"The Psychology of Money" by Morgan Housel

"The most powerful force in the universe is compound interest."

- Morgan Housel

Introduction:

"The Psychology of Money" by Morgan Housel is a captivating journey into the intricate relationship between human behavior and financial success. Through compelling narratives and insightful observations, Housel navigates the reader through the maze of financial decisions, exploring the deep-rooted psychological factors that shape our relationship with money.

 

Lesson Number One : Authentic wealth lies in the intangible, often unseen aspects of life:

True wealth isn't always about money or things you can touch. It's about the things that are important but not physical, like love, happiness, and experiences. One side is luxury cars, pictures of fancy vacations, all these things are clearly visible to us. On the other side, there's the EMI of that house or car, the stress of that person's office, and the daily fights at his home because of his stress; these things aren't visible to us. So what we see often isn't the whole picture. But unknowingly, these things force us to think wrongly. Whenever we see a rich person, like if he has a luxury car or has gone on a vacation, we also think, 'I wish I had this car,' 'I wish I could go to this place.' How fantastic their life is! Now, we don't think about whether those people's lives are actually fantastic or not. We only look for flashy things and such bright things and pick them. We need to remember that the reason that person did all of that was so that people would respect him. But in reality, people aren't respecting him; they are respecting his car. So, whenever a car passes by us, we always say, 'Wow, what a car!' We never say, 'What a person he is.' And because of this, a perception has settled in people's minds that being rich means you should have something to show. But in reality, actual wealth is what allows us to live a life of freedom because the most significant and most important thing we can buy with money is our own time. If you have all the wealth in the world but don't have time to enjoy it because now you're constantly busy at the office and don't even like that work, then what's the benefit of being so rich? That's why the author of this book tells us that spending to show others is the simplest and easiest way to be poor and the most difficult way to stay rich.

 

Lesson Number Two: Every benefit comes with a corresponding cost; nothing is truly free:

In life, every gain carries a price tag; there's no such thing as a free ride. Every opportunity, joy, or success demands something in return, whether effort, time, or sacrifice. Even the smallest perks have hidden expenses, be it dedication, hard work, or compromise. This fundamental law applies universally: for every advantage or pleasure, there's an inherent cost to bear. It's a reminder that nothing truly arrives without a trade-off, emphasizing the importance of understanding and being prepared to pay the price for what we seek or gain.So let's assume you want to buy a car, and its price is 2000 dollar. Now, you have three options: first, pay 2000 dollar. Second, if you don't want to spend that much, find a cheaper car. Third, steal someone else's car. Now, 99% of people wouldn't choose the option of stealing a car because they know that even though they might get a car now, the problems in the future could be significant. So, the benefits that seem clear to us are much smaller than the losses that aren't apparent right now. But if someone steals a car, we'd say they made the wrong decision, regardless of whether they face consequences or not because what we see doesn't align with what that person sees. That's why 99% of us wouldn't like to steal a car. Instead, we might look for a cheaper or second-hand car because we understand that just as in this 'For Free' option, similarly, when you want to become rich and grow your money through investments, you have two options. Either invest your money where you'll get the most long-term benefit, meaning good returns, like in index funds or direct stocks, but for that, you'll need to learn about it. The price is the same here, and you won't pay this price in dollar but invest a little time to learn about it. However, in return, your future will be bright. The second option is to keep your money in a safe place where you won't get high returns, but your money will be safe. You might keep it in bank FDs or gold, which will ensure safety, but in return, you won't get as much profit, and that will be the price. So, in these options, you choose poor returns and pay for it. Now, the truth here is most people choose the second option, which the author of this book refers to as the option of stealing cars. And the simple reason for that is, people spend a lot on their home decorations, going on vacations, eating out, but they don't spend that much on investing in themselves. Because investing in oneself doesn't clearly show them a price, and the things that are more important to them are the house, car, or fixed deposit's fixed interest and their boring daily investments like stock market indexes. They don't see their future as clearly, so people don't choose this option. Similarly, just like those who steal cars, the real value of that stolen car isn't apparent. And the impact here is, we're saying an important thing that growth is driven by compounding, which always takes time but can be destroyed quickly due to distractions in this driven-by single points of failure, which can happen in seconds. So, the result is that people don't choose these options.

