Learnings from The Psychology of Money by Morgan Housel

The Psychology of Money by Morgan Housel is not a typical finance book that talks about numbers, investing formulas, or complex strategies. Instead, it focuses on human behavior and how our emotions and habits shape our financial decisions. The book is full of real-life examples that help us understand money in a simple and practical way.

1. Wealth is What You Don’t See

Many people think wealth is about having fancy cars, big houses, and luxury items. But in reality, true wealth is the money you don’t spend. If you see someone driving an expensive car, it just means they spent money on it, it doesn’t mean they are rich.

Imagine two friends, ABC and XZY. ABC buys a brand-new sports car on loan, while XYZ drives an old but reliable car and saves his extra money. In ten years, XYZ has a big savings account, while ABC is still paying off his debt. XYZ is wealthier, even though it’s not visible.

2. Luck and Risk Play a Huge Role

Success in money is not always about hard work. Sometimes, people get lucky, and sometimes, they face risks they never saw coming. A single financial decision can change everything. Bill Gates became successful because he had access to a rare high school computer in the 1970s. But many other smart kids never got that chance. His success was a mix of skill and luck.

3. Saving is More Important Than Investing

Many people focus on earning high returns from investments, but if they don’t save enough, it won’t matter. The habit of saving consistently is more important than how much you earn from investments. Imagine, ABC earns $50,000 a year and saves 20% of it. XYZ earns $100,000 but saves only 5%. Even though XYZ earns more, ABC will have more wealth in the long run.

4. Spending to Impress Others is a Trap

Many people buy expensive things to show status, but in reality, others don’t care as much as we think. Financial security is better than showing off. Imagine ABC buys the latest iPhone every year to impress friends, but his bank account is always empty. Meanwhile, XYZ keeps using her old phone, saves money, and feels stress-free about her future.

5. Compounding Works Like Magic

The earlier you start saving and investing, the more your money grows over time. Small consistent investments can turn into a huge fortune because of compounding. If you invest $100 a month from age 20, you will have much more money at retirement than someone who starts investing $500 a month at age 40.

6. You Don’t Need to be a Genius to Get Rich

Making money is not about being super smart; it’s about good habits, patience, and making fewer mistakes. Just imagine ABC never tries to time the market or pick the best stocks. He just saves and invests in a simple index fund every month. Over time, he builds wealth without stress.

7. Control Over Your Time is Real Wealth

Having money is not just about buying things; it’s about having freedom. The ability to work when you want and not be forced to do something you hate is real financial success. ABC has enough savings to take a year off and travel. His friend XYZ earns more than him but is stuck in a job he hates. ABC is financially freer.

8. The Market is Unpredictable – Stay Consistent

No one can predict when stock prices will go up or down. Instead of trying to time the market, focus on long-term investments. Imagine, ABC panics when the stock market crashes and sells all his shares. Meanwhile, XYZ stays calm and keeps investing. After a few years, XYZ’s investments recover and grow, while ABC regrets his decision.

9. People See Money Differently

Everyone has different experiences with money based on how they grew up. Someone who grew up poor might save aggressively, while someone who always had money might spend freely. ABC’s parents lost their business when he was young, so he is always careful with money. On the other hand, XYZ never had financial struggles, so he doesn’t think much before spending.

10. Avoid Extreme Financial Decisions

Being too aggressive or too conservative with money can be dangerous. Balance is key. Just imagine, ABC puts all his money into risky investments and loses everything. XYZ, on the other hand, never invests and keeps all his money in a savings account, which loses value due to inflation. A balanced approach would have been better for both.

I’m not a book reviewer. I wanted to share its insights because I know there are plenty of people who don’t naturally enjoy reading. If they can take away even a few of these points and make their lives a bit better, then that’s a win.