7 key lessons from ‘The Psychology of Money’ for financial successnews24

Morgan Housel’s book “The Psychology of Money” throws light far and wide on why emotion, behavior, and decision-making all have a role to play in equity investing and financial success. The following are seven lessons from the book that will help you create a healthier relationship with money:

Find the role of luck and risk

In fact, financial success often does involve a fair share of hard work and luck. According to Housel, “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort.” That sets things back into perspective and keeps us humble. This simply means that we humans should understand our realities and limitations fairly and adjust our expectations from life and finance accordingly.

Harness the power of compounding

Compound interest is a valuable tool in making money over the long term. Housel goes on to say that “Growth is driven by compounding, which always takes time,” once more making the point that patience is a key feature in long-term finance.

This is something that has been repeated again and again by investing legends such as Charlie Munger, Warren Buffett among others. This means that you need to keep calm, show patience and composure throughout your investing journey to build generational wealth.

Practice humility and don’t be overconfident

It requires humbleness where money is in question. It is important to avoid over-confidence by acknowledging the fact that luck plays a massive role in success. In the words of Bill Gates, this idea can be simply summed up as “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” Housel has views with regards to having patience and humility in life to make the entire journey meaningful. This is something much deeper than just wealth creation.

Focus on what you can control

You achieve success financially by not losing lots of money, not earning lots of returns. By performing well with what you can manage, such as spending and savings rate, you do better than to have your success rely on something else, such as what is happening with the market.

This concept has been elaborated with several examples by Housel. In simple words, the idea here is to focus on controlling expenses, keeping your expenditure in check, having the sense of enough and knowing your limits. The example of Rajat Gupta, how he rose from the slums of Calcutta and rose to the higher positions in McKinsey, all this did not stop him from carrying out a well planned insider trading scam. This happened as he lacked the sense of enough.

Know your money blueprint

Your money habits are influenced by your experiences, upbringing, and culture. Housel describes, “Your personal experiences with money represent perhaps 0.00000001% of what’s happened in the world but perhaps 80% of how you think the world works.” This means that: Your personal money experiences are tiny compared to the global financial landscape, but they heavily shape your views on how money and the economy work.

Avoid lifestyle inflation

As your incomes increase, it is easy to get caught up in lifestyle inflation, where spending increases with earnings. Saving and investing some percentage of whatever increase in income can yield huge dividends over the long term when it comes to financial stability and even enhance the overall portfolio. This means that you need to ensure that with rising salaries and incomes your expenditure is not rising in the same proportion. It is important to be responsible with your expenditure in life with an eye on savings.

Understand that money gives you time

The most important value of money is that it places you in control of your time. According to Housel, “Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. This simple idea teaches the readers that one should not opt for personal loans and credit cards casually. As money has the power of giving you time to make your own decisions.

Now if you are under heavy financial debt then your power of making decisions and taking ‘time’ out in life is severely diminished. That is why money has the ability to give you control over your time.

To conclude, “The Psychology of Money” is full of useful information on how to manage money successfully by learning psychological and behavioral lessons. The book also helps readers in becoming better human beings by giving simple yet powerful lessons. Once you go through the books and understand the concepts, you will definitely be able to make more informed financial decisions and attain a healthier relationship with money.