The Psychology of Money
“The lowest-income households in the US on average spend $412 a year on lotto tickets, four times [than] the highest income groups…. Forty percent of Americans cannot come up with $400 in an emergency…. That seems crazy to me.”
Who’s this for: EVERYONE. I try and caution saying a book is for everyone, but EVERYONE utilizes money. It’s time to think about money in a different light. Understand how pennies turn to dollars, and the importance of altering your viewpoint on what saving a dollar today, does for you down the road.
WARNING: BEFORE YOU START READING ANY INVESTMENT BOOK OF ANY KIND – START WITH THIS.
The Psychology of Money is the best investment book that isn’t necessarily an investment book. You’re not going to learn life changing methods to exponentially grow your wealth. You’re going to learn how to truly understand money. Like really understand it. Understand more about your relationship, perspective, and how perhaps it relates to your spending, saving, or investing habits.
It’s always fascinated me about how people view and utilize their money. My Dad raised me to think of it in terms of how long it took you to earn it. So for someone that spends $100, and earns $10/hour, then you’re likely looking at roughly 14 hours of your life you needed to accumulate it (including what’s taken out for taxes). If you make $50/hour, then you’re only looking at a little over a couple hours. This is how I think of expenses, and why I absolutely hate gambling. Firstly, the odds are against you. There’s discrepancy as to which games have the best odds, but for argument’s sake we can say craps, blackjack, and roulette do. But even then they have less than 50% with advantage to the casino. If you go in there and lose $100 and make roughly the median income of an American at $15/hour, you just pissed away 9-10 hours of your life. Why?
It’s all about how we view money, for the most of us it’s wrong. Hence, the quote above. That quote isn’t just crazy to me, it’s insane. I review my expenses every two weeks, and I know where my money is going three paychecks from now. It helps me make determinations today, that’ll help me save more, and enjoy it more down the road. This book added more perspectives to my thought process.
In understanding anything, it needs to be relatable. Many times, it also needs to be broken down as if you’re speaking to a five-year-old. That’s exactly how I like things. To understand any concept fully, I need to break down complex ideas to their simplest form. This book is filled with great metaphors to help with understanding how to think differently of how you handle money.
For example, thinking about investment in relation to car buying. In the chapter, “Nothings Free,” the author, Morgan Housel likens the purchase of a stock to car buying – there’s going to be cost. When you buy a car you have three options 1) Buy it at the current price; 2) find a cheaper car; or 3) steal it. Chances are high, you’re not choosing the third option. Investing has similar analysis. When you purchase a stock you can 1) Purchase with expected volatility; 2) find a cheaper, less volatile stock; or 3) attempt to obtain a profit while avoiding volatility. Morgan states that option three is similar to grand theft auto, because the only way you’re doing that is if you steal it. The consequences of stealing a car, or attempting strategies of investing without volatility will both have dire consequences, and… you lose.
This book is full of more incredibly helpful information just as that, with a great summary and wrap up. Another thing I loved about the book was the transparency laid out of successful investors. Such as the need to fail, and that most of people’s wealth is accumulated off few wins and knowing when to cut losses. I specifically enjoyed this quote from Netflix co-CEO Reed Hastings:
Our hit ratio is way too high right now. I’m always pushing the content team. We have to take more risk. You have to try more crazy things, because we should have a higher cancel rate overall.
Just know you’re going to have some failures, and expect it. (side note: I need to adapt this to my own content).
I’ve never been frugal or a frivolous spender. Just someone that lands somewhere in between. But after reading this, I want to re-evaluate my habits (e.g. savings, spending, investments). This will be a book that I consistently reference and remind myself of from time to time. When that’s the case, then it’s an important book.
Again, this isn’t a get rich quick book. But I believe in understanding what’s laid out by Morgan Housel, you can accumulate wealth in a way that will be more efficient and substantial. Then, when you read other strategic investing or personal finance books, you can understand them with a deeper understanding and beneficial perspective.
I’ve provided a couple examples from this book, but that’s just the very tip of the iceberg. There’s so much more to be gained from it. So buy it, and enjoy the money.
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