The Psychology of Money
Why our habits and biases matter more than financial models.
Doing Well With Money Has Little to Do With How Smart You Are
Financial success is not a hard science. It's a soft skill, where how you behave is more important than what you know. A genius who loses control of their emotions can be a financial disaster. The opposite is also true: ordinary people with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
This guide, inspired by Morgan Housel's book "The Psychology of Money," explores some of the key behaviors and mindsets that truly matter.
Your Relationship with Money is Unique
Your personal experiences with money shape your financial views far more than any textbook. Someone who grew up in a recession will view risk differently than someone who grew up during a boom. Acknowledge your own history and biases.
Wealth is What You Don't See
Spending money to show people how much money you have is the fastest way to have less money. True wealth is the assets in your investment account, not the car you drive. It's the financial assets that haven't yet been converted into visible stuff.
The Power of Time and Consistency
Good investing isn't about earning the highest returns. It's about earning pretty good returns that you can stick with for the longest period of time. That's when compounding runs wild. The timeline is the most powerful force in finance.
Plan for Things to Go Wrong
The most important part of every plan is planning on the plan not going according to plan. A good plan has room for error. This means having an emergency fund, diversifying your investments, and not being overly optimistic about future returns.
More Key Behavioral Insights
Getting Wealthy vs. Staying Wealthy
Getting money and keeping money are two different skills. Getting money requires taking risks, being optimistic, and putting yourself out there. Keeping money requires the opposite. It requires humility, and fear that what you've made can be taken away from you just as fast.
The Seduction of Pessimism
Optimism is the best bet for most people because the world tends to get better for most people most of the time. But pessimism holds a special place in our hearts. Pessimism sounds smarter and more plausible than optimism. It's the intellectual equivalent of a warm hug. But progress is slow, while setbacks happen quickly. This makes bad news more salient.
You'll Change Over Time
We are poor forecasters of our future selves. A 20-year-old cannot imagine what a 40-year-old will want. Therefore, long-term planning is essential, but it should be flexible. Avoid extreme financial plans that require you to stick to a rigid path for decades.