The Psychology of Money by Morgan Housel

Money is many things to many people. To some, it may be the currency of leisure, security, self-esteem or recognition of a job well done. How then, can it mean the same to everyone? Morgan Housel’s The Psychology of Money is about this and more.

Jason Zweig, a leading financial journalist with the Wall Street Journal sums up The Psychology of Money in the following words,

“[Housel] writes beautifully and wisely about a central truth: Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.”

Precisely because it is a repository and source of so many things, managing money can be tricky. The Psychology of Money helps us understand just how our individual psychological make-up and personal history can influence how we approach saving, investing and spending money.

Housel started out in financial journalism in 2008, during the worst recession in 80 years. He writes,

“The first thing I learned after the financial crisis was that no one could accurately explain what happened, or why it happened, let alone what should be done about it. For every good explanation there was an equally convincing rebuttal.”

That’s how he leaves it. With no talk of how the repealing of the Glass-Steagall Act may have played some role in the global crisis. As might have corporate greed. Instead, Housel concluded that the 2008 financial crisis could be better understood through the lenses of psychology and history, not finance.

Even in the chapter Never Enough which focuses financial crimes and greed, Housel writes about convicted pariahs like Bernie Madoff and Rajat Gupta but not Lehman Brothers which went bankrupt in 2008, or HSBC which admitted to laundering money for terrorist organisations in 2012. This is not particularly surprising given Housel is a partner at The Collaborative Fund, a venture capital firm based in New York.

That said, The Psychology of Money is still an entertaining read if you’re looking for inspiration to start investing for the future and need a little push.

However, if you were expecting a hard-nosed book about how to pick stocks or balance your investment portfolio, this is not it. The good news is Housel does give his readers some common-sense money tips which are likely to hold them in good stead. And he dispenses them without bar graphs, number-crunching or financial jargon.

One of Housel’s key points is that managing money well isn’t necessarily about having a degree in finance or knowing a great deal about money matters. It’s about your behaviour—about having the discipline to save a little something out of the smallest pay cheque, or not panicking when the market takes a downturn.

Another good piece of financial advice is getting the goalpost of your annual expenses to stop moving with every pay raise or bonus. Housel states,

“Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations.”

That’s a simple but pithy credo. However, what is certainly far from simple is wrapping one’s head around the idea of compounding.

Regardless of the fact that your accountant may have shown you a chart of how money compounds over the years, compounding is one of those things that is practically impossible to grasp intuitively. It just feels bonkers. Which, however, does not make it untrue.

Morgan Housel illustrates the power and inevitability of compounding and how time is the greatest financial tool known to humanity. Morgan illustrates his point with the example of multi-billionaire Warren Buffett who famously started investing seriously at the ripe old age of 10!

Buffett is considered one of the most successful investors of the modern age with his firm Berkshire Hathaway posting an average annual return of 20%. It suffices to say that he’s great at investing and has tons of money. And yet, $81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65^th birthday. Such is the absurdly stupendous power of compounding. Take a minute to think about that.

Now that we’re back after considering Warren Buffett’s billions, let me state the obvious. Despite all its cosy anecdote-spouting charm, there’s no getting away from the fact that The Psychology of Money is rather simplistic and shies away from addressing the perks enjoyed by the very rich.

For instance, Housel doesn’t really speak about the merits of receiving million-dollar inheritances or the privilege granted to the uber-rich of paying practically zero taxes on their ever-accumulating wealth. That’s probably, why they can afford to let their millions coolly compound into billions during a financial slump while the rest of us need to worry about rent, inflation and other plebian matters.

Instead, The Psychology of Wealth tells us that while we rely on outward appearances to gauge financial success, wealth is silent and often sits unseen in bank vaults and saving accounts. That’s a fair point and also makes financially-conservative people, like myself, feel smart. After all, I bought this book with money I didn’t spend on purchasing Bitcoin!

That aside, Housel highlights the point that money’s greatest intrinsic value is its ability to give you control over your time.

“The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.”

I won’t argue with that. Mostly, because I agree with it wholeheartedly.

To sum up, The Psychology of Money is a light read which makes you think about what you want from your money. It also teaches us that getting money and keeping money require completely different mindsets, and why financial planning is important even though most plans rarely survive an encounter with the real world. However, the hype around this book had me expecting more. You, dear reader, would do well to manage not just your finances, but also your expectations from The Psychology of Money.