Dissecting Our Relationship with Money
We often like to think of our financial decisions as pure arithmetic. You know, the equation “(money in – money out = either happiness or despair).” But here’s a twist: it’s less about the numbers and more about the tales woven around them. Morgan Housel’s “The Psychology of Money” departs from the predictable financial playbook and embarks on an investigative journey into our money psyches.
Contrary to what we’ve been sold, money isn’t just a game of numbers or cold, hard logic. It’s soaked in psychology, emotions, dripping in memories, and tangled up in narratives, both societal and personal. Remember that time when Grandma told you about her penny-pinching days during the Great Depression? Or Uncle Bob’s tales of striking it rich in the stock market?
Such stories, whether we recognize it or not, subtly guide our financial decision making.
Housel’s argument is that the key to financial savvy isn’t acing Algebra or being a spreadsheet samurai, but in understanding our own psychology around it and, when necessary, rewriting the stories we tell ourselves about money?
After reading this book a few years ago, I left it with 5 key takeaways that still guide my financial decision making today. While my money decisions are far from perfect, this book did shed light onto many of the money scripts playing out in the background of my mind that I wasn’t aware.
Key Insights: Delving Deeper Into This Thought Goldmine
1. Past ≠ Future in Financial Decisions:
We’re all, in some way or another, prisoners of our past. And when it comes to money, this captivity can cost us — big time. The sentiment “It worked before; it’ll work again” can sometimes lead us down a rabbit hole of poor decisions. After all, if the stock you invested in skyrocketed last year, it’s bound to do the same this year, right? Well, hold your horses.
In the world of finance, many people swear on their past success as the barometer for future returns. But relying solely on past experiences is akin to believing in financial astrology (hey, not knocking it). The markets are unpredictable, and yesterday’s wins can be today’s losses. So, diversify, research, and always question the myth that past glory guarantees future success.
Your past, with all its triumphs and tribulations, is a story — not a crystal ball. In the chaotic dance of numbers that is the financial world, it’s crucial to keep evolving, learning, and not getting trapped in yesteryears’ rhythms.
Remember: Past ≠ Future. Period.
By not getting entangled in the relentless competition, we can focus on individual financial journeys, which are more fulfilling and less exhausting.
Additionally, true wealth often lies silently in the background and not on other’s Instagram posts. It’s in investments, savings, and assets not flaunted on social media or paraded around cocktail parties. It’s the secure retirement fund, the diversified stock portfolio, the paid-off home. This quiet, unassuming wealth might not get the oohs and aahs, but it offers something more valuable: genuine long-term financial peace and freedom.
So next time you think about wealth, think beyond the visible. As Housel says, “Money has many ironies. Here’s an important one: Wealth is what you don’t spend.” Dive deeper, look for the “Hidden Wealth”. Because what’s unseen often holds the most power.
3. Skill, Serendipity, and Financial Follies:
Ah, the age-old debate: is it skill or luck? In the world of finance, as in life, the answer is a bit of both. It’s seductive to believe that every rags-to-riches story is purely a result of grit and strategy. Similarly, it’s all too easy to dismiss every downfall as a result of negligence or poor decision-making.
But the reality? Luck plays its part, and recognizing its role is crucial in how we assess success, failure, and risk in the financial arena. Housel dives into the intriguing interplay of fortune and astute choices. While skill, strategy, and diligence are essential in finance, the winds of luck can steer the ship in unforeseen directions.
Recognizing and respecting the role of luck not only offers a balanced perspective on success and failure but also cultivates a mindset ready to navigate the unpredictable seas of finance with grace.
4. Flexibility > Precision in Financial Planning:
Have you ever meticulously planned a vacation down to the very last detail, only for it to rain on your beach day? Similarly, in the realm of money, things rarely go exactly as you’ve plotted on your pristine spreadsheet. The market changes, personal circumstances evolve, and unexpected expenses pop up.
The lesson here? Precision might feel good, but adaptability pays.
Rather than being staunchly attached to precise forecasts, adopt an adaptive approach. This means creating financial plans that are resilient to shocks and can evolve as your circumstances change. Think of it as having financial guardrails that keep you on track but allow you to adjust your route as needed.
By having a flexible approach, you can handle whatever financial curveballs life might throw at you. An adaptive approach not only ensures you’re prepared for the unexpected but also enables you to seize new opportunities that arise.
Remember, in the ever-evolving world of finance, it’s adaptability that keeps you ahead of the game.
5. Rational Decisions and Emotional Outcomes
We’re told that money and emotions shouldn’t mix. This advice is especially prominent in investing, where numbers, forecasts, and trends should guide our decisions. You meticulously research, run the numbers, and your spreadsheet seems to nod approvingly at an investment. That’s the logical part.
Then the market takes a slight dip. Panic sets in. Doubt creeps up. You recall stories of people who lost it all and suddenly, that carefully researched investment feels like a ticking time bomb. This is the emotional aftermath of what was a logical decision. This “Emotional Investing” phenomenon can often lead us to make hasty choices, driven by the fear of loss or the allure of gains, causing us to abandon logic when it’s needed most.
While it’s essential to be rational in our financial decisions, it’s equally crucial to recognize and manage the emotional aftermath. Being aware of the emotional rollercoaster that often accompanies financial decisions can prepare you to handle the ride with grace and foresight.
Remember, it’s not just about the numbers; it’s about navigating the complex interplay between logic and emotion.
Does the Book Hit the Bullseye Every Time?
While “The Psychology of Money” offers profound insights into our intricate relationship with finances, some sections are more meditative than actionable. The philosophical depth is commendable, but readers yearning for hands-on financial strategies might feel it lacking.
Final Thoughts
If you’re someone eager to understand the psyche behind financial decisions, this book is a treasure chest. But if you’re exclusively hunting for the next actionable stock market tactic, you might need to adjust your altitude of expectations.The book soars high on insights but might benefit from the occasional touchdown into practical realms.
Personally, I love this kind of ‘brain food’ type of read. It hit the mark for me and is one of my favorite psychology and finance books.
With its refreshing perspectives and engaging analysis, “The Psychology of Money” beckons readers to re-examine their financial beliefs. It isn’t just a guide; it’s an invitation to introspect, recalibrate, and navigate the financial maze with renewed clarity and wisdom.
If you want to learn more about money scripts and the beliefs we tell ourselves, I’ve written an entire post here about it.