The Psychology of Money

The Psychology of Money

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel is one of those rare personal finance books that has something for everyone.

Ths book not only provides insights for new investors to consider at the start of their investing journey, but it also shares insights into how everyone, all of us, interact with money differently. Through a series of short stories, fact-tips collated under specific chapters, author Morgan Housel shares what he considers are the most important and often counterintuitive features of the psychology of money. 

Before I offer up my personal copy to one lucky reader, in the book giveaway later below, let’s take a comprehensive look at some key chapters about what you can expect including some of my favourite takeaways and quotable moments from this well thought-out book.

The Psychology of Money

The Psychology of Money

Throughout this book, Morgan’s main objective is to teach you the consequences associated with money saving and spending in terms of behaviour. This is because unlike the science of medicine so often referenced in the book, expertise (and often success) with saving, investing and finances requires a deep understanding of human psychology. As humans, we are flawed, full of attitudes and irrational patterns. These patterns manifest themselves into our decisions with money so influenced on emotions over math – that sometimes these decisions are very hard to explain or rationalize. But these decisions exist, they happen, because we all make decisions everyday based on our own unique experiences and what we think is relevant to us at the time.

Let’s explore some of these subjects now in those key chapeters to see what might reasonate for you!

Chapter 2 – Luck & Risk

Housel reminds us that “luck and risk are siblings”, citing Bill Gates’ early success with computers as an extreme form of luck: “one in a million high-school-age students attended the high school (Lakeside) that had the combination of cash and foresight to buy a computer.”

This means when it comes to money, luck and risk can be considered doppelgangers – it’s almost impossible to know only in hindsight when someone has been incredibly bold or completely reckless with any given outcome. 

As such, Housel suggests when it comes to money management you “be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.”

If you are successful, then part of your success was likely due to luck. On the flipside, risk can play a major role in a situation where you or others don’t achieve success.

Chapter 3 – Never Enough

Citing more examples in the book, including the Ponzi scheme managed by corrupt investor Bernie Madoff, Housel reminds us there is no reason to risk what you already have and need for what you don’t have and don’t need.

This makes one of the hardest financial skills to master is determing “your enough” number. This “enough” is not in the mathematical sense (as in how much to save for retirement), rather, to avoid increasing your lifestyle too much as financial expectations rise over time. To put it more bluntly:

“The hardest financial skill is getting the goalpost to stop moving.”

Chapter 4 – Confounding Compounding

Here is a financial nugget to remember about the power of compouding. At the time Housel wrote this book:

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.”

The key point here is that while Warren Buffet is often cited as one of the best investors of our time, it’s actually time that Warren Buffett has invested that has been his superpower.

The lesson for you and me is clear: if you want to grow your wealth, the longer you can invest your money, earning good returns over time, that’s when compounding runs wild.

Chapter 5 – Getting Wealthy vs. Staying Wealthy

It sounds so obvious but it’s worth calling out: good investing is not really about making amazing investing decisions – although that certainly helps!

You don’t have to be a perfect investor. Getting wealthy and staying wealthy is “about consistently not screwing up.”

This means when it comes to money management, you should consider becoming “financially unbreakable” over time. 

I like this concept a lot and it’s something borrowed from what Warren Buffett and Charlie Munger recently posted in their latest Berkshire Hathaway shareholder letter to investors – the concept of being “financially impregnable” when it comes to explaining why Berkshire holds so much U.S. Treasury Bills. 

Reference: https://www.berkshirehathaway.com/letters/letters.html

“Berkshire’s balance sheet includes $144 billion of cash and cash equivalents (excluding the holdings of
BNSF and BHE). Of this sum, $120 billion is held in U.S. Treasury bills, all maturing in less than a year. That stake leaves Berkshire financing about 1⁄2 of 1% of the publicly-held national debt. Charlie and I have pledged that Berkshire (along with our subsidiaries other than BNSF and BHE) will always hold more than $30 billion of cash and equivalents. We want your company to be financially impregnable and never dependent on the kindness of strangers (or even that of friends). Both of us like to sleep soundly, and we want our creditors, insurance claimants and you to do so as well.

But $144 billion?

