In The Psychology of Money, Morgan Housel shares timeless lessons about wealth, the differences between getting rich and staying rich, and how money affects our happiness.
To do well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people.
Wealth is What You Don’t See
Growing up, I used to think that being wealthy means you have to achieve all the 5Cs’ – cash, credit card, car, condo, country club. These are the key indicators of what it means to be “rich” Singapore (well, maybe except for the country club, which is not as relevant now). I thought the reason why people work so hard was to buy those things.
Contrary to popular belief, being wealthy does not come from attaining these things. The 5Cs and the likes are societal expectations and yardsticks of what it’s like to have “made it” in life.
True wealth lies in what we don’t see.
Wealth, in fact, is what you don’t see. It’s the cars not purchased. The diamonds not bought. The renovations postponed, the clothes forgone and the first-class upgrade declined. It’s assets in the bank that haven’t yet been converted into the stuff you see.
Money is a tool to accumulate wealth, not to spend on purchasing things.
So what is “Wealth”, really?
As with most things in life, it is about practicing delayed gratification.
Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now.
Quit playing status games.
Understand the true value of wealth as something that generates options in your life.
Past a certain level of income, what you need is just what sits below your ego.
Savings = Income – Ego
Getting Wealthy vs Staying Wealthy
Getting wealthy and staying wealthy requires different sets of skills.
And there is only one way to stay wealthy: some combination of frugality and paranoia.
It’s about having the survival mentality, which helps us to appreciate these 3 things:
Do not interrupt the Power of Compounding
When investing, people tend to tell themselves “I want to achieve big returns in the stock market, and I want to get rich fast.”
Having this short-term mindset almost always fails.
Rather, you should aim to be financially unbreakable more than wanting big returns.
In fact, if you are unbreakable you might get the highest returns because you are staying invested in the market long enough to reap the benefits.
Compounding is the eighth wonder of the world, and it does not rely on earning big returns. Generating average/above-average returns sustained over a long period of time will always win.
Plan About Things Not Going to Plan
We often make plans and projections about our income, saving rate and stock market returns, 5, 10, 20 years ahead.
But think about the events that has happened in the last 20 years, which no one could have predicted – September 11, the 08 global financial crisis, and a coronavirus that shakes the world at this very moment.
The more you need specific parts of your plan to be true, the more fragile your life becomes. Sometimes, life doesn’t go as planned.
A plan is only useful if it survives reality. And a future filled with unknowns is everyone’s reality.
A good plan emphasises room for error.
Plan about things not going to plan.
Or in investing terms, margin of safety.
A frugal budget, flexible thinking, and a loose timeline – anything that let’s you live happily with a range of outcomes.
Something to take note of when you are planning out your finances this year.
Paradoxically, having a mindset that can be optimistic and paranoid at the same time helps you to survive.
Be optimistic about the future. But paranoid about what will prevent you from getting to the future.
If you remain optimistic about your future, you believe that your hardwork will reap it’s rewards eventually.
But at the same time, you must be paranoid about certain things.
Anything that blocks your path to achieving what you want in future, you must NOT tolerate.
For instance, are you aware of some bad money habits you have?
E.g. Overspending on eating out, shopaholic, etc.
These expenditures hinders your ability to save and compound your wealth.
Recognise these early to reap the best rewards, and always have a margin of safety when it comes to finances planning.
As the saying goes, only the paranoid survive. And the good times is the end of bad times.
One last note… Money = Freedom
Many of us equate money to freedom.
“If I have the money, I can get to do whatever I want, pursue my interests and enjoy life the way I want to, without answering to my boss or anyone.”
But fundamentally, the most powerful ability of money is that you can control your time.
Yes, time is controlled by nobody else but YOU.
Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.
What does it mean to have control over your time?
It means having the ability to wait for a good job offer, rather than taking the first job you can find.
It means being able to deal with medical emergencies without worrying about how you will have to pay for it.
It means to have emergency expenses and not being afraid if you have to take some time off to find a new job.
It means retiring when you want to, instead of when you need to.
And studies have shown that having a strong sense of control over one’s life is more dependable predictor of positive wellbeing. Being wealthy makes you happy because it gives you control over your time.
Using money to buy time and options has benefits few luxury goods can compare to.
Wealth creates options, and options creates happiness.
Leaving you with a parting question…
How are you generating wealth and options in your life?
The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel
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