Book Summary of The Psychology of Money by Morgan Housel

Finance expert Morgan Housel suggests that financial success is not solely dependent on education and intelligence, but rather understanding human behavior. By recognizing how emotions and beliefs impact financial decisions, individuals can make better choices.

This guide explains why people struggle to achieve financial success, the reasons behind wanting money, and provides strategies for creating and following a long-term financial plan, while staying informed.

Why People Fail to Achieve Financial Success

According to Housel, the reason why individuals find it difficult to manage their finances is because they overestimate the importance of luck and conflate prosperity with poverty.

Lesson #1: Chance Plays a Bigger Role in Our Financial Lives Than We Give It Credit

Housel warns that we often overlook chance in financial success. For instance, Bill Gates was not only intelligent but also fortunate to have had access to a school computer in 1968.

Therefore, imitating the success of exceptionally lucky people can be misleading. Instead, Housel advises that we look for patterns among successful individuals to increase our likelihood of success.

Lesson #2: Being Wealthy And Being Rich Are The Same Things

Housel says we fail financially by confusing wealth with being rich, which leads us to imitate the spending habits of the latter. It’s challenging to learn self-control from the wealthy, so understanding the difference helps protect and preserve your money.

Understand Why You Want Money

Housel believes two key mindsets are crucial for a healthy attitude toward money: first, recognizing that money gives you control over your time, and second, acknowledging that having enough money is achievable.

Lesson #3: Money Buys Us Control Over Our Time

Housel says money’s value is in controlling your time for happiness. Americans often lack this control, leading to unhappiness. Having more control over time will make you happier, according to end-of-life interviews.

Lesson #4: Be Happy With Enough

Housel advises that being content with enough is crucial for financial success, as wanting more than necessary can lead to losing all your wealth. To achieve this, he suggests avoiding constantly increasing lifestyle standards and deciding to be happy with your current lifestyle.

What to Include In Your Financial Strategy

Housel identifies three key elements for a successful financial strategy: compounding, saving, and contingency planning.

Lesson #5: Take Advantage of Compounding

Housel stresses the significance of compounding in investing, recommending finding steady-return investments for maximum profit. He believes the duration of investment is more crucial than annual returns and cites Warren Buffet as an example of compounding’s benefits. According to Housel, people neglect compounding’s power because it seems counterintuitive and opt for less efficient methods.

Lesson #6: Prioritize Saving Money

Saving money is crucial, according to Housel, since it is the money, you don’t use. Because it is completely within your control and very simple, it is also the most dependable approach to accumulate wealth. To ensure you save money, Housel recommends ignoring others’ opinions and wanting less. Less wants means less spending and greater savings.

Lesson #7: Plan for Things to Go Wrong

Housel stresses the importance of planning for setbacks to secure your financial future and benefit from compounding. He advises against being overly optimistic and suggests preparing for a range of possible futures. To do this, he recommends diversifying investments and keeping a portion in safer options to cover potential losses.

How to Create a Financial Strategy You Can Stick To

To ensure you follow through with your financial strategy, Housel suggests two principles: Firstly, expect your future goals to change. Secondly, prioritize common sense over logic.

Lesson #8: Expect Your Future Goals to Change

Housel advises against extreme financial plans and suggests expecting future goals to change when developing a long-term financial strategy to avoid regret and missed opportunities due to the end-of-history illusion.

Lesson #9: Be Sensible, Not Logical

Housel advises prioritizing sense over logic and being flexible about goals for a successful long-term financial strategy. By investing in companies, you love and considering non-financial elements like peace of mind, you’re more likely to stick to your strategy and accumulate more wealth.

How to Counter Negative Thinking

To handle bad times in the market, Housel offers two lessons: Don’t let uncertainty deter you and keep in mind that frequent failure doesn’t mean you can’t ultimately succeed.

Lesson #10: Don’t Be Put Off by Uncertainty

Housel advises accepting uncertainty in the market to achieve long-term investing success. Rather than trying to avoid it by timing the market, he suggests embracing it and focusing on potential long-term gains.

Lesson #11: Even if You Fail Frequently, You Can Still Succeed

Housel advises staying optimistic in the face of setbacks and failures by acknowledging the role of luck in successful financial ventures. Outlier events can offset numerous smaller setbacks, so focus on overall financial health rather than individual failures.

How to Pay Attention to the Right Financial Information

To maintain a long-term financial strategy, it’s important to be aware of how the information you encounter affects your decisions. Housel suggests that knowing your personal financial goals is one way to ensure you focus on the right information.

Lesson #12: Know Your Personal Financial Goals

Housel advises setting personal financial goals and avoiding irrelevant information to make better financial decisions. He recommends creating a mission statement for your finances to discover your goals and avoid following herd mentalities in investing.

Book Summary of Rich Dad Poor Dad by Robert Kiyosaki

Robert Kiyosaki grew up with two dads: his biological father, a financially illiterate PhD who valued job stability, and his best friend’s father, a high school dropout who built a business empire worth millions. Kiyosaki calls them Poor Dad and Rich Dad, respectively.

Poor Dad believed in the traditional view of work and money, which is to get a good education, a secure job, and buy a house without a clear long-term plan. In contrast, Rich Dad had a contrarian view of finances and life, focusing on achieving financial independence, having money generate more money, and taking calculated risks.

Kiyosaki argues that most people adopt the Poor Dad view and let money control their lives, leading them to get stuck in jobs they dislike for the sake of money, trapped in a cycle of working to make ends meet.

Lesson 1: The Rich Don’t Work For Money – Money Works for Them

To become wealthy, it’s not enough to just earn a high salary – owning income-generating assets is crucial. The rich buy assets that generate income and limit spending on expenses and liabilities. Those who are not wealthy either spend all of their money on spending or acquire non-income producing obligations. The objective is to amass enough assets that produce income so that you may stop working.

Lesson 2: Buy Assets, Not Liabilities

To build wealth, focus on buying income-generating assets, not liabilities that drain your money. Assets create more money for you, while expenses reduce it. However, beware of deceptive investments that look like assets but are liabilities in disguise, such as overpriced houses.

Real assets include businesses, stocks, bonds, income-generating real estate, and intellectual property. Treat each dollar as an employee working for you 24/7 to create more wealth. Remember, every dollar you spend today is a missed opportunity to generate future income.

Lesson 3: Reduce Taxes through Corporations

Kiyosaki suggests setting up corporations to deduct business expenses pre-tax instead of paying with post-tax dollars.

Lesson 4: Overcome Your Mental Obstacles

To achieve your Rich Dad goals, you need to overcome common mental obstacles:

  • Self-doubt: Success requires more than intelligence and grades. Guts, chutzpah, balls, and tenacity play a big role.
  • Fear: Courage is needed to pursue great opportunities, and failure is an opportunity to learn and grow. Don’t let fear of failure or others’ opinions hold you back.
  • Laziness: Busy people can be the laziest, using busyness as an excuse to avoid investing in their future.
  • Guilt for feeling greedy: Embrace your desire for wealth and the power it brings.
  • Arrogance: Be open to new ideas and don’t dismiss anything as beneath you. Even sales techniques can be valuable.

Lesson 5: Build Your Economic Intelligence. Continue To Learn

Understanding accounting, investment, markets, and legislation is a prerequisite for having financial intelligence, which entails applying that knowledge to problem-solve ingeniously. Incremental improvements in knowledge can have a significant impact over time, and the faster you can learn and apply your knowledge, the greater the rewards.