Book Review: The Psychology of Money by Morgan Housel
As the name suggests, the Psychology of Money delves into the most important aspect of financial wellbeing - your mindset. As I regularly tell my clients, your money mindset is the foundation of your financial house. It drives your behaviours which determines much of your financial outcomes. Money, investing, personal finance and the like are often taught to us as something founded in math and logic. If you analyse the data, apply a formula then you should achieve the outcome expected. The reality, however, is that financial decisions are rarely driven by logic, numbers and what a spreadsheet is telling you. Financial decisions are made in everyday settings like at a BBQ, over dinner with your spouse, in a meeting or on a walk. These decisions are influenced by our emotions, ego, marketing, personal perspectives, education and even where we live.
For those that haven’t heard of Morgan Housel, he is an award winning finance writer and a partner at the Collaborative Fund. He is an excellent storyteller and his super power is taking complex information and distilling it into simple, relatable concepts.
The book itself is not a long book. It contains 20 chapters, 19 of which are lessons relating to how our psychology influences the way we behave with money and the 20th chapter includes Housel sharing his approach to managing his own money. You can read the book end to end or simply consume the chapters as independent lessons themselves. Personally, I found this book hard to put down. It might reveal the fact that I’m a huge finance nerd but it’s more probably because of the well crafted narratives interspersed with research and real life stories.
A particular highlight was how Housel eloquently explained how and why we’re all so different in the way we behave with money in the first chapter. “People do some crazy things with money. But no one is crazy. Here’s the thing: People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies, experiencing different job markets with different incentives and different degrees of luck, learn very different lessons… so all of us - you, me, everyone - go through life with an anchored set of views about how money works that vary wildy from person to person”. So in essence, every financial decision we make makes sense to us at the time based on our unique view of money and how it works in the world. Personal finance is just that, it’s personal.
Throughout the chapters Housel imparts many wise messages on how to think about and manage your money. Three of my favourites (and it was hard to choose!) include:
“Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own. But the foundation of ‘does this help me sleep at night?’ is the best guidepost for all financial decisions.”
“Use money to gain control over your time, because not having control over your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to , pays the highest dividend that exists in finance”.
“Be nicer and less flashy. No one is as impressed with your possessions as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than through horsepower and chrome”.
The book is very America-centric in its facts, figures and focus. That’s no surprise given that Housel is American and America remains the dominant global superpower, for the time being at least. Australia’s 30-year recession free steak does get a mention though. So that’s something.
This book is excellent if you’re looking to understand why we do what we do with money and how we might think about it differently. It’s not a step by step guide on how to get rich or invest in EFTs but there is practical advice on saving, avoiding lifestyle inflation, thinking about risk and ensuring you have room for error in your financial planning.
I loved it and would absolutely recommend it as a book to read. Short but full of compelling and engaging narratives on my favourite topic - the psychology of money.
4.5 🌟