‘The Psychology of Money’ by Morgan Housel: Book Review

Introduction

The Psychology of Money by Morgan Housel is a book that explores the different ways in which people think about and manage their finances. The book offers insights into how our emotions, biases, and personal experiences affect our financial decisions. Housel is a former columnist for The Motley Fool and his book draws on years of experience writing about personal finance and investing. In this review, I will share my thoughts on the book and explain why I believe it is a must-read for anyone interested in understanding the reasons we make the decisions we do with money.

The Importance of Psychology in Money Management

The Psychology of Money highlights the role of psychology in money management. While most personal finance books focus on the technical aspects of investing and saving, Housel’s book takes a more holistic approach. He argues that money is not just a tool for achieving financial security but also a source of emotional and psychological satisfaction. This is why our attitudes and beliefs about money matter just as much as our financial skills.

Housel notes that there is no one-size-fits-all approach to managing money since we all have different goals, values, and personalities. Therefore, he suggests that we need to pay more attention to our own biases and tendencies and learn to work with them instead of against them. This requires a deep understanding of our own values, priorities, and emotions.

The Three Levels of Wealth

One of the key concepts in The Psychology of Money is the three levels of wealth. Housel argues that wealth can be viewed on three levels: 

• Financial wealth: the most common measure of wealth, and it refers to the amount of money and assets we have
• Social wealth: refers to the relationships and networks we have and the trust and goodwill they bring us
• Time wealth: the freedom to use our time in ways that align with our values and priorities

Housel argues that people who focus only on financial wealth tend to miss out on the other two levels of wealth. For instance, someone who works tirelessly to accumulate wealth but neglects their relationships and health may end up feeling lonely and unfulfilled. Similarly, someone who has a lot of financial wealth but no time to enjoy it may feel trapped and stressed.

The Role of Luck in Wealth Creation

Another important theme in The Psychology of Money is the role of luck in wealth creation. Housel argues that while hard work, discipline, and skill are important in achieving financial success, luck also plays a significant role. Many of the wealthiest people in the world have benefited from lucky breaks, such as being born into the right family, being in the right place at the right time, or having a chance encounter that led to a lucrative opportunity.

Housel suggests that acknowledging the role of luck in wealth creation can help us avoid the trap of thinking that our success is entirely due to our own efforts. This can lead to a sense of entitlement, arrogance, and complacency, which can be detrimental to our financial well-being.

The Power of Compounding

The Psychology of Money also explores the power of compounding, which is the ability of an asset to generate earnings that are reinvested to generate even more earnings. Housel argues that compounding is a powerful force that can turn small savings into large sums of money over time. However, he notes that compounding requires patience, discipline, and a long-term perspective, which many people lack.

Housel suggests that people who want to harness the power of compounding need to focus on their savings rate, rather than their investment returns. This means saving as much as possible, consistently and over a long period of time, rather than trying to beat the market with fancy investment strategies.

The Psychology of Money Conclusion

Overall, The Psychology of Money is a thought-provoking read that is unique in the field of investing books.  The focus on the non-monetary aspects of investing and personal finance is both refreshing and needed in today’s get-rich-now mindset.   This book is a must read for anyone interested in investing and personal finance and there are numerous takeaways for every reader.  I have personally read this book three times and highly recommend it.

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