5 Tips on Managing Your Money from The Psychology of Money
The Psychology of Money by Morgan Housel is one of the most helpful and accessible personal finance books I've come across. Each chapter is short yet impactful and insightful. Some might say that Housel often states the obvious—but sometimes bringing to the forefront things you already (sort of) know but have been ignoring is immensely helpful in keeping you on track (thanks Morgan!).
The premise of the book is that financial success relies more on behaviour and mindset than intelligence or technical expertise. Here are some of my favorite reminders from this book (Part 1, since otherwise this post would be way too long):
Try to be less judgmental about how you and others handle money. Some people do seemingly irrational things with their money, like buying lottery tickets despite the one-in-millions odds of winning, but no one is truly crazy. Everyone's views and attitudes about money are shaped by their unique personal experiences, e.g. whether they grew up poor or wealthy, during high inflation or stable prices. This explains why equally smart people often disagree on how best to manage their money.
Luck and risk play crucial roles in everyone's success or failure—inevitably, they will play an important part in determining your success or failure. Recognize this reality and focus less on individual success stories and more on broader patterns.
There is such a thing as having enough. Countless stories tell of people who, by all objective measures, had more than enough but lost everything because they grew greedy in their pursuit of more wealth. As Housel writes, "There is no reason to risk what you have for what you don't have and don't need." Don't keep moving the goalposts— be content when you have enough and don’t compare your finances with others.
Compounding x Compounding x Compounding. Which means the earlier in life you start saving and investing, the greater the returns you will see in your lifetime, i.e. start ASAP. Also, even if your financial goals change as time passes (which they likely will), don’t interrupt the compounding unnecessarily.
Not only must you have the ability to get wealthy, you also need the ability to stay wealthy—and these require very different skills and mindsets. Building wealth requires optimism and risk-taking, while keeping it requires the opposite: humility, frugality, fear of loss, and ultimately a survival mentality so you can avoid getting wiped out and can realise the power of long-term compounding.
