The Psychology of Money

🎨 Impressions

Life changing book for me, as someone who has previously worried in the past about money and developing wealth, this book serves as a guidance to living a more calm and healthier relationship with money. This book is filled with invaluable lessons on how to manage our own psychology regarding money, which is a more determinant factor than our income. Our ability to endure and let compounding do its magic is more important than how large is our monthly check is.

🙋🏽 Who Should Read It?

Everyone. Managing personal finances is more of an art than a science, this book clearly demonstrates why. The vast majority of us stress and worry about money, with zero or very little information on what to do about it.

☘️ How the Book Changed Me

The book has radically changed my relationship with money, more than any other book I’ve read. Since it has been so transforming, I’ve decided to write the core lessons in the summary + notes section.

✍️ My Top Quotes

The hardest financial skill is getting the goalpost to stop moving. Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.
The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.
It’s a subtle recognition that people generally aspire to be respected and admired by others, and using money to buy fancy things may bring less of it than you imagine. If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.
Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor. The biggest gains occur infrequently, either because they don’t happen often or because they take time to compound.
Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.

📒 Summary + Notes

This book is quite dense and it’s becoming quite hard to summarise it in concisely. But the author gives his own conclusions, which I think are the best summary there is. Here are the key points along with some of my own thoughts.

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong. Life and economics are incredibly complex, and no one truly understands it all. Luck and risk are huge players when it comes to building wealth.
Less ego, more wealth. Your ability to build wealth depends more on your psychological ability, rather than your income. Ego is the enemy of building wealth, being able to know how much is enough is key.
Manage your money in a way that helps you sleep at night. People will have appetites when it comes to managing their earning and savings, there is not a template for all of us. The guiding idea should be “will this way of managing my money let me sleep at night?”.
If you want to do better as an investor, the single most powerful thing you can do is increase your time horizon. Compounding seems like the single most determining factor in the creation of wealth. It can make big mistakes go away and little funds grow very large. This is the key reason why Warren Buffet has been the most successful investor of all times, not because he had the best returns, but because he has been doing it for longer.
Become OK with a lot of things going wrong. You can be wrong half the time and still make a fortune. Tail events tend to carry the majority of earnings in any investment portfolio. For example Amazon Web Services and Amazon Prime are tail events for Amazon, after experimenting on hundreds if not thousands of failed products, these two are responsible for the vast majority of the company net income. The key lesson here, is that in finance it is very important to feel comfortable with a lot of small investments not going well, as usually a few good ones will pay off massively.
Use money to gain control over your time. This is arguably the most important lesson in the book for me. The highest dividend that can be payed in finance is the ability to have control over your own time. Having the ability to do things when you want it, with who you want it for as long as you want it.
Be nicer and less flashy. One might think that we buy things because possessions give us admiration and respect, but this is far from the truth. We are far more likely to achieve these things through kindness and humility.
Save. Just save. you don’t need a specific reason to save. The future economic environment is impossible to define, let alone predict what is going to happen. Savings is the best tool against life’s inevitable ability to surprise the hell out of us. Savings can makes us less afraid of our bosses, allow us to pick jobs that are more meaningful to us and navigate uncertain times more calmly.
Define the cost of success and be ready to pay for it. In order to get something nice in the future there will have invisible price tags that we will have to pay for, and we should see it that way. Risk, uncertainty, doubt and regret come along with the chance of earning something higher in the future. We should try to perceive this as a fee and not a fine in order to achieve higher earnings.
Worship room for error. Endurance is what makes compounding happen. Allowing your plan to not go as planned is essential to achieve your long term goals. Allowing for your plan to keep you in the game for as long as possible is the only way to achieve long term financial success.
Avoid the extreme ends of financial decisions. Moderation in all regards, spending a moderated time at work, with family, having fun, etc. Is way more likely to keep us in the game long term, this is what makes compounding work for us in the long term. It is normal for our goals and desires to evolve over time, the more extreme our past decisions the more likely is that we will regret them.
You should like risk because it pays off over time. But there is risk that can be fatal, never taking that sort of risk is essential in building wealth. Knowing what you can afford to loose is key here.
Define the game you’re playing. Define your financial success and know that other people are playing a different one with the cards they were given and the experiences they have lived. In order to develop wealth we need to understand when we are being influenced by other people, with different goals and incomes.
Respect the mess. Sophisticated players in finance can disagree, mainly because they have different goals and desires. There is no silver bullet that works for everyone; just understand what works for you.