Psychology of Money relates to your behaviour with money. The core concept of this book is to comprehend why individuals make certain choices, and those choices determine how you create your wealth. This is the summary of Psychology of Money, and how it has examined attitudes and behaviours towards money. In this Blog post, I have deeply Explained bout the Psychology of Money Book Summary.
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Chapter 1: No one is Crazy: People have Different Views about Money
Money is viewed by people differently. People born in poverty, or who have undergone a recession, or people who have gone through rough patch in life will anchor to a different set of views. Hence, we make our decisions based on the experiences we gain in life.
It is important that we take our investment decisions based on our goals and the right investment options, and not play them by emotions. Financial outcome, whether success or failure, is an interplay of various factors like income stability, spending and consumption habits, economic conditions. Making a sound decision is the most critical among all.
Chapter 2: Luck and Risk- They have a bigger Impact than Financial Risks
Not every success is a result of hard work, and not all poverty is due to laziness. Skills and effort are at times overemphasized. Outcomes are also influenced by luck and risk. The accidental impact of actions outside of our control can be more consequential than the ones we usually take.
To explain, this the author uses the example of Bill Gates. He is smart hardworking, and also has a rare affinity with computers. He was able to establish Microsoft and thus, became a billionaire.
However, when looking at the success of billionaires, CEO’S and other rich people, it is difficult to identify what is luck, skill and risk. When you learn about the best way to manage money, we should not be observing successes and failures of people. Then, saying ”Do what she did, avoid what she did” The focus of this book is on specific individuals and more on broad patterns of success and failure. The role of luck in success needs to be identified and the risk of failure helps us to develop humility.
Chapter 3: Never Enough, learn to Shift the Goalpost
There are countless individuals, who have lost everything because they felt millions were not enough. The lesson to learn from these failures is not to risk what you do not have and what we do not need. In addition, the hardest financial skill is to stop the goal posts from moving. The cycle never ends. It is often related to comparing yourself to others, someone always will have more than us. Make goals related to one’s own accomplishments.
Chapter 4: Confounding Compounding – Leverage the Power of Compounding
Good investing is not about investing in highest returns. It is about earning great returns that you can stick with and which can be repeated for the longest period of time. Warren Buffet is a great example in this case and his strategy is not his investment strategy. It is time because he started investing at the age of 10. Compounding only works, if you an asset to grow. Start investing as early as possible to get good returns.
Chapter 5: Getting Wealthy Vs Staying Wealthy
Getting money is about taking risks, being optimistic and staying in the danger zone. Keeping money requires the opposite of taking risk. It requires the following two things:
- Humility and fear can be taken away from you
- Frugality and success can be attributed to luck, so past success cannot be relied upon indefinitely
Be optimistic about your future, however paranoid about your obstacles.
Chapter 6: Tails You Win
Few events cause majority of outcomes, when you accept some events make a huge impact. You embrace short term fears and uncertainty leading to problems.
Chapter 7: Freedom
The highest form of wealth is the ability to wake up every morning and say that you can do whatever you want and to have control over your time. This is the intrinsic value of money which is to have control over your time.
Chapter 8: Man in the Car Paradox
The Man in the Car Paradox is that people do not think you are cool because you are driving a flashy car. People think it would be cool, if they had that car. If respect and admiration are your goals, then, you need to develop kindness and empathy.
Chapter 9: Wealth is What You See – Difference Between Rich and Wealthy
We tend to judge wealth by what we see because that is the information we have. Being rich is a current income. Nice cars are purchased. Diamonds are brought, but wealth is hidden.
Chapter 10: Save Money – Your Saving Rate is Key
Building income is nothing to do with investment, or income returns and lot to do with saving rate. One can build wealth without a high income, but no chance of building wealth without a savings rate.
Savings can be created less, you can spend less, if you desire less. However, saving money is not just about goals. Saving without a spending goal gives you options and flexibility. The ability to wait and opportunity to pounce. Flexibility allows you to wait for better opportunities.
Chapter 11: Reasonable > Rational – Being Rational is Draining
You need to adopt a financial plan that you can stick to over the long- run, a rational investor takes a decision based on facts. A reasonable investor takes their decisions in the court room. Besides, Investing has a social component which is often ignored, when, it is viewed through a financial lens.
Chapter 12: Surprise – Things that Never Happened Before Happen all The Time
History can be misleading guide to the future of the economy because it does not account for structural changes, it also helps us calibrate our expectations. The history of money is useful and it should be an evolution in progress.
Chapter 13: Room for Error- Margin of Safety
Things that have not happened before, happen all time. Avoiding unknown risks is impossible, you cannot prepare for what you cannot envision. You need to avoid single points of failure. The biggest single point failure with money is sole reliance on a pay check to fund short- term spending needs.
Chapter 14: You will Change- Expect your Future Self to have Different Goals
Long- term financial planning is way harder because goals of people change over time. When, you plan an investment strategy keep in mind that you can change. In addition, you need to have moderate annual savings.
Chapter 15: Nothing’s Free, you need to pay the Price of Success
Successful investing demands a price, it can lead to volatility, fear, doubt, uncertainty and regret. In addition, when you invest in long- term, you need to willing to accept the short-term price of market fluctuations. You should view market volatility as a fee, not as a fine.
Chapter 16: You and Me- Find your Personal Identity and Play Your Own Game
Long- term investors optimistic in their ability to generate real economic growth over the next 30 years that will accrue to your investment. Short- term investors do not care about the price of a stock, as it has momentum. You need to understand your time horizon, rather than being persuaded by the actions of people because every investor is different.
Chapter 17: Seduction of Pessimism
Create an investment plan that makes sense to you and stay the course. Do not withdraw, or change your investment behaviour, when the market is a down low. The media uses fear to scare investors into making irrational decisions. You need to keep your cool in uncertain times, true financial optimism is to expect things are bad and be surprised, when they are not.
Chapter 18: When you Believe Anything
The more you want something to be true, the more likely you will believe a story that overestimates the odds of it being true. The author calls these things appealing fictions and they have a big impact on how we think of money.
The Psychology of Money Review
Independence has always been a personal financial goal. In addition, the investment strategy has to pick the right sector. It also has to rely on high savings rate, patience and optimism that the global economy will create value over the next decades.
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