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5 Lessons from The Psychology of Money Thumbnail

5 Lessons from The Psychology of Money

Investment Retirement Funding Insights

One of my favorite personal finance books is The Psychology of Money.

It really examines how our knowledge, experience and mindset around money affects our financial decision making.

Here are 5 lessons from the book that were my favorite.

Getting Wealthy vs. Staying Wealthy is Very Different

“Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.“

Getting wealthy requires some risk, such as starting a business or investing. But staying wealthy is more about risk management and preservation, while still playing offense. 

Morgan states - “More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.”

Being consistent with your savings habits, protecting what you have built and still pushing for more is what keeps you wealthy.

The decisions are justified

“Every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model of how the world works.”

Everyone has different beliefs around their money. For example, imagine the different relationships these two people would have with money:

  • Grew up poor, with two loving parents, but money didn't stop them from enjoying life
  • Grew up upper-middle class, roof over their head, but parents always argued over money

The environment and experience we have in life with money play a huge role in how we view it and how we manage it. Having the knowledge of how your environment affects your decisions will help you take necessary actions to get better with money.

Leave room for error

“The most important part of every plan is planning on your plan not going according to plan.”

You can’t actually prepare for what you don’t know to prepare for.

For example, did you predict Covid in 2020?  Did you predict Russian invading Ukraine?  Did you predict what the market would do the last 10 years?  You can build a spreadsheet or a plan that will spit out a number with the assumptions you put in.  That plan or spreadsheet is wrong the minute you are finished.  

Look at it this way, what would have to go wrong for your plan to completely blow up?  Or maybe what has to go exactly right for your plan to work out?

Having room for error is the peace of mind many people want and yet don’t create.

Leave room for error

“The most important part of every plan is planning on your plan not going according to plan.”

You can’t actually prepare for what you don’t know to prepare for.

For example, did you predict Covid in 2020?  Did you predict Russian invading Ukraine?  Did you predict what the market would do the last 10 years?  You can build a spreadsheet or a plan that will spit out a number with the assumptions you put in.  That plan or spreadsheet is wrong the minute you are finished.  

Look at it this way, what would have to go wrong for your plan to completely blow up?  Or maybe what has to go exactly right for your plan to work out?

Having room for error is the peace of mind many people want and yet don’t create.

What’s Enough?

“Happiness, as it’s said, is just results minus expectations.”

Jordan Belfort, the Wolf of Wall Street, is the perfect example of a person who could never have enough. After earning $49 million in his first year of Stratton Oakmont, he was upset because he was 3 shy of a million a week and decided that it wasn't enough. So he continued pushing for more and more, leading him to make unethical decisions, which ultimately led to him losing it all.

He didn’t know what his “enough” was.

The most important piece of understanding your “enough is knowing what you value and being comfortable with yourself..

As Morgan puts it - “The hardest financial skill is getting the goalpost to stop moving. But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.”

Man in the car paradox

“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.“

In the book Morgan tells the story of how he used to be a valet at a hotel.  He was able to drive a lot of expensive, luxury cars.  The thought of owning one of those types of cars appealed to him.  

Then one day he realized, that he never remembered who drove the car or what they looked like and that was really the very reason he wanted the “cool” car.

Nobody really cares about what you drive, where you live or what brand of clothes you wear. The material possessions are not important to the other people in your life.  

If you truly care about that, then great!  But don’t spend your money on those possessions if it’s for someone else’s purpose.

 

If you haven’t had the chance, make sure you read Morgan’s book or check out his weekly writing at the Collaborative Fund here.


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