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

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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.

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.



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John Ajayi

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?