That imposing sum, I assure you, is not some deranged expression of patriotism. Nor have Charlie and I lost
our overwhelming preference for business ownership. Indeed, I first manifested my enthusiasm for that 80 years ago, on March 11, 1942, when I purchased three shares of Cities Services preferred stock. Their cost was $114.75 and required all of my savings. (The Dow Jones Industrial Average that day closed at 99, a fact that should scream to you: Never bet against America.)

After my initial plunge, I always kept at least 80% of my net worth in equities. My favored status throughout
that period was 100% – and still is. Berkshire’s current 80%-or-so position in businesses is a consequence of my failure to find entire companies or small portions thereof (that is, marketable stocks) which meet our criteria for longterm holding. 

Charlie and I have endured similar cash-heavy positions from time to time in the past. These periods are
never pleasant; they are also never permanent. And, fortunately, we have had a mildly attractive alternative during 2020 and 2021 for deploying capital. Read on.”

What. A. Gem.

In Chapter 5, Housel will explains that keeping cash is a hedge against any unknown future with any plan. 

Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”

The strive to become financially optimistic for the future yet somewhat paranoid about it at the same time will help you immeasurably over time. 

Chapter 7 – Freedom

“Controlling your time is the highest dividend money pays.”

Indeed. I’m striving for that. I suspect you might be too!

Housel references the work of gerontologist Karl Pillemer who interviewed a thousand elderly Americans looking for the most important of life’s lessons to share with others. Pillemar concluded from those interviews:

  • Not a single person said you should try to work as hard as you can (to make money) to buy things you want.
  • Not a single person said it’s important to be at least as wealthy as the people around you – to define your success.
  • Not a single person said you should choose any work based on your desired future earnings power.

Instead, consider things that offer more value in life: quality friendships, being part of something bigger than yourself, and spending quality, unstructured time with others including your children. 

Chapter 9 – Wealth is What You Don’t See

Although you can absolutely decide to spend your money on things or possessions, The Psychology of Money highlights that long-term wealth is something that people don’t see.

In this chapter, you’ll find prominent examples of people that have over-leveraged themselves (to create an appearance of wealth) when it’s really the role models that don’t share flashy assets is what you are looking for.

“There are, of course, wealthy people who also spend a lot of money on stuff. But even in those cases what we see is their richness, not wealth. We don’t see the savings accounts, retirement accounts, or investment portfolios.”

A reminder…

“The world is filled with people who look modest but are actually wealthy and people who look rich who live at the razor’s edge of insolvency.”

Chapter 10 – Save Money

We all know that saving money, at least some money, is important but Housel puts things into deeper perspective for us: it’s your savings rate that really matters and what you and I should focus on over time.

Why?

Because your savings rate is in your direct control.

Unlike taxation, government legislation, rates of return, inflation and more – the first idea concept behind building wealth is so simple to overlook because so much attention is talked about elsewhere.

“Building wealth has little to do with your income or investment returns, and lots to do with your savings rate.”

…and people’s ability to save is usually in more control than they think:

  • Savings can be created from a higher income, sure, but savings is often created by spending less.
  • You can spend less if you desire less.
  • If you desire less, you will probably care less about what others think of you. 
  • Focusing on you, your savings rate, is essential for wealth-building because a high savings rate offers an unseen return on wealth: flexibility and control over your time.

Chapter 11 – Resaonable > Rational

I loved this chapter, personally. 

Although the math on any spreadsheet is compelling to me, personal finance is and will always be more mind over math. And this reality comes from a Nobel Prize winner as well who Housel referenced in this book that wanted to “minimize future regret” so he invested in a 50/50 split between bonds and equities even when a higher percentage of stocks would have done better…

Quite the teachable moment.

Further still, even the legendary late-great Jack Bogle, founder of Vanguard, who spent his career on a crusade of sorts promoting low-cost passive index investing to millions – invested some of his own money in his son’s higher cost mutual funds. Yes, it’s true. 

What on earth was the explanation in Housel’s book?

We do some things for family reasons,” Bogle told The Wall Street Journal. “If it’s not consistent, well, life isn’t always consistent.”

Further, if you search a bit, you’ll find the following when Bogle was asked about his son’s active money management approach:

He is making money for clients and for himself. “Is there anything wrong with that?” he said once in response.

