18 Wealth Lessons From The Psychology of Money

I've read a lot of personal finance books but none goes into how we think and behave around money better than this book the psychology of money by Morgan housel so in today's video let me share with you the 18 wealth lessons from this amazing Book lesson number one recognize that when it comes to our money no one is crazy we easily judge people based on their worldview or where they decide to invest their money we judge someone who is putting all their money into gold as someone who is still living in the 16th century we

judge someone putting all their money in nfts as someone living in a fantasy world and we judge someone putting all their money in vtsax as someone void of a personality however every decision people make with money is justified by taking the information they have at the moment and plugging it into their unique mental model or how the world works both my parents were born during the Korean War and they spent most of their adult lives in a war-torn country that was trying to rebuild theirself so they have a certain worldview based on their experience food

isn't something you throw away because you never know where your next meal will come from you work when you can and then whatever job is available because freedom to choose your work is a fantasy and the stock market sounds like a scam because frankly where they grew up the stock market didn't exist so let's be careful before we judge I might think investing all my money in a low-cost broad market index fund is safe but someone else might see that as being crazy we all make decisions based on our own unique experiences and world view

let's first seek to listen and understand before we jump to judgment number two wealth lesson understand luck and risk when it comes to wealth building whereas I like to think we have no idea how luck and risk will play into building our future the line between inspiringly bold and foolishly Reckless can be a millimeter thick and only visible with hindsight we live in a world of extremes we praise Mark Zuckerberg for having turned on Yahoo's 2006 one billion dollar offer to buy his company what a genius he saw the future and took bold risks that

ultimately paid out however in the same sentence we criticized Yahoo for having turned down a big buyout offer from Microsoft what a bunch of fools didn't they know what a great deal Microsoft was offering but the truth is that we honestly don't know depending on how Facebook and Yahoo's future Panda are opinions their approach to these by out offers could be completely different we can never know what is luck and what is skill so therefore take a conservative approach with money arrange your financial life in a way so that not one bad investment or a

misfinancial goal can wipe you out hold a good amount of reserving cash diversify your investment and keep your household expenses low number three wealth lesson recognize the power of enough or better yet the danger of not knowing are enough when it comes to Growing our net worth we tend to attribute high value to technical knowledge such as investing tax planning and financial forecasting however the hardest Financial skill is getting the goal post to stop moving is so human nature I was so happy with my brand new Civic that is until I saw my neighbor drive

up in a brand new Tesla I was overjoyed by my 2000 year-end bonus that is until I found out my colleague received a three thousand dollar bonus when you have no sense of your enough you will spend your life constantly chasing a moving goal post a life never fulfilled because the ceiling of social comparison is assuming that no one will ever hit so identify you enough by knowing what is most important to you not what is important for your neighbor or your co-worker identify what level wealth is enough for you and stick to that number

number four wealth lesson recognize the ridiculous power of compounding Albert Einstein said it best compound interest is the most powerful force in the universe Warren Buffett's net worth is well over 100 billion dollars at the time of this video however what many people have a hard time comprehending is the fact that 99 of Warren Buffett's net worth was earned after his 50th birthday in 1986 when he was 56 years old Warren Buffett became a billionaire Warren Buffett by any major comparison is a phenomenal investor however it wouldn't do justice to compound interest if we attributed

all his success to his stock picking abilities alone because the real Secret Sauce to his success is actually time the fact that he's been a great investor for three quarters of a century the main takeaway is this don't try to find winning stocks good investing isn't all about earning the highest returns because High returns most often can be attributed to luck as we mentioned earlier it's hard to tell if it's based on someone's phenomenal skill or if they're just lucky so aim to earn okay returns for a long period of time leverage the most powerful

force in the universe compound interest to your benefit number five wealth lesson recognize that there is a clear distinction between getting rich and staying Rich it's easy to bucket the skills required to making money and keeping that money as the same skills however they're completely different Mike Tyson was excellent at making money at the peak of his career Mike Tyson could command 30 million payout for each of his fight however due to his lavish lifestyle he filed for bankruptcy in 2003 with 27 million dollars in debt as good as Mike Tyson was in the boxing

ring and then making ridiculous amount of money he really sucked at keeping his money Tyson once built a mega mansion in the dreams in Connecticut and an iconic feature of this home was a 2.2 million dollar bathtub made of pure gold he also once owned three Bengal tigers named Kenya storm and Boris spending two hundred thousand dollars in annual food budget alone making money takes risks risks such as trusting the stock market to grow our net worth however keeping our money requires the opposite of taking risks humility and fear that what we've made can be

taken away from us in a blink of an eye number six wealth lesson understand the tale follow the average what do we mean by the tale we're referring to the furthest end of a distribution curve it's easy to assume that all events have an equal impact upon the market and the economy however the reality is that all impacts aren't distributed equally most often a small number of events account for the majority of the outcome take a look at the stock market when we see the amazing growth of the market over the past 50 or 100

years we might think that all the companies contributed equally to its growth however when we look deeper most of the companies in the index were effectively failures most recently companies like apple and Amazon were what's true of the S P 500 or the total stock market to its positive returns everyone else losers the key takeaway here is not to say that we should actually try to identify these Tales because that is impossible to do especially for average investors like uni rather the point of tales highlights the importance of following the average a good definition of