Lesson Number Three: Differentiating between becoming wealthy and maintaining that wealth over time:

It's about two parts: gaining wealth and keeping it. The first is about growing your riches, while the second is about safeguarding and nurturing what you've earned. Getting rich involves building your money, but staying rich demands wisdom, discipline, and smart choices to preserve and grow what you've amassed. The journey to wealth isn't just about reaching the top; it's also about securely staying there. It's the difference between climbing up and then ensuring you've got a sturdy ladder to stay at the summit, protecting what you've worked hard to achieve. There are numerous ways to become rich, but there's only one way to be poor: not handling money equally and spending more than you have. That's why they say it's more difficult to stay rich than to become rich. Because when someone doesn't have money, there's no need to control it; they simply don't have it. But when someone has a lot of money, they must learn self-control. That's why you need a different mindset to become and stay rich. If you start by saving a little and invest through that to become rich, do you have a chance? That same mindset will keep you rich, and that's why more than 90% of the world's rich are self-made. So, you should always have a survival mindset, for which you need three things. First, to be financially unbreakable means making yourself mentally and financially so strong that market cycles don't affect you. When you invest in real estate or gold, you know there are market cycles, and its price fluctuates. When the price drops, we don't sell; we buy more. We should use the same logic in the stock market and mutual funds. Don't fear market cycles; use them for your benefit. Second, good plan, leave room for error. Whenever you plan, also consider what you'll do if it doesn't align with the investment plan. What will be your backup plan? That's why in the investing world, we create portfolios, keep emergency funds aside. Third, be optimistic about the future but paranoid about your obstacles to success. Always remain optimistic and positive about the future, but be alert and cautious about your current success. Is there any danger to it? As the author gives two interesting examples here: first, Ronald. He worked as a watchman his entire life, but before he died, he had saved a million US dollars. How could a person from a modest job save so much money? The answer lies in habits of savings and investment. On the other hand, there's Dimple, who studied at the top college, Harvard University, worked in the world's top companies like Merrill Lynch, and held a good executive position. But he developed such a habit of debt and spending that he had to declare bankruptcy in 2008. What's worse than going from riches to rags? So, if you can't manage 10,000 dollar invested with your abilities, you can't manage 1,00,000 dollar. This tells us that your biggest problem isn't less money; it's not knowing how to manage money. This is always the mindset of poor people: 'When we have more money, we'll learn to manage it.' But the mindset of rich people is: 'When we manage a little money well, our money will increase on its own.

Lesson Number Four: Strive to establish unshakable financial stability and maintain a                                                   positive outlook on future finances. :

Work towards building solid financial ground that won't waver, coupled with a hopeful perspective on upcoming finances. Secure your economic footing by saving, investing wisely, and crafting a safety net. Alongside this, embrace an optimistic attitude regarding your financial future. It involves believing in the potential for growth, envisioning success, and staying resilient during challenges. This balance of solid stability and a positive mindset forms a robust foundation for enduring financial wellness, allowing you to weather storms while keeping an eye on brighter horizons. In this world, there are three types of people: those who save, those who think they cannot save, and those who think they don't need to save. We often hear about savings. Your parents might have advised you since childhood to save money. But why are savings so important? Because every one dollar you save and invest buys you time in your future that someone else might have bought otherwise. Therefore, according to the author, even if your salary is low, you can still become rich if you start saving. But if you don't start saving at all, you will never become rich.

Lesson Number Five :  The most important 7 advices enduring wisdom on financial matters                                               shared by Morgan Housel:

Advice number one:Make all your financial decisions independently. Don't think about showing off to someone or doing something just because someone else did it.

Advice number two: Avoid spending future earnings today; it's detrimental. Leave behind the habit of spending more than you earn. Saving for the future is crucial. Don't squander future income on immediate desires; it compromises long-term financial stability and growth.

Advice number three: Drive pleasure from free or low-cost activities like exercise, reading, podcasts, learning. Because real joy in life comes from these everyday, free, and small things. This way, you'll stay healthy, wealthy, and wise.

Advice number four: Keep 10-20% of cash as emergency funds. This is because whenever there's a crash in the stock market, you won't need to sell your investments at a lower price. You can use your emergency fund.

Advice number five: The first rule of compounding is to never interrupt unnecessary. Your actual wealth will grow through long-term investing. Through compounding, but the condition is to let it compound without any interruption.

Advice number six: Every investor should pick a strategy that meets their goals and other considerations. Index funds are the best choice for most people.

Advice number seven: The elements of the house approach: high savings rate, patience, and long-term optimism. Because many people dream of living a life like millionaires. They want to travel to the best places in the world. But actually, what they mean is, do they want to spend millions of rupees, which is entirely contrary to what they're saying? Because if you spend your million rupees, how can you be called a millionaire?