram that shamed celebrities for repeating their outfit on different occasions. What a lame-ass admin and his/her concept! Why can’t celebrities wear again something they like? Is being wealthy and repeating your outfit a sin? These are shallow uneducated minds that do not care a dime about the environment.
Nelson Mandela had just one suit that he wore for 10 years while he was struggling to make ends meet. The man changed the world's perception with his belief and determination. He surely would have been judged for his outlook and life situation but do you know anyone’s name who criticized him and who could make a 100th of the impact that he could?
Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
We are influenced by the life choices of people in our environment. There is always a tendency to fit in. The type of circle you have determines your decisions around expenses.
What you wear, what you eat, the restaurants you go to, and the type of wine you drink are all influenced by the company you keep. Often people fall into the trap of outshining their peers in terms of income, style, and opulence. Their benchmarks have already been set high and they go on to break the bank. This attitude is toxic as well as hazardous to your financial health.
As the author says, happiness is not determined by more possessions but by knowing how much is enough. In fact, this enough is very less if you actually think about it.
You only wear 20% of your wardrobe 80% of the time. So you don’t need as many clothes as you think. You actually enjoy a good room and views on a vacation and not necessarily the brand of Hotel. Staying at a luxury hotel may give you bragging rights but opting for the cheapest room of this luxury hotel versus staying in a cheaper presidential suite room of a lower-rung hotel could actually be a poor use of your hard-earned money.
The point is that the ceiling of social comparison is so high that virtually no one will ever hit it.
Social comparison can only take you to a point. Beyond that, it will trouble you and cause anxiety as you would start to realize that there is a gap that you cannot fulfill even in this lifetime. You would still slog to be the best in the world but the hustle will deplete you. You will stop living in the present as the relative deprivation will cause you to feel miserable. Enjoy what you have while also trying to get better. Be content with your current situation as for many people it is a dream to be where you are.
Reputation is invaluable. Freedom and independence are invaluable. Family and friends are invaluable. Being loved by those who you want to love you is invaluable. Happiness is invaluable. And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.
People feel that there is nothing in this world without money. Sure money can solve all your money problems but it cannot solve each of your problems. You would still have to work for good health, relationship, and love.
People lose track of these aspects in the race to reach the next milestone of their wealth creation. They forget that money is just a number in the bank that provides a sense of security. If you can’t satisfy yourself with the security of wealth you already have you probably will also not benefit from an added zero in your wealth.
So spend time with your loved ones, follow things that add meaning to life, go on vacations, and spend money on things that make you happy and not for the purpose of showing off to others. I would add Health to the list of invaluable things as your body is the only one you will get
Charlie, Warren, and Rick were equally skilled at getting wealthy. But Warren and Charlie had the added skill of staying wealthy. Which, over time, is the skill that matters most.
Rick Guerin cashed out early from Berkshire Hathaway, the investment company of Buffet and Munger. He wanted to get rich quickly and did not have enough patience to wait for a long time. He took too much leverage to grow his wealth. Ultimately his wealth was destroyed by the market. The lesson is to use leverage wisely and not at the risk of losing it all.
Room for error—often called margin of safety—is one of the most underappreciated forces in finance. It comes in many forms: A frugal budget, flexible thinking, and a loose timeline— anything that lets you live happily with a range of outcomes.
The margin of safety is applicable in every aspect of life. If you have an important meeting to attend then it is better to start early than your usual time. The law of attraction attracts all the possibilities that you wish not to happen- traffic snarls, car breakdowns, or any unforeseen things that may cause you to be late for that important meeting.
Margin of safety is an important concept in Mountaineering too. Climbers start early for their summit push so as to keep a buffer for unforeseen situations on the route to the top. Not maintaining a margin of safety is sleeping on the edge of the building without a safety harness fixed to an anchor.
A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it.
One should have at least 6 months of expenses saved in liquid form for any unforeseen circumstances.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
This paragraph is the gist of the book and I had nothing to add here.
Thanks for reading!
