20 Important Financial Lessons From Morgan Housel’s The Psychology of Money

John Ajayi
10 min readJun 21, 2021

“Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is really hard to teach, even to smart people.” — Morgan Housel

Two people: a tech executive and a janitor — one went broke while the other was worth $8 million at the time of death.

The tech executive developed a major component in Wi-Fi systems and made a lot of money from this. On the other hand, the janitor was a high school graduate who cleaned floors and worked as a gas station attendant.

Like many newly rich people, the tech executive had money and ensured that people knew he had money everywhere he went. He once told a hotel attendant to buy him gold coins worth $1000 each. He and his friends ended up skipping these gold coins at sea to see whose coins went the farthest.

Money spent is not money saved. Thus, it was not surprising that the executive later went broke.

On the other hand, the janitor saved his money over the years and invested in the stocks of blue-chip companies. These assets compounded to $8 million.

These two stories are not fiction but real-life accounts told by Morgan Housel in his book, The Psychology of Money.

Before the thought crosses your mind, this book is not saying ‘live your active years like a poor person and retire with more than enough money.’ The premise of this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave.

It is less about how much you earn but how much you keep.

I read The Psychology of Money two times in one week, listened to podcasts that interviewed the author, and saw several reviews. Here are 20 lessons I picked from the 20 chapters of the book.

Financial success is not about what you know but how you behave.

If financial success is about how much you know, people with ivy-league education or degrees in finance-related subjects should never go broke or be neck-deep in debt. However, we’ve heard the news of former executives of financial corporations who have declared bankruptcy or have had their properties repossessed.

When you spend above your means or take on debts to fund an expensive lifestyle or buy things you don’t need, you can go broke.

Your personal experience with money makes up about 80% of how you think the world works.

Before 2020, Australians didn’t experience a recession in 30 years. Unemployment was low, the standard of living was high enough, and the economy saw growth. However, someone in the United States who experienced the dot-com bubble burst of the early 2000s and the financial crisis of 2007 would be more skeptical of investing in the stock market than someone in Australia whose economy experienced 30 years of growth.

Someone who grew up rich will see money differently from someone whose family had to scrap to survive. To one, money is abundant; to the other, money is a scarce resource with a lot of value.

These different perspectives of money influence financial decisions. We make decisions based on our unique experiences and what seems to make sense to us in a given market.

Nothing is as good or as bad as it seems.

Every outcome is guided by forces other than individual effort. Luck and risk play a vital role.

Hardly does anyone like to tie their success to luck, but many had opportunities others didn’t. Bill Gates openly admitted that if he hadn’t gone to Lakeside School, there would have been no Microsoft. Of all the 303 million high-school-age people in the world in 1968, only 300 of them attended Lakeside School.

In investing, don’t be quick to blame yourself or others for bad decisions. You might have invested in a promising company, but you couldn’t have calculated the odds that an executive in the company would have a major screw-up that will send the stock price crashing.

The trick is to arrange your financial life in a way that a bad investment here or a missed financial goal there will not wipe you out so that you can keep playing the market.

When things go bad, know that the outcome is just a reflection of the unforgiving realities of risk.

Knowing when to stop moving the goalpost.

Housel made the point of people looking at others to set their income goals. The NFL rookie who earns $500,000 annually starts to look at another player on the same team who earns $30 million a year. The player earning $30 million is looking at the player with a 10-year $500 million deal.

Shifting the income goalpost is why many people do crazy things. It is the reason why someone worth $100 million would still be involved in insider dealing for more money.

Social comparison is the root cause of this. You’re looking at someone you know who owns a Porsche. You know you can’t afford it on your income, but you’re thinking of taking a loan to buy it. Would you also take loans to maintain it?

Many things are not worth risking, no matter the financial gain.

  • Reputation is invaluable
  • Freedom and independence are invaluable
  • Family and friends are invaluable
  • Being loved by those you want to love is invaluable
  • Happiness is invaluable.

Remember that there is no reason to risk what you have and need for what you don’t have and don’t need.

Compounding grows your money with time.

$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday. That’s crazy. Compounding made this happen.

If you invest $1000 in stocks and it yields 15% returns annually, your money will be $1150. You take that money and reinvest, earning the same 15%, your money will be $1322.5 after the second year. After the 5th year of compounding, with the same 15% returns, your money will be $2011.4.

Of course, I know that the stock market is volatile and returns may vary every year. You might even lose money when the stock prices plunge, but if you wait and keep reinvesting everything, your money will snowball with time.

Pay attention to what Charlie Munger said, “the first rule of compounding is to never interrupt it unnecessarily.”

Getting money and keeping money are two different things.

With hard work, a strong work ethic, ambition, and exploring opportunities, a person can become rich. However, keeping the money requires a whole new different skill set.

Having a survival mentality will help keep the money. Ensure that you invest what you can afford to lose because if that investment goes the other way, you want to be able to keep playing the market.

The biggest win is not winning the highest returns, but being able to comfortably play the market the longest, without getting wiped out.

80/20; 90/10

In investing, you almost can’t avoid making wrong decisions. Companies and startups with promising futures fail a lot of times, with many of them never coming back.

Venture capital companies make the most returns from 10% of investments. The same can happen to you. Of all the stocks you own, it may be one or two that will bring the most returns, with others doing averagely and others failing miserably.

