The Psychology of Money in 10 Minutes (MUST READ)


This Book Is the Perfect Follow-Up to The Millionaire Next Door

Photo by Mathieu Stern on Unsplash
I entered the world of equities in late 2021. The markets were bullish then. I made good profits.


The bubble burst only a few months later. And now I have to watch my portfolio bleed red everyday. It’s been a sobering experience.

I did not have the right mindset to survive the stock market.

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Driven by greed and FOMO, I’d make really bad investments. That’s what inspired me to learn more about how money works.

I’m sure I’m not the only one who’s found himself in this situation. There’s no definitive way to predict how markets will behave tomorrow. What you do have control over, is your own behavior.

It’s not an easy task. The most primitive parts of the brain direct our behavior. You need to understand how you actually think about money.

Morgan Housel’s The Psychology of Money fills this niche. The book explores how human psychology drives money matters.

Housel’s prose is well-written. He presents ideas in a crisp, easy to digest manner. However, with over 20 chapters, TPOM is a rather long read.

That’s why I wrote this summary. I’ve covered the important ideas and related them with topics explored in other famous personal-finance books.

What follows is a 10-minute guide to help you start your journey towards financial freedom.

Read also: 5 unavoidable laws about life

8 Billion Opinions

We form opinions based on our life experiences. With enough experience, one might even feel that one knows how the world works.

What we tend to disregard is that there are eight billion people in the world. Everybody has their own opinions, and every single person is right — in their own worlds. Something might make the perfect sense to one person, and still seem crazy to an outside observer.

Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works

Let’s take an example — someone born in the 1970s would’ve seen the rise of index funds. To them, this form of investing would appear very attractive. On the other hand, this person’s children, born in the 90s, might grow up to believe in cryptocurrencies. After all, they would’ve witnessed first-hand as Bitcoin rocked the world.

This goes to show that you mustn’t limit yourself to your own experiences in making financial decisions. Read books, watch videos, attend seminars — do whatever it takes to gather more information. Make decisions based on this intel; not emotions.

Success Is Just the Tip of the Iceberg

The world is infinitely more complex than the human mind can comprehend. Oftentimes, the consequences of your actions are governed by factors outside of your direct control.

For example, let’s say an entrepreneur comes up with the perfect product for a market niche. She might get lucky with her timing, and find that consumer sentiment is totally on her side. But some disaster can hit without warning, disrupting the market and completely upending her plans. There’s no accounting for unforeseen risks like these.

Nothing is as good or as bad as it seems

When making financial decisions — whether you’re evaluating yourself or critiquing others — take luck and risk into account.

Never make decisions based on the one success story that made it to Forbes’ front page. Similarly, don’t discount an idea because of somebody else’s failure. These are extreme cases, and are most likely to be outliers.

The outcome of an endeavor is easily visible. However, we don’t always see the effort that went into it. There’s no way for an outsider to know if it was a lucky break, or how muck risk it involved. Always remember that nothing is as good, or as bad, as it seems.

For your part, just keep working towards your goals. Learn from mistakes — your own as well as those that others make. And never let success get to your head. At the same time, don’t allow failures to discourage you.

Do You Have Enough?

In this economy, and with inflation as high as it is, depending on one job is probably not a good idea. It’s great if you have a productive side hustle. It’s even better to have multiple income streams.

But ask yourself this: when will you have enough? Because constantly pining away after money is not conducive to your mental health. This a mindset leads you to greed, and has destroyed many smart people in the past.

There are ways to escape this trap. Housel offers two practical tips —

Stop moving the goalposts

Set definite financial goals for yourself. Once you’ve achieved them, step back and enjoy the results of your hard work. You’ll be happy as long as you can temper your expectations.

Never compare yourself to others

Your life is your own. It’s you thoughts, opinions, and decisions that brought you where you are now.

There’s no point in comparing yourself to others. You’ll give some vague, external agency power over you. It’ll make you envious. And envy destroys mental peace.

Understand The Power of Compounding

There exist processes in this universe where the results of one step serve as the fuel for the next step. Think of the tiny rivers that carve out grand canyons in the landscape over millennia.

Housel argues that wealth generation follows similar patterns. There’s no doubt about how important it is to make shrewd investments. However, the true key to generating vast fortunes actually lies in how long you’ve been at it.

$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities

Let’s contrast the achievements of Jim Simmons and Warren Buffet. The former is renowned as the world’s greatest investor. He’s been able to generate 66% returns on his capital.

On the other hand, Buffet has “only” ever managed to make 22% returns. These numbers seem to indicate that Simmons wealth would be miles ahead of Buffet’s. In reality however, it’s Buffet that has built the larger empire by far.

How? The answer is compounding. Where Simmons began investing at 50, Buffet entered the field when he only 10 years old.

Tiny efforts, made consistently over long periods of time, lead to extraordinary results. James Clear explores this fact in great detail in his book Atomic Habits. You can read my summary here.

