‘The Psychology of Money’
by Morgan Housel
Timeless lessons in wealth, greed and happiness!
This book should be taught at all schools, colleges, and universities, it debunks many commonly held beliefs around financial wealth. The author explains with great practical examples the fundamentals that determine people’s financial wealth over time:
- Does not depend primarily on your income.
- Many wealthy people do not have lavish lifestyles.
- Many people with lavish lifestyles are only a few pay checks away from bankruptcy.
- It is more (than you may think) about what you save than what you earn.
- Compounding over time is the single greatest builder of wealth.
As someone who has worked in the financial markets and built and compounded his wealth over many years Morgan Housel is well placed to understand the psychology of wealth. Early on in the book the author explains an important rest life example of wealth building in the form of a blue collar, working class man called Ronald Read.
Ronald Read was born into poverty in Dummerston, Vermont, USA; after returning from serving in the Second World war, he spent the rest of his working life, firstly as a gas station attendant and then as a janitor! When Read died in 2014 at the age of 92 he left an estate valued at just under $8 million dollars!!
So how can someone who never earned more than US$15,000 a year in income, with only a basic high school education manage to accumulate nearly US$8 million!? The author uses this example as a starting point to explain how wealth can be built by ANYONE!
The author identifies 3 big factors that enable anyone to build wealth, ‘Luck’, ‘Lifestyle’ and ‘Time’.:
There is luck involved in generating wealth and also bad luck involved in losing wealth, however, ‘bad luck’ can be mitigated by diversifying how you save and invest and by building ‘room for error’ a subject which there is a whole chapter on in the book.
2-LIFESTYLE (Spend v Save)
There is always a compromise between lifestyle and maximising your savings.
There are many wealthy miserable people, who regret living life too frugally. Equally there are many poor people who regret having lived too lavishly.
The simple rule that most people appear to ignore is ‘The way to be rich is to spend less than you have!’
It may be better to do a career that you love, rather than a career that you dislike that earns you more money!
The Man in the Car Paradox
Linked to lifestyle choices recalling his youth when he was a valet for expensive cars (Ferraris, Porsches etc) the author learned that people who owned these cars predominantly wanted people to admire them, but the reality was that people rarely admire ‘the person in the car’, they admire ‘the car’ which made him realise ‘what’s the point’. He also learned that many of the owners of these cars were not accumulators of financial wealth, other than classic cars, most expensive cars depreciate in value and many people use debt to buy a car, and he recalls one particular example who was a guy he knew who had his Porsche repossessed.
Time is the greatest builder of wealth! Maintaining a balanced ‘savings and lifestyle plan’ over a long period is ultimately the optimum solution. People like janitor Ronald Read and one of the world’s wealthiest people Warren Buffet both took advantage of the ‘wild returns’ of steady compounding over many decades.
You will find many other fabulous insights into ‘psychology of wealth’ which are very well explained.
The author ends the book with a simple but fabulous tip:
“When you consider how you change over your life, balance becomes the strategy to avoid future regret and encourage endurance, aiming at every point throughout your working life to have at least:
- moderate annual savings,
- moderate free time,
- no more than a moderate commute and
- moderate time with your family!
This (balance) increases the odds of being able to stick with the (savings and lifestyle) plan and avoid regret.”
This book would make a great Christmas present, particularly for younger people as ‘the valuable pearls of wisdom’ in this book are not taught in the mainstream education system.