The Psychology of Money by Morgan Housel

The Psychology of Money Book Summary

There is a difference between getting rich and getting wealthy and this book will teach how to become wealthy.

If you have a better relationship with money and if you know your needs and wants then you will be able to understand the meaning of money and this is what Morgan Housel, author of The Psychology of Money will teach you.

Powerful Quotes From The Psychology of Money

“Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”

“Spending money to show people how much money you have is the fastest way to have less money.”

“Controlling your time is the highest dividend money pays.”

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The Psychology of Money Summary

I read The Psychology of Money at the beginning of 2021 and it has taught me a lot about how to manage money and how to spend money on needs and wants.

Sometimes we want to buy a new smartphone, just because it has one or two new features and this can be called wants because you already have the smartphone and it’s working fine, and yet you want a new smartphone.

Funny thing is, you already know your needs and wants but you don’t want to accept them because doing exercise every day won’t make you happy but eating fast food will.

Stay Rich

Let’s say, you got rich and you have 1cr in your bank account, so technically, you can call yourself rich, and even if you don’t say it, everyone else will say it for you.

Now, here key part, let’s say, you got excited and bought a new house for 50 Lakhs, invested 30 Lakhs in crypto and 20 lakh is still in your bank account.

Now tell me, are you rich or stupid?

You could have invested some of the money in the stock market, some in crypto, and mutual funds, and some for your needs.

The KEY-WORD is don’t spend everything you have. Forget about the 1cr, let’s say, your salary is 50k, so ask yourself, what are my needs and wants?

In short, Manage money between needs and wants.

Power of Compounding Effect

Warren Buffett started investing from he was 11 years old and when he was 50 years old, his net worth was $84.2 billion.

Now, you can’t say, I want 1cr in five years, you need to be patient and try to invest every month, don’t miss any SIP, and just forget that you’re investing every month.

Now if you don’t want to invest Rs 5,000 or even 10,000 every month then try to invest at least Rs 500 every month.

I have made an Excel sheet from which I will add some data down below. I have calculated on Rs 5,000 investment.

I won’t able to share all 29 years of data, so I have skipped some of the columns.

Investment DateRegular InvestmentInterest (30%)Ending Balance
01-01-2022Rs 5,000Rs 100Rs 5,100
02-01-2022 Rs 5,000Rs 202Rs 10,302
03-01-2022 Rs 5,000Rs 306Rs 15,608
12-05-2050Rs 5,000Rs 4,913,467.18Rs 250,586,826.01

Total Investment after 29 Years: Rs 1,740,000

Total SIP Return on Investment: Rs 250,586,826.01

In short, after 29 years, the total investment will be 17 Lakhs and 40 thousand and you will get around 25cr.

What does this mean, being a regular investor?

I know getting a 30% annual return is a bit hard but if you’re willing to take risks then you will able to achieve and this is where room for error comes in.

Let’s say, you’re assuming that you will get a 30% annual return but you only got a 20% annual return.

So tell me whether you will get happy or sad.

Here, what you have to do is, when you decide that I will get a 30% annual return, at the same time, say to yourself, even if I get a 20% annual return, I will be more than happy.

And this is called room for error…

By the way, the 30% was for example only.

Know When is Enough

When you’re eating food, you will know, when you’re full but when it comes to money, you forget when to stop.

The same can be applied to work and even to exercise. You don’t need to work 15hr every day, you can also work for 6hr a day, you don’t have to do exercise 2hr a day, you can also exercise for 30 minutes.

So you need to tell yourself, what is enough?

Save as Much as You can

You know what to do right, yes, save as much as you can. Now you don’t have to save 100% of your income and invest all of your money.

First of all, keep a certain amount of money that you will need and some money for your wants, and the rest invested.

For example, 50% of income is on Needs, 20% of income on Wants, and 30% of income on Investment.

You can play around with numbers.

Takeaways from The Psychology of Money

  • Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Because it’s never as good or as bad as it looks. The world is big and complex.
  • Luck and risk are both real and hard to identify. Do so when judging both yourself and others. Respect the power of luck and risk and you’ll have a better chance of focusing on things you can actually control. You’ll also have a better chance of finding the right role models.
  • Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income.
  • Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To. each their own. But the foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.
  • Use the money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness.
  • The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
  • Save. Just save. You don’t need a specific reason to save. It’s great to save for a car, a down payment, or a medical emergency. But saving for things that are impossible to predict or define is one of the best reasons to save. Everyone’s life is a continuous chain of surprises.
  • Savings that aren’t earmarked for anything, in particular, is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
  • Define the cost of success and be ready to pay it. Because nothing worthwhile is free. And remember that most financial costs don’t have visible price tags. Uncertainty, doubt, and regret are common costs in the finance world.
  • They’re often worth paying. But you have to view them as fees (a price worth paying to get something nice in exchange) rather than fines (a penalty you should avoid).
  • Worship room for error. A gap between what could happen in the future and what you need to happen in the future in order to do well is what gives you endurance, and endurance is what makes compounding magic over time.
  • Room for error often looks like a conservative hedge, but if it keeps you in the game it can pay for itself many times over.
  • You should like a risk because it pays off over time. But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time.
  • Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game. You should like a risk because it pays off over time.
  • But you should be paranoid of ruinous risk because it prevents you from taking future risks that will pay off over time. Define the game you’re playing, and make sure your actions are not being influenced by people playing a different game.
  • Respect the mess. Smart, informed, and reasonable people can disagree in finance because people have vastly different goals and desires. There is no single right answer; just the answer that works for you.

The Psychology of Money Review

This is one of those books which you should read at least once. The book will teach you everything from money management to how to control your emotion.

Also, the book is written in simple language, so it will be easy to understand. One thing I liked about this book is, that the author is not saying where you should invest, an instant of that, he is saying to invest regularly.

Go Read it, if you haven’t already because this book will change the way you think about money.

By the way, we also have a WhatsApp Channel, so if you love reading then it’s better to join the channel. And yes, it’s FREE…

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