Getting Rich Vs. Staying Rich

The rise of the Internet and social media has made it very easy to set up and monetize a side-hustle. You can trade stocks, F&Os, even cryptos, and make quick profits. With enough capital and grit, it’s not too difficult to get rich these days.

Staying rich is the hard part.

Go to any major street in any big city, and you’ll get inundated by garish advertisements. Look at your phone, and I’m sure you’ll have plenty of messages about pre-approved credit cards and “low-cost” loans. There’s loyalty points, “gift” coupons, and a hundred other tactics of ensnaring consumers.

Sure, modern technology has made money making easy. But it’s also provided us with multiple ways to spend it all.

The key to preserving your wealth is frugality. Housel likens this to survival strategies. You need to cultivate a certain amount of paranoia regarding your money.

Never assume that yesterday’s success will translate to today or tomorrow. Don’t get complacent. Make all financial decisions with the same amount of care and research you put into your first endeavor.

The only factor you can control generates one of the only things that matters

If you’re reading this article, I’m sure you’re not one of the proverbial 1%. You’re just a normal person like me doing their best to make good financial decisions. The way our world is set up, people like us don’t have much control over what happens to our money.

It’s macroeconomic factors like inflation that ultimately determine the value of our money. What you can control, however, is your spending.

Saving money is an art. It goes hand-in-hand with the concept of frugality. You need to limit your expenses, and save as much as possible. Learn to separate your needs from your wants. And while you’re at it, teach yourself the difference between assets and liabilities.

It’s not something you’ll figure out in one day. Give the problem the respect it deserves. Introspect. Find out how you’re using your income. Then, think of ways to optimize your expenditure.

With these initial steps, you will build a robust system of managing money. You’ll form good habits that last a lifetime. This, more than any financial or business strategy, is what will allow you to preserve your wealth.

Tails, You Win

In statistics, the Law of Large Numbers predicts the results of repeating an experiment multiple times. It states that, if you repeat an experiment enough times, the average of your results will approach the theoretical probability of success.

Good investing is not necessarily about making good decisions. It’s about consistently not screwing up

As an entrepreneur, you can apply LLN to your work. Think ten times larger and work ten times harder. Massive action is the key to winning massive rewards. And when your goal is that high, you’ll win even if you fall short. This is the crux of 10X thinking.

LLN also ties in perfectly with the concept of diversification in investing. When you have a large portfolio, you’re not dependent on any one stock. You’ll win, provided a reasonable number of companies perform reasonably well.

You can be wrong half the time and still make a fortune

You don’t need to be perfect in order to be wealthy. You can be wrong half of the time, and still make millions. All you have to do to never stop pushing forward.

Be Time-rich

What do you think is the ultimate benefit of building a vast amount of wealth? Is it fame? The ability to buy whatever you want, whenever you want it?

Housel argues that the greatest dividend money pays is the control over your own time. People who identify themselves as “happy” generally tend to have some freedom on how they use their time. Several studies point to the fact.

And that’s why money is important. Having money means you have options in life. It means that you don’t need to stick around at a toxic workplace. You don’t have to force yourself to go to work when you’re not feeling well. You can comfortably go job hunting. Maybe even take a vacation if you need it.

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.”

Focus first on building a nest-egg for yourself. Something that can tide you over a few months without pay. Once you have this, you can begin considering your next steps in life.

Ultimately your goal should be to align your earning with building a life where you have control over your own time. Remember that it’s not enough to simply accumulate wealth. You should also have to time to enjoy its returns.

Read also: 6 unusual secrets of the happiest people

Lavish Is Banal

When I was young, I wanted to buy a spots car, a luxury yacht and a penthouse suite.

But think about the times you’ve seen someone flaunt these status symbols. Chances are, you won’t be able to recall the person. You’re much more likely to remember the excitement the sight triggered in you.

Luxury items are definitely eye-catching. It’s their entire purpose. They are also completely redundant.

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

In day-to-day life, you only need a car to get from point A to point B. Driving a a Honda Civic will give you the same result as a Ferrari. Only difference is that the latter costs a fortune, and demands another fortune in maintenance.

All status symbols are the same: tempting, but ultimately pointless. You need to realize that luxury items are actually liabilities, not assets. They drain money away from your pocket.

Spending money to show people how much money you have is the fastest way to have less money

This is the most important perspective shift you’ll need to make in order to form a healthy financial mindset. Learn from America’s millionaires — live below your means.


This brings us to the close of my summary of The Psychology of Money.

I found it an engaging read with lots of intriguing ideas. I was able to relate these concepts with things I learned from many other authors. TPOM really ties most of the popular personal finance books together.

And this is the truest value of the book. Describing the underlying psychology, TPOM explains concepts from the ground up.

I hope my summary will be useful for you. Do leave your thoughts in the comments, and subscribe to me to catch my latest work.

CONTRIBUTED BY Akshayarka Deka

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