5 More Tips on Money Management from The Psychology of Money
Here's Part 2 of my favorite insights from Morgan Housel's "The Psychology of Money." If you haven't read Part 1, which covers the first 5 chapters of the book, check it out here.
The greatest value of financial freedom is giving you the ability to control your time and your life. Sure, it's debatable whether money can buy happiness, but what it can buy is independence and autonomy—the freedom to do what you want, when you want. This means no more worrying about toxic bosses, dissatisfying careers, emergencies, or long-term survival generally. Instead, you can focus on what truly matters: family, friends, passion projects, or whatever brings you joy. This freedom to choose how you spend your time is, without doubt, a crucial component of happiness.
Showing off fancy things doesn't get you real respect or admiration. People who stare at luxury possessions aren't admiring their owners—they're only imagining themselves with that big house, expensive car, or designer watch or jewelry.
Wealth is the money you don't spend. While spending money on expensive things may make you feel rich in the moment, it's easy to forget that excessive spending actually prevents you from building wealth. Obvious, I know. But how many of us have ignored this principle and bought the latest trendy but unnecessary product simply because we "could afford it"? Remember: the goal is financial freedom, flexibility, and control over our lives—and this can only be achieved by consistently saving our income rather than spending every dollar we earn.
An investment strategy that works is one you can stick with long-term. As an example, a Yale University study showed that young investors using two-to-one margin when buying stocks could achieve higher lifetime returns—even if that means they would experience significant losses early on. However, human psychology makes it difficult to maintain such an aggressive approach and remain coldly rationale even in the face of great losses. That's why it's better to choose a reasonable strategy you can follow consistently, even if it doesn't generate the maximum possible returns.
Always leave some room for error. Even if you are confident in your investment strategy, the future is still unpredictable. While studying economic and market history is valuable, unprecedented and surprising events will always occur. Building in safety margins protects you from being completely wiped out when things don't go according to plan—and ensures you're still in the game and can capitalize on opportunities when they arise.
