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Home » The psychology of money by Morgan Housel: five takeaways

The psychology of money by Morgan Housel: five takeaways

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 Lower-class people in the USA spend about $400 annually on the lottery, which is around 50thousand NRS and they do not even have any savings. Perhaps you are wondering why they don’t save $400.

It’s because they have the mindset that “only lottery can change their financial situation.”, so they rely on luck. They understand that becoming a rich person means becoming lucky. 

True wealth is what you don’t see…

What we see are big houses, luxury cars, and Instagram vacation posts. 

The EMI loan on the house and the car, and the stress he experiences due to these loans, are not shown.

When we see a rich person, we also desire the same things as them, but we don’t consider their financial strain.

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Understanding that people are buying these expensive things to earn respect and status in society, but they don’t realize that those societies don’t respect them as much as their huge homes and cars do, is imperative. 

It is a common perception that being rich means showing off, but wealth is where we can live a financially free life. Our most valuable resource is our time.

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No matter how rich we are in the world, if we don’t have time to enjoy it, it’s useless. Morgan Housel says that show-off expenses are the easiest and best way to become poor and the hardest way to become rich.

The person who purchases a car worth 50,00,000 tells us clearly that their total wealth is reduced by 50,00,000. 

Everything has a cost.

Imagine you need to buy a bike for Rs20,000,000. By paying the price of the bike, buying a cheaper model bike, or stealing the car, the bike can be purchased. 

Most people won’t steal the car now because doing so can get you jailed and cause other problems.

Plus, stealing is wrong. The cheapest bike will likely be chosen instead of stealing because nothing is free. The same principle applies to investing.

If you want to grow your money through investing you have two options:

  1. Your money can be invested in a way that will yield long-term profit. I.e. direct stock purchasing. And for that, you need to know those companies and stocks. That learning is the price you pay for long-term gains in stocks.
  1. The second option is to keep your money in a safe place with low returns like FDs, gold, etc. You will earn minimal profits from this investment, but your money is safe. Here you pay the price of low returns for the safety of your money. 

According to the author, most people choose the second option.

which is the same as stealing a car from option a. The reason is that many people spend a lot of money on vacations, houses, cars, etc. But they don’t invest in themselves.

Show-off items are more important to them than long-term stock investments.

Getting wealthy and staying wealthy:

There are many ways to become wealthy, but there is only one way to become poor, and that is improper handling of money, which is why Morgan Housel says it’s difficult to stay wealthy.

Because people create a relation of money i.e. Money is directly related to their expenses rather than savings.

The less they have money the less they spend but as the money increases, their expenses increase instead of investing and saving, which makes them poorer faster.

This is why world’s more than 80% of rich people are self-achievers and the world’s 70% of lottery winners turn to poor in less than a year.

We should, therefore, always have a survival mindset that focuses on three things:

a. aim to be financially unbreakable. : making yourself both mentally and financially strong that market cycle makes no effect on you. If we invest in stocks, we know that the market is fluctuating and when the price of the market starts to get low instead of selling we become fearless and buy stocks and increase our investment. Be fearless of the market cycle and use it for your benefit.

b. a good plan leaves room for error: whenever you plan an investment always have a secondary plan that is why we create a portfolio in the stock market and keep emergency funds safe.

c. be optimistic about the future but paranoid about obstacles to success: be positive toward your future but be very alert for your current success.

The authors of this book have given very good two contrasting examples: you can google the name Ronald Read, he was a janitor and had 8 million dollars i.e. around 88 crores NRS in his savings when he died. he didn’t even win a lottery or anything.

He just saved consistently throughout his life while letting the wonders of compounding do their things.

And the contrast example is Richard Fusco, who is a student of Harvard University and works in the world’s topmost company Merrill lynch as an executive but he had a habit of getting loans and spending that in 2008 he declared bankruptcy.

The worst thing in this world is to become poor after being rich. If you can’t invest and manage Rs10 lakh you can’t manage Rs 10 crore. Therefore the main problem in your way to becoming rich is not having less money it’s not known to manage and handle that money.

Savings and financial freedom:

According to Morgan Housel, one can become rich even by doing fewer savings but if you don’t save you will have no change in your financial life. Consistent savings can lead you to financial freedom. 

Life tip of Morgan Housel ( timeless advice on money)

  1. Independent decision: never make any financial decision to just show off or to copy anyone.
  2. Live below your means: don’t waste your future earnings by spending them today.
  3. Seek pleasure from low-cost activities: as much as possible, have your expenses low and seek pleasure from free things: read books, exercise, listen to the podcast and learn from YouTube. 
  4. Maintain 20% of your cash as an emergency: this fund can help you in the market crash situation by saving you to sell your investments and using these funds.
  5. The first rule of compounding is not to interrupt it: your actual wealth will only increase in long-term compounding.
  6. Every investor should pick a strategy that has the highest odds of successfully meeting their goals.
  7. Three key elements of financial success: High Saving Rates, Patience and Long term Optimism.

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