The Psychology of Money Book Review

The Psychology of Money by Morgan Housel is a book I was recently recommended by a friend.

I was not really sure what to expect when I first downloaded it from Audible but was immediately sucked into the story and content. Morgan was able to take a very dry subject such as money and finance and add a fascinating twist by talking about how people’s feelings (psychology) drive so many aspects of the ways we think about and deal with money.

Personal Finance Tips

Here are some of the tips and advice which I picked up from the book and want to share with you.

Your financial strategy is personal

There are a lot of people out there who will tell you how to structure your finances with strict guidelines. What people tend to forget though is that someone’s financial strategy is deeply personal. It will depend on many factors like age, education, location, goals, aspirations, events, family. There is no right answer, although there are definitely things you should avoid.

People often get trapped not realising they are changing. Your career path, investing strategy and life goals at the age of 18 are unlikely to be the same at 30 and 40. Recognise this and don’t be afraid to change.

Setting your safety net

I have recently been thinking about what is a suitable level of cash to hold outside of investments. I find it a bit distressing knowing that I have money in my accounts that is not being put to work and even worse is actually losing value over time due to deflation. There are two areas explored in this book that have helped me to think through this topic.

1. You need to have a sufficient buffer such that in case of an unexpected event you are not forced to sell your assets like shares. Morgan highlights that unexpected events are not so unlikely. The majority of people will incur sudden unplanned expenditures one or more times in their lifetimes, so you need to plan a buffer for this. If you don’t have a buffer you could be forced to take very costly actions (poor sale timing, downmarket, fees, taxes) to get the cash you need.
2. Ask yourself what financial structure will most help you sleep at night? This is an important consideration when considering your cash buffer but also your risk appetite in investments. If you have put all your cash into high risk investments, you will likely be having lots of sleepless nights and checking your phone every day to see the health of the market.

“Things that have never happened before happen all the time.”

― Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness

Investing

Compounding is an interesting thing and one that humans find hard to visualise. If you were asked to add 8 + 8 + 8 + 8 + 8 you would likely be able to do this in your head (the answer is 40). If you were now asked to do 8 x 8 x 8 x 8 x 8 I think you would struggle (it’s 32,768).

If you invested only $50 / week into a low-cost index fund (which has historically averaged >9% annual growth) you would likely end up with over $30,000 within 10 years. Check out the effects of compound interest with this online calculator which I use regularly.

One of my favourite sayings is:

“It’s not about timing the market but rather time-in the market”

When choosing a place to invest your money keep in mind the following. Variability in the market is the fee for participation. Just like you can pay 100$ for Disney world tickets to go on the biggest rollercoaster ride vs 10$ for a local funfair. This is the cost to participate and for the “return” on experience.

It has been shown over and over again that active traders have on average done worse than investing in index funds and just holding the investments. This being said, although it sounds like holding your investments is easy (Hodling) are you sure you would be able to hold your nerve during a 50% market drop?

Therefore the most important thing you can do is start young and save regularly. Build this habit and you will be on your journey to financial freedom.

“Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.”

― Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness

Our perception of money, wealth and success

Why is it that our heads turn when we see someone drive past in a flashy sports car? Usually, it is because we would like to experience driving it ourselves. You are rarely thinking about the person who is driving the car itself.

So why when we buy a nice car do we think people will regard us more highly?

Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That’s all you know about them.

― Morgan Housel, The Psychology of Money: Timeless lessons on wealth, greed, and happiness

Conclusion

Overall, I highly recommend this book. In particular, I listened to it on Audible. Due to the storytelling style, it lends itself well to audio format and you don’t miss out too much not having the written text.

The book is not too long and managed to hold my attention and I learned some new things in particular about how to think about money and investing. Also how to talk to others better about the topic.

If you want to know where to start your investment journey I would highly recommend Interactive Brokers. I have been using them for many years and they have extremely low fees to help you compounding all those gains!