Psychology Of Money, Proven Ways To Wealth

The Psychology of Money

The Psychology of Money emphasizes emotional comprehension of finances, largely by realizing what is important to you. For most, it’s controlling your own time.

Recently, my fiancée recommended I read The Psychology of Money: Timeless Lessons On Wealth, Greed and Happiness, written by Morgan Housel.

I’ve read a lot of financial and investment books over the years, but this one surprised me. It moved me to such an extent, it shifted my perspective on financial planning and gains.

It’s not so profound that it radically altered the way I manage money, but rather it internally pointed me toward a different kind of personal freedom never considered.

I thought you may also find this insight enlightening, if only for your consideration.

Below I’ll summarize the basics of the book, ending with what I personally gained from it. While the summary will give you a good understanding, I highly recommend you read through the book or listen to the audible.

What you’ll find with this article are points and aspects of what spoke to me during my read. You, on the other hand, will see those points, and possibly many others that directly matter to you. 

That’s something you can only discover by going through the book yourself. 

You can find The Psychology of Money for sale here.

Please note, that this is NOT an affiliate link. MidLife Assets does NOT earn any income from recommending this book. 

The Psychology of Money: Timeless Lessons On Wealth, Greed and Happiness

Written by Morgan Housel and published by Harriman House.

The book was released on September 8, 2020. It explores personal finance and investment decisions through psychological and behavioral perspectives.

Brief Summary

The Psychology of Money offers a compelling look into how people perceive and handle money, emphasizing the role of psychology over financial metrics or logical models. 

If I were to summarize the book, it would be this.

The author suggests that happiness translates to comfortably satisfying financial stresses, such as covering necessary expenses and having money left over. 

For some, that amount of money may be a large sum, exceeding multiples beyond expenses. For others, it’s about having a year’s worth of expenses covered, sitting comfortably in savings.

Either way, the book claims money is about the way it can give you more control over how you spend your time.

Key Points

1. Wealth vs. Riches: Housel differentiates between being rich—having a high income—and being wealthy, which means having freedom over one’s time. This concept is why many high earners aren’t wealthy, as they are always working.

2. Saving Behavior: The importance of saving is highlighted as a function of freedom and security, rather than just the accumulation of wealth. How much you save and how you handle the urge to spend are more indicative of financial success than how much you earn.

3. Compounding: A major theme in the book is the power of compounding, not only in terms of investment returns but also how small and consistent positive behaviors can lead to significant outcomes over time.

4. Luck and Risk: Housel discusses the roles of luck and risk in personal finance. He argues that both elements are often underestimated and that many financial outcomes can be attributed to external factors outside of individual control.

5. Influence of Personal History: The book explains how personal background—such as the era in which one grows up—profoundly influences one’s financial behavior. These factors can dictate an attitude towards spending, saving, and investing.

6. Irrationality: Housel argues that many financial decisions are not made from a rational perspective but are deeply influenced by irrational behaviors and emotional biases.

7. Financial Peace: Finally, the book explores the concept of finding contentment in financial decisions. The key to lasting happiness with money lies not in earning more, but in achieving peace with how one manages money.

Savings May Be More Important Than Investing

Having an abundant savings may be the best investment of all.

Housel, provides a nuanced exploration of the psychological factors influencing money management, urging readers to focus on long-term financial health rather than short-term gains. 

This alone implies to many that properly invested funds earning the highest yield possible, in the most secure way, is the right path.

However, that may not necessarily be correct.

In another article, How To Retire With Little Or No Money, I wrote about how while historically proven investments are a great idea, that doesn’t make them the right way for everyone. 

Markets go up, and at times, down for many months, if not years. People may not have the stomach for those times. 

In other words, for some, having massive savings, even at the cost of inflation, makes more sense, rather than large investments.

Here’s An Example.

Person A has $500,000 invested in the S&P 500 Index, one of my favorite investments, and $50,000 in savings.

Person B has $400,000 in savings, and $150,000 also invested in the S&P 500 Index. 

Neither has any other income except for Social Security and whatever their investments pay.

Both retire, but early in their retirement, the S&P 500 drops 56%. (This actually happened, the index fell from the end of 2007 to early 2009 when it bottomed out.)

Person A has paper losses (value of stocks decline, but not sold) of over -$250,000. 

Person B has paper losses (value of stocks decline, but not sold) over -$75,000.

Depending on personality and lifestyle, that kind of drop in the market can have intense effects.

Person A has $50,000 in savings, plus Social Security benefits.

Person B, on the other hand, has $400,000 in savings, plus Social Security benefits. 

No one knows when the market will recover, nor what may happen to Person A and B until then. Maybe there are medical expenses, perhaps an emergency for a loved one, a natural disaster, or something else entirely. 

Which of the two would fare better in this situation?

Person B with the $400,000 in savings would have a clear advantage.

In case you’re curious, in this S&P 500 real-life scenario the market didn’t fully recover until early 2013. 

That’s 4 years Person A and B would have needed to stay afloat.

I’m Focusing More On Saving

As of the date of this article, I’m 47 years old. 

I’ve had a few bumpy decades, some very abundant years, and quite a few difficult ones, all of which took me by surprise. I learned a lot from those experiences.

One of those lessons is about compounding interest and long-term gains.

However, I admit that I’ve been intensifying my investments as a means of playing “catch up”. My savings, while healthy enough to cover a year’s worth of expenses, have been largely ignored.

Currently, I have most of my non-invested cash in high-yield interest-earning accounts or certificate of deposits (CDs). Other than having those funds benefitting from passive interest, I haven’t added additional money.

I’ve decided to now shift some of my monthly fund allocations toward growing my savings.

This is now how my monthly income ratio breaks down.

Living Expenses: 30%

Savings: 25%

Investments: 40%

Entertainment: 5%

Previously I invested over 50% of my monthly earnings.

I should also tell you, I don’t live a lavish lifestyle. 

I do travel to Europe a few times a year, but other than visiting our families, my fiancée and I enjoy the simpler pleasures of life. We often visit the beach, go for walks, hike, read, talk, and listen to music. Occasionally we’ll go to a very nice restaurant and the theater. 

We’re very happy living this way, and it’s not particularly expensive.

You May Feel Differently, And That’s OK

I agree with Morgan Housel. 

My fiancée and I want to feel comfortable.

That means making sure the basic expenses and any potential surprises are covered. Having that adds to our happiness. 

So long as we can have greater control over our time, doing more of what we want without obligation, exceeding that amount of money matters less.

Don’t get me wrong, if I’m able to earn far beyond what I imagined, that would be awesome. Based on my current trajectory, that’s looking good. However, life doesn’t always go the way we want. 

If it doesn’t, I want to make sure I have an amount I’m comfortable with in the event of a market collapse and emergencies. Granted, that amount is somewhat theoretical, but I have a pretty good idea. 

You, on the other hand, may be in a different position or prefer something else entirely.

Perhaps you’re willing to take the risks and go with the volatility of the markets.

Should there be a serious fall, I admit I’m confident they’ll recover. You can always count on human greed to revitalize economies.

The question that comes to my mind is, how long will it take? How will that affect my soon-to-be wife and I during the interim? How will it affect you and your family?

Thoughts to consider. 

Until the next time, cheers.

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