Table of contents
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave."
Most of us assume financial success depends on education and intelligence. But in The Psychology of Money, finance expert Morgan Housel presents an alternate hypothesis: The key to financial success lies in understanding human behavior. Housel posits that when you understand how emotions and beliefs influence your financial decisions, you’ll make better financial decisions.
Learn why people fail to achieve financial success and why you want money. You’ll also learn what to include in your financial strategy, how to create one you can follow for decades, how to follow it through those decades—and how to pay attention to the information you need to do so.
Money is everywhere, but only few people master it. Housel suggests two major reasons: We underestimate the role of chance in financial success, and we confuse being wealthy with being rich.
🌈 3 Sentence Summary
- Chance plays a big role in our financial lives. Don't confuse being wealthy with being rich.
- Money is to buy us control of our time. Be happy with enough.
- Prioritize saving money, and plan for things to go wrong.
💡 Thoughts
The main ideas in this book is pretty simple. Earn more, spend less, invest the rest; all according to your values, goals, and dreams.
It's not a linear system. We don't need to earn a lot of money before investing. The main point is to do things correctly right from the start, such that our stable system won't change that much even when our income doubles or triples.
Take advantage of compounding interest.
👤 Should You Read It?
You'll probably enjoy it if:
- If you want to understand the basics of money and where it comes from.
- If you're thinking of using money to live your good life.
- If you want to be financially intelligent and financially independent.
🚀 Actionable takeaways
- Prioritize saving money. It's the most reliable way of getting rich.
- Invest in an index fund to take advantage of compounding. It's very difficult to beat the market. I use Stashaway.
- Plan for things to go wrong. Invest 10% in extremely high risk funds, and 90% in extremely safe funds. Nothing in between.
✍️ Summary + Notes
🦄 1. Theories aren't reality
"The challenge for us is that no amount of studying or open-mindedness can genuinely recreate the power of fear and uncertainty."
We are not machines. Studying the facts of an event is very different from feeling it happen in real time. It's easy to look back and say "buy low sell high", but it's another thing to be paralysed by fear and uncertainty of not knowing where the market will turn.
There is a lot of luck involved in success. Don't overweight the role of individual effort, but focus on broader patterns. When more people succeed in A rather than in B, you should strive to do A, even if the successful people in B are insanely richer than people in A. (e.g. dentists vs traders). There is no reason to risk what you have and need for what you don’t have and don’t need.
Be kind to yourself when you make a mistake or end up on the wrong side of risk. The world is uncertain, and it may not be your fault if something goes wrong.
💸 2. Prioritize saving
“Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risk. It requires humility, and fear that what you’ve made can be taken away from you just as fast. It requires frugality and an acceptance that at least some of what you’ve made is attributable to luck, so past success can’t be relied upon to repeat indefinitely.”
Getting money requires taking risks. The more you want to achieve, the more risk you have to bear. But saving money requires risk mitigation, fear of losing what you've earned, and avoiding greed.
The best way to save is by using the Uneven Barbell Principle
📊 3. Creating a Monthly Tabulation
Now that you've got your raw data, tabulate it. Convert your expenses from dollars to life energy spent using your real hourly wage (from step 2). This really helps you put spendings into perspective.
🦄 4. Aligning Spending With Values, Purpose, and Dreams
Ask yourself "Did I receive fulfillment, satisfaction and value in proportion to life energy spent?"
In your table from step 3, make a minus (-) sign if you did not feel fulfilled proportional to the hours of life energy spent on that.
Make a plus (+) sign if you think increasing expenditure in that thing area would increase fulfillment.
Mark (0) if that area is fulfilling enough.
🎲 5. Graphing Your Income
Create a large chart wall by plotting your total monthly income and total monthly expenses (from your monthly tabulation).
This shows you the trend of your financial situation. Ideally the gap between them should be increasing as our income increases and spendings decrease.
💸 6. Strategies/Categories to Cut Spending
Cut down on the things with a minus sign (-), and increase things with a plus sign (+).
🤑 7. Increasing Your Income
Make stuff every day. Know you’re going to suck for a while. Fail. Get better. Improve your skills and monetize them.
Productize your work, automate, delegate.
💰 8. Graphing Your Investment Income
This is where we can begin to taste financial independence. You will begin to see a growing gap between your savings and your spendings. The amount of gap is called capital.
Capital is the money that makes money. Invest your capital in relatively safe investments (e.g. S&P 500).
Take the 30-year historical average of each investment and graph the average expected returns.
📈 9. Invest Your Capital
Step 9 is about empowering yourself to make wise financial choices. Make Antifragile choices, or at least Robust ones.
Leverage your current paid hourly wage to set up passive income streams. I'm not giving financial advice, but I personally put 90% of my capital into safe investments like Stashaway, and 10% into extremely risky investments like Crypto, DeFi, and DAOs. There is no in-between.
Your capital must produce income, be absolutely safe, and be liquid.
Have capital to produce income, cash cushion to last you 6 months in case of an emergency, and cache (result of your continued practice of the 9 steps) to enjoy, give to charity, or be reinvested.
Enjoyed this post? If so, you might want to subscribe to my weekly newsletter. I discover new
articles, books, and podcasts every week, and condense them down into a short life lesson or two.
Click here to check out the previous issues ( and maybe subscribe :D )