And there you go. 

Chapter 12 – Surprise!

Life and the future in general is full of surprises that you nor anyone else simply cannot see coming. Yes, it’s important that we learn from history as best we can. However, events that shape our history are often marked by outlier events that no one can predict.

Historians are not prophets.”

Chapter 13 – Room for Error

“The most important part of every plan is planning on your plan not going according to plan.”

I’ve often touted planning, while very good, is not nearly as important as the process of planning and re-planning.

Further Reading: How much is enough for retirement?

Housel suggests we continue the thinking and behaviours around being “barbelled”. That is, take some risks, but ensure you have a plan that is adaptable and flexible to succeed. 

Housel: “I just want to ensure I can remain standing long enough for my risks to pay off. You have to survive to succeed.”

The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future.”

Chapter 15 – Nothing’s Free

As consumers, we pay for everything. Everything has a price. Even the stock market.

“But say you want to earn an 11% annual return over the next 30 years so you can retire in peace. Does this reward come free? Of course not.”

Housel explains the price of long-term stock market gains is the riding out the shorter-term market volatility. This is the price of market returns. This is the price of admission. “And it hurts” from time to time.

Chapter 16 – You & Me

In this chapter of The Psychology of Money, Housel again points out that different people will have different financial goals. Best keep that in mind when investing.

My plan and decisions will likely be very different than yours – understandably so.

The takeaway here is that:

“…few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are. The main thing I can recommend is going out of your way to identify what game you’re playing.”

Chapter 18 – When You’ll Believe Anything

Humans try to make sense of the world around them by telling themselves a narrative (a story) that fits into their worldview.

A reminder:

“Everyone has an incomplete view of the world. But we form a complete narrative to fill in the gaps.”

We all do this, and often. We have to. The world is a very complex place and it would be hard to get out of bed to begin to understand it if you didn’t tell yourself some stories or have a narrative to connect it all.

Chapter 19 – All Together Now

This chapter summaries some of the lessons you should have learned in the previous chapters – before Housel highlights how he manages his own money in chapter 20 as part of his confessions.

On that note, some of Housel’s confessions:

  • We own our house without a mortgage, which is the worst financial decision we’ve ever made but the best money decision we’ve ever made.” “On paper (paying off a mortgage with rates so low), it’s defenseless. But it works for us.”
  • Over the years I came around to the view that we’ll have a high chance of meeting all of our family’s financial goals if we consistently invest money into a low-cost index fund for decades on end, leaving the money alone to compound.”
  • “We also keep a higher percentage of our assets in cash than most financial advisors would recommend – something around 20% of our assets outside the value of our house. This is also close to indefensible on paper, and I’m not recommending it to others. It’s just what works for us.”

We do it because cash is the oxygen of independence, and – more importantly – we never want to be forced to sell the stocks we own.”

Housel goes on with his cash wedge philosophy to reference Charlie Munger in saying:

The first rule of compounding is to never interrupt it unnecessarily.”

The Psychology of Money Summary

The Psychology of Money is a gem of a personal finance book – tying together many short stories, facts and personal anecdotes to provide a comprehensive picture of how psychology impacts money decisions – all of us very universally but also differently.

Reading this book will undoutedly provide some simple, straightforward advice on how to recognize the power of psychology in your personal finance journey.

Some key reminders as I leave this book review and share my own reflections of personal finance frequently shared on this site:

  • Personal finance is and will always be, personal.
  • The best answer for you when it comes to your money management decisions will usually be: “it depends”.
  • The best investing strategy is not an index-investing approach or absolutely nothing. I believe the best investing strategy for you will ultimately be your high, sustained savings rate and a financial plan that meets your investing objectives – nobody else’s.
  • Financial independence should be the main goal – not any form of “retire early”.
  • Cashflow is always king and second to that, keeping a healthy cash wedge is always smart to weather any market volatility or financial surprise. 
  • You don’t have to be a great investor. You just have to be a good one by avoiding many financial mistakes.

The Psychology of Money by Morgan Housel (About the Author)

Morgan Housel is a well-known financial journalist who is currently a partner at The Collaborative Fund.

