Reviews

This book is going to be looking into the psychology of money as the title states but I have a feeling there is more to it than that. The introduction and opening chapter introduces us to the idea that nobody is wrong when it comes to spending their money and making it. While some may look down on others for spending their money or hoarding it, there is a reason behind it. Housel explains that it has everything to do with the environment we grew up in and this heavily influences how we handle our finances. For example, someone who grew up poor might spend their money in one of two ways, either they will spend it immediately in frivolous items because they are not used to handling and processing this kind of money or they will hoard it and spend virtually nothing because they fear a time when money isn’t readily available. Both habits come down to psychology and our internalize idea of money and how it should be spent.

The next chapter looks at luck and risk, both play very important roles when discussing money. This chapter uses done real life examples to show how luck and risk are two sides of the same coin. Housel also makes the point that whether you experience success, or failure does require some level of intelligence and experience but most of it comes down to luck in the end. Housel goes on to explain that stopping while you’re ahead a good and normal thing to do but social expectations drive people to reach for more and drive even those that are wealthy to commit crimes to achieve more wealth. This society founded on social expectation which has a cowling that can never be reached is a dangerous thing and will only lead to more risk taking. People are encouraged to find their enough and stick to it even if means leaving potential and opposition on the table to preserve what you have.

Now we’re begin looking at compounding which explains the question of why some people are richer than others despite having higher annual returns or better investments. Compounding is something so small and many people overlook it but it can make the difference between who becomes rich and who doesn’t. The next chapter is related as it looks at getting wealthy and staying wealthy. This chapter very clearly demonstrates how these two things are interlinked but require radically different skills that not many people possess. To obtain wealth you need to have ambition and be willing to take more than a little risk while retaining wealth requires a level of patience and paranoia that those possessing the first skill don’t have. This is why many rich people go bankrupt or lose their money, but they don’t possess the skills to retain their wealth.

We then turn to the idea that you can lose quite a lot and still win in the end which seems to be common in the art world. Art dealers often by lots which contain mostly art that isn’t worth much but a single painting in that lot might be from a famous artist and make them a lot of money balancing out the scales in ways that many wouldn’t anticipate. Disney is great example of this since Walt Disney’s first company went bankrupt and he wasn’t having much commercial success despite being known as an amazing animator, but Snow White changed everything. That one movie made Disney enough money that the company was freed from debt, and he was able to retain animators and artists. This might seem insane considering how well-known Disney is now but without that movie it might not exist at all today. In finance it is the same, it isn’t about being wrong or right with your investments but weighing up how much you made being right compared to how much you lost being wrong, this is why big companies like Disney and Amazon can have do many duds in their inventory because they make way more money on their success than they lose on their duds. So, in the end they might only be right half of the time, but they still make a fortune and knowing this combined with patience is what leads to true success in the finance industry.

The next chapter is focuses on time and how controlling our time pays the biggest returns. It was found in a study that the ability to control one’s time and do what they want when they want was a great indicator of happiness than wealth, education and job combined. It seems that money really doesn’t buy happiness, it buys freedom which causes happiness, this is why many people are unhappy because they can’t control their own time being tied to jobs or education when they really want to be doing something else. This ties in perfectly with the next chapter which shows us that possession isn’t worth as much as we are led to believe in the grand scheme of things. Freedom is something we all want, and money provides that but the steps to gain it are unique to each person.

Looking more into this we are introduced to the man in the car paradox. This states a man in an expensive car will be looking at but not in the way he desires. People will look at the car rather than the person, they will assume the person is wealthy without noticing them at all which is what the person bought the car for, to be noticed. This paradox leads into the discussion on what wealth is and it turns out to be the parts of a person you don’t see. While someone might flaunt expensive items it doesn’t necessarily mean they are wealthy but wealthy people will often shy away from flaunting and often reject normal ideals meaning their wealth is unseen by most. Savings are more important than many realizes as this can provide the freedom that the author is discussing but many overlook it or assume savings news to be tied to a financial goal which is a detrimental mindset to have especially if you’re in a lower income bracket.

