On happiness and wealth: The Psychology of Money
tl;dr • The ability to control your time is the highest dividend money pays • Saving consistently is more important than income or return rates • Raise your humility to increase your happiness
I recently finished listening to a lovely audiobook, The Psychology of Money by Morgan Housel. This was a pleasant and easy listen, full of invaluable gems for beginner investors that even the more experienced ones will appreciate. Below are some of my favorite takeaways (all of the bullet points were adapted from book quotes).
Wealth is what you don't see
If you spend money on things, you'll end up with the things and not the money.
Money's greatest intrinsic value is its ability to give you control over your time, over what you can do and when you can do it, a level of independence and autonomy that comes from unspent assets.
Someone driving a $100,000 car might be wealthy, but the only data point you have about their wealth is that they have $100,000 less than they did before they bought that car, or $100,000 more in debt. That's all you know about them.
Wealth is the nice cars not purchased, the diamonds not bought, the watches not worn, the clothes foregone, and the first class upgrade declined. Wealth is financial asset that has not yet been converted into the stuff you see.
You don't need tremendous force to create tremendous results
Building wealth has little to do with your income or your investment returns, and lots to do with your savings rate.
Wealth is just the accumulated leftovers after you spend what you take in. One can build wealth without a high income, but has no chance of building wealth without a high savings rate.
Compounding works best when you can give a plan years or decades to grow. This is true for not only savings, but careers and relationships. Endurance is key.
Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself.
Happiness = Results - Expectations
"I have something he will never have: enough." – Joseph Heller
The value of wealth is relative to what you need. Life isn't any fun without a sense of enough. Learning to be happy with less money creates a gap between what you have and what you want.
Past a certain level of income, what you need is just what sits below your ego. One of the most powerful ways to increase your savings isn't to raise your income, it's to raise your humility.
The hardest financial skill is to get the goal post to stop moving. The insatiable appetite for more will push you to the point of regret, just like food.
Staying wealthy is some combination of frugality and paranoia
Plan is important, but the most important part is "plan on the plan not going according to plan". You need short term paranoia to keep you alive long enough to experience long term optimism.
Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control. The good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.
No risks that can wipe you out are ever worth taking. You have to survive to succeed. For my own money: I take risks with one portion, and am terrified with the other.
Bottom line
“What’s the one thing you can do, such that by doing it, everything else will be easier or unnecessary?” – Gary Keller, The ONE Thing
In regards to becoming more prosperous, the one thing is consistently saving a portion of one’s income.
Understanding that your savings rate is a greater determinant to building wealth than your level of income or investment returns can be a life-changing realization. Focus on setting up systems for saving consistently – preferably automatically –, and stick to your plan for the long run.
Make sure to have a sense of enough, and don’t take risks beyond what you could afford to lose, so you can sleep well and enjoy the control over your time that greater wealth can provide.
There are many more gems in the book, including captivating real-world stories Housel shares to illustrate each of the points he makes. I recommend it!
Disclaimer
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This is not financial advice. I am not a certified financial planner or advisor, just an ordinary guy trying to sort out his own finances, sharing his perspective with no guarantees. Use the information provided at your own discretion. You are highly encouraged to do your own research before making any personal finance decision.