The Psychology of Money

Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to totally smart people.

In the past year, every one of us had worried about losing our job and feared the doomsday approaching sooner than we expected. I am no different. As the only earning member in the family, I have always been a bit more worried about financial matters compared to my peers. Pandemic took my anxiety to another level. But this also pushed me to learn more about money and to be mindful of the way I spend it. When I started learning about money, I also became curious about how other people see it. However, trying to have an honest conversation about money is such a taboo. It's just like sex. Nobody wants to discuss it. But everybody wants to have it. My quest for learning about the psychology behind money lead to this wonderful book by Morgan Housel.

As a newbie exploring the various strategies of personal finance, I have read my fair share of articles available over the Internet. It seems everyone wants to advise about money without even bothering about context. Personal finance is a billion times more nuanced than numbers on paper.

Knowing what to do tells you nothing about what happens in your head when you try to do it.

This is what sets apart The Psychology of Money from the rest of the books about personal finance. It is a book that everyone should read at least once in their lifetime even if they are not interested in money.

Apart from the usual personal finance advice like having an emergency fund, living below our means and the magic of compounding, the below points stood out for me in this book.

Independence is the ultimate goal

If you are dependent on a 9-5 job like me, you would know the frustrations that come along with it. Few of us could afford to quit the job without thinking twice. Having a safety net to cover you in such dead-end circumstances would give you the peace of mind nothing else can offer. This would enable us to say no to the first low paying job that comes in our way. Such a safety net is power.

Personal finance is personal

Every one of us sees the world through a different lens. It is shaped by our unique circumstances. We cannot blindly follow Warren Buffet and let's admit most of us were thinking about how to skip school when we were ten years old rather than thinking about investing for the rest of our lives.

Importance of luck

This is one aspect that nobody seems to talk about. The year you are born, the family you were born into and the kind of education you received - everything plays an important role in the process of getting wealthy. Do you know that Bill Gates, who is of the same age as my father, had the opportunity of studying in a school which had a computer at that time? Now imagine the world where he was not privileged enough to have that sort of education!

The best investment strategy is the one that helps you sleep better at night

As someone who struggles with debt, I cannot stress this point enough. My vision for 2021 is to be debt-free and sleep well at night. So.my investment decisions will never involve taking unnecessary risk. Most of us never get the fact that there is no easy way to getting rich, end up in debt and lose sleep over it.

Save even if you don't have any end goals

Apart from retirement and taking a vacation every once in a while, I don't have any specific goals like buying a house or car. So I get confused whenever someone says that one should associate a goal with saving. Housel mentions that saving for specific goals makes sense only in a predictable world and our world is anything but predictable. In the long run, a high saving rate can help you buying freedom from your 9-5 job.

Humility is everything

Though I have always tried to live below my means, there were times when I was fallen for the peer pressure and ended up spending more than I could afford. It is hard to be mindful of such traps when we are young. I have seen friends accumulating loans for cars and houses which were out of their budget just to show it to the world that they belong to a specific class of society. We should always know where to draw the line in going beyond our means and that’ the key.

One of the most powerful ways to increase your savings isn't to raise your income. It's to raise your humility.

If you have read this far, the most important and insightful chapter in this book was the last one. It gave a glimpse of how the average American consumers think the way they do and how the behaviour got shaped by historical events. I wish somebody has done a similar analysis on Indian consumers as well.

My recommendation may have fallen flat. But this book is definitely worth your time and effort. So what are you waiting for? Go and pick this one now!