Next, we turn to discussing reasonable vs rational. This chapter makes the point that rational thing to do isn’t always the reasonable thing to do and, in any business, especially finance walking this line can be tough. This chapter highlights the idea that what is rational to do, isn’t always the right thing to do. Take for example, in finance, the rational thing to do when costs need to be cut might be to cut wages or reduce the number of staff employed but because the people running the companies know their employees need employment and money, they might take money from investors or future earnings rather than cutting costs. That course of action is the reasonable one to take and it is this difference between the two that can make or break a business. A business that is completely rational might have a high turnover rate or have high levels of employee dissatisfaction while one that is reasonable won’t have these issue but make less money overall.

The next two chapters go hand in hand surprise and room for error. These are two things that every business needs to consider but often don’t. Surprise means that business need to plan for the unexpected to happen since these are often the events that can break a business and alongside this, they need to budget a margin of error for these events. This can be things are simple as having to move premises due to flooding etc. that aren’t normally planned for because they are unexpected spontaneous events. Room for error is just as important but has greater impacts for businesses. Having room for error means that need ideas and plans can be implemented without worry about the outcome since it has already been worked into the finances for it. It also means that if investments or stocks take a downturn, it doesn’t break investors because they have breathing room to account for these events.

However, we also must consider that the biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future. This is something many people who begin investing fail to account for as they have limited resources to work with to make profit. This means they invest their paycheck leaving themselves with no margin of error and if their investments don’t pan out, they have nothing in reserve to create a buffer. The smart investors create a buffer through savings meaning when they do invest their money even if it doesn’t pan out, they have a fallback option to stop them from going under.

The next chapter looks at how long-term planning often doesn’t work out the way we imagine. Many people create a long-term savings or investment plan, but life often doesn’t agree to being planned. This means a lot of investors go under early in their careers because things like sickness or jobs don’t work out throwing the entire plan into chaos. While it sounds great on paper, these plans very rarely work out and the ideal course of action is to have room for error as well as savings to fall back on to deal with events like these as they happen. We also must remember that people’s lives change over years, for example, only 27% of college graduates have jobs related to their major, meaning someone might study medicine but work in finance and vice versa. While long-term financial planning is essential, the world is constantly changing around you, including your own goals and desires and that must be accounted for in your daily financial planning as well as investment planning.

During planning it must be said that you should avoid the extreme ends of the spectrum. Whether that is assuming you will be happy with a very low income or choosing to work 60-hour weeks to gain a high one, this increases the odds that one day you will find yourself regretting these choices down the line. We also must consider that many people enter a career when they aren’t even old enough to drink and are expected to stay in that career for decades. However, the odds of still enjoying that job when you are old enough to entire is extremely low. This leads into the idea that everything has a price, and you need to be willing to pay to get the rewards. This means that the key to a lot of things with money is figuring out what the price is and whether you are willing to pay it. However, the problem with this is that the price of a lot of things isn’t obvious until you have experience them firsthand and the bill is due. This means that people investing might not understand the consequences of their actions until they must pay the bill for their choices.

The next chapter looks at investment over time with a particular focus on bubbles like the dot com bubble of the 1990s and how these occur. These bubbles often have great returns but have just as many pitfalls that investors fail to consider. We must remember that an iron rule of finance is that money chases return to the greatest extent that it can. This means if an asset has momentum, short term traders will keep it moving up but this isn’t forever as sooner or later it collapses under its own weight. The dot com bubble was the era of day trading, short-term option contracts and up to the minute market commentary and this isn’t the kind of thing you’d associate with long-term views.

Overall, The Psychology of Money was an interesting look into the finance world, both in investment and everyday spending and saving. It does provide a lot of insights and advice that everyone can use to deal with their investments and to make the most of their everyday finances allowing them to save in ways they wouldn’t have been able to otherwise. If you are looking to save for a house, or just to have some breathing room in case things go wrong then definitely check out this book.

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informative inspiring reflective medium-paced

4.5

The postscript at the end helped me understand some of the reasons why the economy is going the way it's been going the past few years - super interesting and left open-ended to reflect on why things are the way they are and possibilities about the future.

The 18 recommendations throughout the book are well-researched, easy to understand, and well-spoken. These recommendations focus primarily on why we spend money, rather than how to spend money, which was useful to me, so I can reflect on my money habits. This book doesn't feel like a cash-grab that other finance books sometimes have in their writing.

Overall, would recommend!