“The Psychology of Money” is a compelling, easy-to-read book that shows that the ability to acquire wealth often depends more on sound behavioral skills than on intellect, and that behavior is often difficult to teach. Author Morgan Housel illustrates her case through a series of short stories about people’s money-making decisions.
Housel said the book is a deeper exploration of themes he covered in a widely read report of the same name in 2018. A former reporter for The Wall Street Journal and The Motley Fool, Housel is now a partner at venture capital firm Collaborative Fund.
Over the course of the book’s 20 easily understood chapters, Housel provides examples of people who have succeeded and failed in accumulating and preserving wealth and investing it profitably over the long term. Housel shows how financial decisions are made based on factors such as personal history, worldview, fears, and pride.
The key to saving money
In a chapter dedicated to saving money, Housel details the benefits of frugality, the importance of building up savings, and the idea that you don’t need to make a lot of money to build up significant savings over time.
Frugality and humility are important
Saving a large portion of your income is linked to living frugally, which requires a certain amount of humility, Hausel writes. For one thing, when you care less about socializing with friends and neighbors, you feel less need to spend money on material things.
When it comes to increasing your savings, Hausel writes, increasing humility is often a more powerful driver than increasing your income.
Cash in the bank has invisible benefits
While it’s important to save up for big purchases, Housel stresses that it’s also important to set aside money just for savings, because having money in the bank gives you options and flexibility — for example, the sudden loss of a job will be less of a shock if you have some savings to tide you over.
The combination of flexibility and control over time that comes from having ample savings is an “intangible return on wealth,” Housel writes.
Low-income earners can save money
Hausel points out that building wealth has less to do with income and more to do with a person’s savings rate.
In the book’s introduction, Housel tells the story of Ronald Reed, a former gas station attendant and cleaner who became an investor and philanthropist. Throughout his life, Reed built up a fortune bit by bit by saving what he could and investing in blue-chip stocks. When he died at age 92, he had more than $8 million, much of it accumulated through the power of compound interest.
Mr. Housel contrasts Mr. Reed’s story with that of a highly educated, highly paid Merrill Lynch executive who retired in his 40s to become a philanthropist and whose lavish lifestyle, including two luxury homes, led him to eventually file for bankruptcy.
Through the stories of these two men, Hausel makes the point that financial success often depends less on what you know and more on how you act.
Actions and beliefs for successful investing
Housel believes that successful investing depends on how well you hold onto the wealth you make and how well you can generate sizable gains over time, rather than just making a quick buck.
Success comes from survival mode
Housel gives the example of an investor who is good at building wealth but bad at preserving it: Building wealth requires optimism and risk-taking, but preserving it requires humility and a fear of losing it all, Housel writes.
He further explains that the survival mindset needed to maintain wealth comes down to a desire to avoid financial ruin, preparing for the unexpected, and maintaining a sense of prudent optimism.
The Power of Compound Interest
Essentially, compound interest is interest earned on interest over time. In his book, Housel cites famed investor Warren Buffett (whose net worth is about $143 billion, according to Bloomberg) as someone who has reaped huge rewards from compounding his investments. Housel attributes much of the 92-year-old Buffett’s success to the fact that he’s been investing since he was 10 years old.
While high investment returns often come from one-off successes that can’t be repeated, Housel writes, it’s more realistic to get fairly good, consistent returns over a long period of time that benefit from compound interest.
Nobody is crazy when it comes to money.
In the book’s first chapter, “Nobody is Crazy,” Housel argues that while some people may do crazy things with money, no one is actually crazy. Rather, everyone’s unique money habits and beliefs come from their own personal experiences, such as when and where they were born and who their parents were. For example, someone who grew up during a time of high inflation or a severe recession may handle money differently than someone who grew up during a booming economy.
So personal background influences how we save, invest, and spend, helping to explain why one person’s choices may seem wrong or crazy to another, Hausel writes.
True wealth is often hidden
Throughout the book, Housel emphasizes the importance of frugality and humility in saving money, and points out that wealth is intangible. Someone with a lot of money in the bank may not drive a luxury car, live in a mansion, or wear expensive clothes. Conversely, someone who spends money on a lavish lifestyle may have little or no savings.
While luxury cars and big houses are visible and desirable, what people don’t see is someone’s savings, retirement accounts or investment portfolios, Housel points out.
Conclusion
The Psychology of Money is a worthwhile read that will open your eyes to how your mindset about saving and investing may be holding you back from developing healthier financial habits. It gets its point across through concise chapters, charts, and personal experiences, making it a must-have addition to any personal finance bookshelf.
If you’re looking for more books on personal finance, check out Bankrate’s 12 Best Investing Books for Beginners.
