The central message of The Psychology of Money by Morgan Housel is that behavior, not what you know or what you do for a living, influences your finances. The following are key points I noted for a quick reference in the future.
1. Everyone has their own perspective about money, and everyone is right in that perspective. The difference is presented in the way money is used by people. What we do now may be right for us but others may feel it wrong and vice-versa. Define the game you’re playing. Everyone plays differently.
2. Luck and risk go hand-in-hand. If you’re lucky with the risks you take, you grow, otherwise, you fall apart. Focus on definite patterns to take risks, that’s how you can manage your luck and reap rewards.
3. Don’t be too greedy. Set a target and reach it. If you pass your goal, treat it as a bonus. Learn to be content while pursuing your goals and improving yourself. Avoid the extreme ends of financial decisions. It isn’t poker, don’t go all-in. Diversify.
4. High net worth isn’t because of high returns in a short time. They are due to earning decent income over a long period, consistently. Try to lose less when wrong and gain more when right. Have control over what you do, when you do it, and with whom you do it. You’re the average of five people you spend the most time with. Choose well.
5. Earning money is not the point. Keeping money is. Have alternatives for your Plan A because it will most likely fail. Don’t be too optimistic about the future, have some doubts. Make room for error. Have enough margin of safety for your plans — in case it doesn’t work out.
6. Money is not everything. Spending money lavishly and showing off won’t bring you respect. It is also the fastest way to lose money.
7. Building income has more to do with savings than investment returns and income itself. Saving money is in your control. The value of wealth we hold is important. Learn to be happy with less money.
8. Increase your time horizon to become a better investor and master your finances so you can sleep well at night. Be reasonable (be happy and satisfy everyone dear to you with your money decisions) than rational (using numbers). Everything has a price, don’t think of it as a fine when you spend it, it’s your choice. Spend money on things that make you happier.
9. There are static parts about money that are consistent for every generation and dynamic parts that are present for only one or two generations, like inflation or a bull market. Identify them and distinguish them by learning from history. Don’t keep the goals you set for yourself in different circumstances. Modify them with time.
10. Pessimism is seductive. Setbacks happen too quickly to ignore, but we can always recover and grow. Progress occurs too slowly to notice. If you want something to be true, you’re more likely to convince yourself that it is. Fill the gaps and make the narrative whole by continually learning. You don’t know what you don’t know.
Financial success is not a hard science, it’s a soft skill. How you behave is more important than what you know. Anyone can acquire wealth once they understand the psychology of money.