Having this mindset will help you see a broader perspective of failed investments.

The highest dividend

Controlling your time is the highest dividend money pays. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless.

It is less about being able to afford to drive nice cars, and more about being able to quit a job you hate and still stay afloat financially before you get the one you want.

It is about the freedom to spend quality time with your loved ones, and less about the house with more bathrooms than occupants.

No one is impressed with your possessions as much as you are.

When people see a nice car, they admire the car, imagine themselves behind the wheels, but pay less attention to the driver. The attention is on the car.

The driver who bought the car for respect and admiration thinks people are paying attention to them. But the reverse is the case.

Wealth is what you don’t see

The nice car and mansion are not necessarily symbols of wealth. Those could have been bought with debt. Of course, you need a certain level of income to get that kind of purchase approved, but those things don’t reflect what you have in your bank account or savings.

Wealth is the money saved, not money spent. It is the diamond not bought, the watches not worn, the clothes forgone, and the first-class upgrade declined. Wealth is the financial assets that haven’t been converted into the stuff you see.

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

You can earn $300,000 a year and still have little or no savings, or even in debt, because of the lifestyle you lead. The world is filled with people who look rich but are broke, and people who look modest but are wealthy.

It helps to know how much you need in a month to have a reasonably comfortable lifestyle. The rest goes to your savings. When you get a raise, you don’t spend the increase on nice things, but add it to your savings. That’s wealth building.

In investments and financial decisions, it is better to be reasonable than rational.

It is rational to invest all your savings in a company you’ve studied and found to have been doing well for years. You’d make more money if you invest $100,000 than if you just invest $10,000. However, it is not reasonable. What if someone high-up in the company screws up and the stock price falls drastically?

If you invested all your money in that company, you may be wiped out. Imagine the fate of those who invested all their money in Lehman Brothers. The company does not exist anymore and all their money is gone.

When it comes to investing, history is not the best teacher.

If there is anything you’ll learn from history is that things change and surprises happen. Things that have never happened, happen all the time. Nobody could have anticipated the coronavirus or the 9/11 attacks.

History gives us little or no guide about the things that will affect the economy because there will always be unprecedented events.

Always give margin for error.

Investing can be like playing cards. If you go all in and you lose, you’ll get wiped out. However, if you go little by little, you have a chance of winning back what you’ve lost.

Don’t invest all your savings, have an ample amount of cash. Of course, money loses value over time and interest rates don’t make up for anything, but your money in the bank is safer than money at the risk of being wiped out.

You must plan on your plan not going according to plan. This plan is very important. Many times, stocks usually return below the industry average, but you’d be able to sleep at night knowing your family’s future is secure.

Change is constant.

You’re most likely not what you wanted to be when you were 5 years old. You may even not be what you wanted to be when you were a teenager. That’s life. Things change.

This also happens in investing. You might have made terrible financial decisions in the past, but you are no longer the same person. You need to accept the reality of change and move on as soon as possible, instead of regretting decisions made in the past.

In investing, volatility is the price you pay for more returns.

Everything has a price, but not all prices appear on labels. When you invest in stocks, be ready for a rise and drop in value. The drop in value is the price, but not a fine.

When some of the stocks we own drop in value, we start to blame ourselves for making a bad decision, and the drop is the punishment for the decision.

Volatility, fear, doubt, uncertainty, and regret come with investment in stocks. And this happens across the board. Monster Beverage rose 319,000% from 1995 to 2015 but traded below its previous high 95% of the time.

Know the game you’re playing.

The truth is that you’re not playing the same game with everybody. Some people play long-term while some others play short-term. Day traders may pump the price of a stock so very high, that you start to ask if the intrinsic value of the company is worth the high.

However, day traders are having the time of their lives creating a bubble that will make people buy into the company. What then happens is that day traders sell at the all-time high, raking in large amounts of profit.

A person playing long-term who buys the stock may be left with an overpriced stock that will fall soon.

When you want to invest, do it because you see potential in the company, and you believe in its products. You should avoid being swayed by the actions and behaviors of many because you don’t know the game they’re playing.

Be careful of the seduction of pessimism.

Bad news and pessimistic views get more attention than good news or optimistic views. A 40% decline in 6 months of the price of a stock will make the news while a 180% growth in 2 years would hardly.

Bad stories always seem like good advice or a cautionary tale.

The economy is a reflection of our pessimistic or optimistic narrative.

In 2008, once the narrative that home prices will keep increasing broke, mortgage defaults rose, then banks lost money, then banks reduced lending to businesses, which led to layoffs, which led to less spending, which led to more layoffs, and on and on.

When people are optimistic about a company, they will buy the stocks and this will increase the price, giving the company more money to grow.

Do what helps you sleep at night.

The best universal guidepost for all financial decisions is the question, ‘does this help me sleep at night?’ Now, it is not about earning the highest returns or your savings rate, but the way you manage money that helps you sleep well at night.

Knowing that your family is financially secure no matter what happens is a good place to start.

There you have it: 20 important financial lessons from the book The Psychology of Money by Morgan Housel.

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John Ajayi

Walking through this adventure called life. Am I the only one who thinks this way or life is just like Jumanji without dinosaurs?