Reference:

https://www.collaborativefund.com/

In the past, Morgan was a columnist for both The Motley Fool and The Wall Street Journal and won awards for his journalism. Currently, he lives in Seattle with his family.

The Psychology of Money – Enter to Win!

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Related reading including from my site:

What is a Financial Plan and what should that cover?

What is a Financial Plan and what should it cover?

Why is a cash wedge so important? Read on to learn why and how you can easily implement one.

The Cash Wedge – Managing market volatility

Strive for Financial Independence (not early retirement).

Strive for financial independence not early retirement

This is the definitive answer to paying off your mortgage or investing.

The definitive answer to paying down your mortgage or investing

The Psychology of Money from Morgan Housel via The Collaborative Fund blog.

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

49 Responses to "The Psychology of Money"

  1. It’s always great to have a plan until you realize that “life” doesn’t care about your plan – it has it’s own plan – sometimes compatible with ours, often not… the response (or re-planning) is where the real growth occurs…

    Reply
  2. Good post Mark, thanks. The chapter on Saving Rate rang a bell with me. From my view if a young person can manage that, she/he is on track! All interesting and good reading.

    Reply
  3. Thanks for reviewing Mark. I really like the approach of having a high-level summary per paragraph. And finance journey is all about mindset. Having a good psychology of money can really go a long way!

    Reply
  4. This sounds like an excellent read. Like most investors, I have made my share of mistakes along the way. I’d like to win this book so that, after reading it myself, I can pass it along to some family members.

    Reply
  5. Awesome! This wioukd be great reading as I go on vacation next week also 😎
    Thank you for the great insight you share, it is so relevant and provides confidence when I think things are getting scary!
    Great content and keep up the good work Mark!
    I am always looking for great reads and education as I near retirement and as I try to pass on wisdom to my kids.

    Reply
    1. Thanks Kim! Yes, trying to pay it forward a bit via my site and sounds like you’re trying to do the same for your kids.

      Are you going to retire? Semi-retire? Other?
      Mark

      Reply
      1. I worked hard saving my whole life. Determined I would set myself up to be able to retire at 55. (Now). But feel too young and more in me haha! I did get a new job at my work and perfect for pre-retirement. I could handle 2 more years 😁
        I am an avid self-learned financial planner and built a retirement spreadsheet similar to what you had shown in a webinar you did with Mike Heroux. Also includes spouse and income splitting.
        Love following him also.
        You do great work and I like when my favorite people team up. That’s confirmation you both are good! 👍

        Looking forward to following more of you. Very difficult to chose the right portfolio at this stage in life. Ha!
        Easy to save and invest, now how to hold onto it.

        Reply
        1. “I am an avid self-learned financial planner and built a retirement spreadsheet similar to what you had shown in a webinar you did with Mike Heroux. Also includes spouse and income splitting.”

          Excellent.

          Yes, I know Mike very well. He’s a very passionate DIY investor ready to help others too…

          Very kind words Kim and thanks for that 🙂

          You make a great point about wealth preservation. Once you build it, you need to maintain it!

          What is your approach to that?
          Mark

          Reply
      2. I saved all my life for a target retirement date of 55 (now). I just got a new job at my company and perfect pre-retirement job. I could continue for 2 more years. I love financial planning and built a retirement spreadsheet as you had shown in a webinar with Mike Heroux. I love Mike’s concepts also and I am glad when I see two great partners like you and him team up. Gives me confidence I am following the right people 🙂
        It’s easy to save and invest, the hard part now is how to keep it!

        Reply
  6. This book sounds right up my alley…can’t wait to read it. I also love Jack Bogel, and have read and given a few of his books as gifts over the years; he just made so much sense. Years ago I read “The Millionaire Next Door” and “The Millionaire Mind”…sounds like there is some similar messaging in this book. Thanks for the suggestion!

    Reply
  7. Deane Hennigar (RBull) · Edit

    This was a great book. Nice review Mark.

    I laughed at the Nobel winner investing the 50/50% allocation. I did the same thing when I retired even knowing it would be inferior over time, but have “allowed” a rising equity glide path further into retirement.

    Will soon be time to reread that book.

