Book Summary: The Psychology of Money: Three Ideas to Improve Your Relationship with Money.

Hey there! Welcome to my monthly Book Summary series, where I get to share with you the incredible insights I gain from the books I read. Every month, I pick out one book and dive deep into its teachings, distilling it into bite-sized nuggets of wisdom that you can easily digest.

The book: The Psychology of Money by Morgan Housel

My impression

TLDR: This book is a must for those who want to improve their relationship with money.

I had a great time reading this book. The author, Morgan Housel, beautifully explains concepts and examples to key messages for readers to take home on each topic. He used clear and simple language that non-native speakers like me always appreciate.

I expected to learn how to approach investing and got what I expected. But I was surprised by the pearls of wisdom Morgan Housel generously shared in the book. A lot of information and knowledge in the finance context can and should be applied to how we live. Reading this book gives me a sense of warmth and security, almost like Morgan sits next to you and shares what he wants his child to know.

“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”, Morgan Housel.

Reading this book, I expected to learn how to approach investing, and got what I expected. But I was surprised by the amount of wisdom Morgan Housel generously shared in the book. A lot of information and knowledge in the finance context can and should be applied to how we live. Reading this book gives me a sense of warmth and security, almost like Morgan sits next to you and shares what he wants his child to know: how to manage their money and be happy doing it.

Three Ideas to Improve Your Relationship with Money.

1. We can’t win the game if we don’t know the rules.

Apart from money, successful investing demands you to face market volatility and emotions. The first time I tried investing, I didn’t consider the amount of fear, self-doubt, and regrets that came with the uncertainty of the market. They made the experience overwhelming. Of course, I panicked and made poor decisions.

Many investors try to avoid this cost by imitating someone’s decision despite their goals, principles, and risk tolerance differences. They’re playing a different game. The result is clear: they lose their money, time, and hope.

To have a better idea of the game you’re playing, ask:

  • What is my investing goal?

    • My example: I want a well-diversified portfolio with enough dividends to cover my day-to-day expenses. I want to feel free and do whatever I want whenever I want.

  • What do I need to do to reach my goal?

    • My example: I need to keep saving money for my investment fund. I’ll also need to learn investment principles and mindsets to use that knowledge to build my portfolio. Lastly, I’ll need to be patient and have backup funds to stay in the game.

  • How do I know I reach my goal?

    • My example: I have the income stream from dividends that cover my daily expenses, $100k for an emergency fund, and an additional 30k for my traveling annual trip. I should feel confident in my investment skills and that I’m comfortable with managing my portfolio.

  • Remember, there is no single correct answer, just one that works for you.

2. Focus on your happiness.

“When forced to choose, I will not trade even a night’s sleep for the chance of making extra profit.” Warren Buffet.

We become interested in our finances because we believe money can provide us the happiness we yearn for. And it does if we use it right. Money provides us with a place to live and food to eat. It feels much safer knowing we have money to cover our expenses. It also feels amazing when we wake up every morning and say, “I can do whatever I want today.

However, it’s crucial to know what makes you happy. Many people keep focusing on making more money without asking themselves what they really need. Some may want a big house for their child to grow up in, while some may want it so they can start pursuing more meaningful careers, and some may find having a lot of money increases their self-esteem. Again, the answer will vary depending on each person, and there’s no right or wrong.

To see your situation clearly, try asking yourself:

  • What do you want money for?

    • My example: I want money to feel safe. I’ll always have enough to live comfortably for my lifestyle, which means dining out twice a week, paying a decent apartment rent on time, eating high-quality foods, traveling twice a year, and playing games with my friends in the morning.

  • Do those things give you happiness?

    • My example: Yes, they do.

  • Do you actually need money to get those things?

    • My example: I need some of them, such as apartment rent, traveling, and eating high-quality food. However, I discovered that the cheaper one would also do the work for me, so I wouldn’t need as much money as expected.

Spend money on what makes you happy and allows you to sleep soundly at night.

3. Be humble and nicer.

Things that have never happened before happen all the time. “Scott Sagan”

What we think we know are fractions of what happens in this world. We can’t rely solely on history since there’s always a possibility that something could happen. We need to remain humble, improve ourselves, and stick around for a long time without wiping out or being forced to give up. Those who can stick to the game long enough will make money.

Being humble also means that you know money and identity are not linked. Many believe respect and admiration are earned by making a lot of money and buying fancy things. The truth is, “No one is impressed with your possessions as much as you are.” People may look at your fancy car and think, I want that car. They wouldn’t think, “I want to be that person.” If you want respect and admiration, be kinder and more empathetic.

To become more humble, ask:

  • Is there a possibility that I’ll be wrong?

    • My example: Thing always goes wrong. The stock I was confident about could easily plummet. My decade savings account was burned to ash by making one wrong investment decision.

  • How will I reduce the chance or solve the problem if things go wrong?

    • My example: I have to have an emergency account. I’ll also need to continue learning about investment and analyze each stock carefully before making a decision. Finally, I’ll never invest anything with anyone except certified institutions.

  • To become more nicer, ask:

  • How can I help others without spending money?

    • My example: Instead of lending my friends money, I can teach them what I’ve learned about finance and help them manage their money for a long-lasting benefit.

  • Do I need this thing to become a kinder and likable person?

    • My example: I don’t need a fancy webcam to be kinder or likable. I must be authentic and non-judgemental to other people.

Humility, kindness, and empathy will bring you more respect than horsepower ever will.

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