To grasp why people bury themselves in debt, you don’t need to study interest rates; you need to study the history of greed, insecurity, and optimism.”- Morgan Housel
Psychology of Money, authored by Morgan Housel is an extremely popular book on Personal Finance Advisors. This book defines how one should fundamentally think and behave with money, psychologically. Published in 2020, this book shows how people view money, why they take debt and how can they save and create wealth at the same time.
Morgan Housel, partners at a Venture Capital firm called “Collaborative Fund”, also is a Columnist for some renowned companies such as The Motley Fool & The Wall Street Journal.
There are teaching one could entail from this book with regards, some of it is mentioned underneath:
1. Today is a reflection of your past
How your attitude is towards money or any financial decision you make is based on how you must have handled your money in the past.
You must have seen a difference in approach when it comes to investing between you and your parents. You may have seen that they believed that investments should go towards the FDs only. But you know that Fixed deposits hardly beat inflation.
So, Morgan here explains that no one is crazy about money, but there is a difference in the attitude of people towards their money depending upon their generation, mentality, income, and economic background.
If you are wealthy today, then you must be knowing how your past has been. How you focused on making the right financial decisions, there might be ups and downs, but consistency and patience are what let you move forward.
2. Power of Compounding
Morgan says that how one can become rich if he invests in assets that promise decent returns and remains invested for a longer period. He explained the power of compounding with an illustration of how it has helped Warren Buffett become one of the richest people in the world.
It is believed that Warren Buffett was not just a good investor, but instead, he was a good investor for 75+ years. Mr. Buffett is someone who is known to hold onto his investments since he was 10 years old. He stayed in the market for 70-80 years that eventually made him build his wealth. Warren Buffett’s skill is investing but the secret to his success is TIME!
Therefore, if you are in your early 20’s, then start investing today itself. Focus on long-term investing, as then and only the power of compounding will work in your favor.
3. Difference between being Wealthy VS being Rich
There is a significant difference between becoming wealthy and being rich. In certain shows like KBC, you must have seen players winning crores of money but later they eventually become bankrupt due to their poor financial decisions.
Identifying rich people is not difficult, because they lead a luxurious life even if they bought it through debts or EMIs. Wealthy people on the other hand don’t spend the majority of their income, they use their money to further grow their wealth. Their actual wealth can be seen in the forms of assets like stocks, rental income, etc.
Earning money is very difficult but more difficult is preserving it and appreciating its value. Thus, wealthy people believe in growing themselves, giving themselves greater flexibility and the ability to make the right decisions/choices.
4. Protecting your own Wealth
Creating wealth is something but protecting your wealth is more important. Many people believe that good investments mean making the right decision. But according to Morgan, good investment means avoiding bad decisions. Earning money is important but it is more important that we secure that money responsibly.