    Reply
    1. I found that interesting as well re: Harry Markowitz had a 50/50 split. I guess at the time bonds meant something but even he would know back then as he was developing his theory that stocks > bonds > cash and a bias to equities over time would have been better…

      Again, a great lesson in saying one thing, knowing one thing, and doing something else 🙂

      Hope all is well!
      Mark

      Reply
      1. Deane Hennigar (RBull) · Edit

        Yes, true.

        No regrets here. I never take hindsight too seriously – what ifs etc, beyond learning if it can apply and help in future. What works for me is always be forward looking and thinking.

        Things are good. Can’t stop making highs, yesterday, today again. When will it end?
        Income moving along nice also.

        Hope all is well with you too.

        Man it is windy here.

        Reply
        1. Cold and overcast this morning here. No regrets here either. A few more years of working full-time, saving, investing, I should be able to choose my work. At least I hope so. I feel like we’re getting very close!

          I have no idea where the market highs will end. I’m down a bit for the YTD since I have some U.S. stocks that are suffering but hardly thinking of selling BlackRock (BLK). Ha.

          Income should be moving higher in my April report 🙂

          Stay well!
          Mark

          Reply
          1. Deane Hennigar (RBull) · Edit

            You are close! Great feeling I’m sure. I’ve been pondering making some moves on US stuff to be more defensive. We’ll see.

            I don’t doubt that on your future income growing!!

            Reply
            1. Ha. Yes, same. I’m rebalancing by buying more defensive stuff. Utilities (AQN), industrial (WCN) in particular were on my list from earlier this year. Maybe some EQB (in taxable) since it has dropped more. In this post:
              https://www.myownadvisor.ca/5-stocks-i-want-to-buy-in-2022/

              The top-stocks in ZLB would be smart for the coming years. A blend of defensive and income.

              I wouldn’t own Hydro One given government intervention but the FTS, AQN, EMA, CPX, and BEPC are solid.

              Top-10 as of today:

              4.59% HYDRO ONE LTD CA4488112083 H 138,121,080
              3.84% FRANCO-NEVADA CORP CA3518581051 FNV 115,516,436
              3.37% METRO INC/CN CA59162N1096 MRU 101,356,710
              3.35% EMERA INC CA2908761018 EMA 100,868,616
              3.32% FORTIS INC/CANADA CA3495531079 FTS 99,857,125
              3.13% EMPIRE CO LTD CA2918434077 EMP/A 94,054,488
              3.12% INTACT FINANCIAL CORP CA45823T1066 IFC 93,991,858
              3.10% LOBLAW COS LTD CA5394811015 L 93,393,828
              2.96% BARRICK GOLD CORP CA0679011084 ABX 88,948,347
              2.70% CANADIAN UTILITIES LTD CA1367178326 CU 81,246,253

              Again, the “TULF” stocks right? Time to get ready for lower total returns me thinks….
              Mark

              Reply
              1. Deane Hennigar (RBull) · Edit

                Yes, it often comes back to those names/industries especially for retirees and seekers of more defence with long bull markets.
                I own all the ones you mentioned, and also like having ZLB now as 8/10 top names I don’t own so gives me a little exposure there. The funds record is bullet proof so far but will get the real test with the next serious downturn.
                I was referring to US market. Pretty much set in Canada. I may move from VTI to more defensive sectors and slightly higher yields. Already have REET, considering XLP, XLV, IHF, XLE or the Vanguard equivalents.

                Reply
                1. Ya. I could see more IHF and others for sure. I suspect some darker days (near-term) are coming for U.S. market and best be a bit defensive here at home and there as well. This too shall pass though. I still own JNJ and PG from U.S. along with SO for U.S. utilities there. Holding a bit of BLK for long-term growth.

                  Reply
  8. Good Morning,

    I love reading literature on money and personal financial management. And then pass it on to my 2 millenial daughters who definitely could gain a better perspective on the Psychology of Money. Just last weekend I was talking with friends about our time in high school 30+ years ago and we had absolutely no education regarding personal financial mgt. Thank you for this blog, I love it. Cheers

    Reply
    1. Eldon, love hearing that and thanks very much for reading and following along. I enjoy running it. Sadly, not too many things have changed when it comes to financial education in our school system. Some information at best but certainly not very practical nor educational. Some day… 🙂

      Mark

      Reply

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