Woman looking at a financial statement

The Psychology of Money: 7 essential takeaways from Morgan Housel’s seminal book

Apart from Warren Buffett, there are very few household names in the personal finance and investing space.

One name I would throw into the ring, however, is Morgan Housel.

His book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, has been hailed as “seminal” and has sold more than 3 million copies, which is remarkable for a personal finance book.

It’s certainly had a big influence on my thinking, both in the way I look at my own financial arrangements and how I consider the advice and guidance I give clients.

In it, Housel lists no fewer than 18 money rules. That’s far too many to deal with in a single article, so I’ve picked out seven of the most important.

Here’s what they are, and how they can help you plan your financial future.

1. The financial decisions you make are driven by personal experience

One of the keys to understanding your financial planning arrangements is that, as Housel puts it, “Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works”.

There is nothing intrinsically wrong with that. The important thing is to be aware of it so you can factor it in to your decision-making.

Consider it like playing a golf shot into a cross-wind. If you make allowance for it you’ll end up on the fairway, rather than ignoring it and ending up out of bounds.

It means that one of the crucial ways an adviser can add real value to your plan is by looking at your circumstances subjectively and keeping you on the right track.

2. You need to know what “enough” is

In a previous article, you read about why continually moving your goalposts can be a major inhibiting factor to your future financial wellbeing.

Housel makes the same point with this rule.

As he says: “The hardest financial skill is getting the goalpost to stop moving, but it’s one of the most important”.

He stresses that it’s a battle that can never be won. Or, more importantly, the only way to win is to not fight to begin with. You should accept that you might have “enough”, even if it’s less than those around you.

If you’re constantly raising your expectations and altering your financial targets your ambition will ultimately outstrip your satisfaction and you’ll end up frustrated and disappointed.

Not understanding that will make wealth accumulation an end in itself, which can lead to disenchantment as you realise it’s impossible.

3. You should recognise the extraordinary power of compounding

Compounding is the theory that starting with something small and sitting back and watching it grow can produce remarkable results.

In this regard, Housel is happy to reference Warren Buffett.

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.”

From this comes the appreciation of the importance of time as the key to investment success, and the power of compounding.

“If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Time is the most powerful force in investing”.

Read more: Volatility is not something to fear. Investment guru, Warren Buffett, explains why

4. It’s crucial to understand wealth accumulation as a motivating force

This rule requires you to have an appreciation that what you’ve made can be taken away from you very quickly if you aren’t careful.

It also requires you to accept that at least some of what you’ve made could be attributable to luck, so past success can’t be relied upon to repeat indefinitely.

In Housel’s words: “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up”.

A certain amount of margin for error needs to be written into your financial plan. Not everything will go according to plan, so you have to be ready to adapt, and accept that few gains are so great that they’re worth risking everything to attain.

Read more: What does “wealthy” mean, and how does it impact on your retirement planning?

5. Your happiness comes from having the freedom to do what you want

Housel says: “The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays”.

It’s not necessarily about the amount of wealth you accumulate. In a recent article you read about the importance of separating your wants and needs, and this is the gist of what Housel is getting at with this rule.

Housel stresses this a lot. As he says: “The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today’”.

This reiterates the previous rule about compounding, and that the greatest asset is time. “Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.”

6. True wealth is what you don’t see

With this rule, Housel warns against ostentatious and gratuitous displays of wealth. “Spending money to show people how much money you have is the fastest way to have less money.”

Financial wealth is often advertised. Because we don’t know how much others earn, we judge them on outward appearances – a new car, a bigger house – and use those to assess their value.

In reality, wealth is what you don’t see. Often, items are put on display because they’ve been foregone in pursuit of a longer-term goal of true happiness.

You should appreciate the difference between being wealthy and being rich. It is more than semantics, and not knowing the difference can result in you making poor money decisions.

Read more: Why your personal benchmarks are more important than external ones

7. You don’t need a specific reason to save money

Of all Housel’s financial rules, this is by far the simplest.

There’s a massive benefit to be gained from just saving money for saving’s sake. And indeed you should. Everyone should.

Develop a savings habit and teach your children the same. It’ll be one of the best lessons you can give them.

In Housel’s words: “Building wealth has little to do with your income or investment returns, and lots to do with your savings rate”.

Read more: Why the amount you save is more important than investment returns

Get in touch

If you’d like to know more about Morgan Housel’s book and planning your financial future, please get in touch.

You can call me on 07769 156 250.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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