an investing genius is the man or woman who can do the average things when all those around them are going crazy Tales Drive everything number seven wealth lesson and this is my personal favorite and that is to recognize that of all the things that you can buy with money time and therefore freedom is the greatest purchase the highest form of wealth is the ability to wake up every morning and say I can do whatever I want today for me this is very personal because I spent a good 20 years of my professional life in some

form of institution whether in the military a school or company at the time it was hard to wrap my head around the value of ultimate freedom because I've never truly experienced it but studies and my personal experience has made me a Believer happiness is a complicated subject because everyone's different but if there's a common denominator in happiness a universal fuel of Joy it's that people want to control their lives if you have the means to buy back time buy back Freedom even if it's a small sliver of complete Freedom it'll provide you the best return

for your money number eight while fussing very straightforward no one is impressed by your car when you see someone driving a nice car you rarely think wow the guy driving the car is cool instead you think wow if I had that car people would think I'm cool subconscious or not this is how people think so if you like nice cars try one because you want to not to impress someone else number nine wealth lesson real wealth is most often hidden we naturally judge people's wealth by oec because that's all the information we have to go

off on they aren't going to show us their bank account or investment Holdings so we can only make inferences based on outward appearances how fancy is their car how big is their home how lavish was their last overseas vacation however this is the worst way to truly gauge someone's wealth modern capitalism makes helping people fake it until they make it a cherished industry the honest truth is that any one of us with a decent credit score can look rich if we wanted to we can finance a new Lamborghini we can take out a two million

dollar mortgage for a mansion and we can put that fancy trip to Greece on a credit card but true wealth is actually what we don't see because wealth is actually built when we don't spend the money not buying that nice car or the large Mansion or taking that overpriced first-class flight so next time you see someone with a lot of nice rich things don't be impressed the world is filled with people who may look poor but actually wealthy and people who look rich but are actually living on borrowed credit number 10 wealth lesson if you

want to Achieve Financial Independence you must learn to save money this is more important than your investment returns your income or your ridiculous good looks wealth is just accumulated leftovers after you spend what you take in and since you can build wealth without a high income but you have no chance of Building Wealth without a high savings rate it's clear which one matters more when it comes to money we get so enamored with the sexiest tools investment vehicles and get rich schemes but Building Wealth is very simple spend less than you earn and save money

so care less about what others think of you lower your ego save more and build real wealth number 11 wealth lesson when it comes to managing your money don't try to be a perfectly rational spreadsheet just be reasonable enough reasonable is more realistic and you have a better chance of sticking with it for the long run which is what matters when managing your money when we think of money and numbers we automatically think we need to become a spreadsheet meticulously calculating the pros and cons of every purchase dilemma and arriving at the most ideal decision

however we're humans not computers to set the expectation that we should behave like one is just setting ourselves up for failure so accept reasonable accept our social beings so we don't need to aim for spreadsheet level Perfection with every financial decision if you can do reasonable enough consistently over a long period of time you will win with money number 12 wealth lesson recognize that the world is surprising we often use history to predict the future but the biggest lesson that history should teach us is that the future is not predictable we have no idea what

will happen next it is smart to have a deep appreciation for economic and investing history history helps us to calibrate our expectations study where people tend to go wrong and offers a Rough Guide for what tends to work but it is not in any way a map of the future history is good for General takeaways General understanding of greed and fear how people behave under stress and how people respond to incentives but be wary when someone tries to use specific historical Trends Industries or Market movements to explain what is happening today the economic and political

landscape of yesterday is completely different from today and it will be even more so tomorrow take the general lessons but be wary whenever someone gets too specific number 13 wealth lesson always make room for error a margin of safety or a buffer room no plan will ever go according to the original plan in World War II's Battle of Stalingrad the largest battle in the world history there was a point in the battle where the desperately needed German tanks failed to function properly where they wore now from all the fighting were they too damaged from the

last engagement no it was actually the mice few of the mice that had nested inside the tanks had eaten away all the insulation covering the electrical system making them inoperable the Germans went into battle with one of the most sophisticated equipment in the world at the time yet they were defeated by something no one could have ever expected mice the honest truth is that despite how ridiculous such stories sound things like this happen all the time so the good rule of thumb is to expect the unexpected and always make room for error when it comes

to my finances my favorite margin of safety is to hold cash at least three to six months in an easily accessible checking or savings account I personally favor 12 months Bill Gates said this when Microsoft was a young company I wanted to have enough money in the bank to pay a Year's worth of payroll even if we didn't get any payments coming in even at the early stage of the company Bill Gates knew he needed a margin of safety to make his dream come true number 14 wealth lesson or actually this is more of a

life lesson recognize that you will change or as I like to say You must change this reminds me of what a marriage counselor once said a couple in their 40s went into a therapy session and the wife was complaining to the counselor how her husband was no longer the same man she married 20 years ago the fire was gone it was a lot more reserved now not as spontaneous as when they first started dating do you know what the marriage counselor said well good I really hope he's not the same guy you married 20 years

ago do you still want to be married to a 20 year old college student when it comes to planning our financial future we oftentimes approach it with the Precision that we'll know exactly what our future selves will want but the truth is that we will change we have to change I may be completely okay wearing the same shirt right now but who knows when I'm 15. I might have a fashion Eureka moment and might want a bigger closed budget therefore we should avoid the extreme ends of financial planning assuming you'll be happy with the very

low income or choosing to work endless hours in pursuit of high one increases the odds that you'll one day find yourself at a point of regret number 50 Teen Wolf lesson recognize that when it comes to investment returns even the ones that follow the market nothing is free I advocate heavily for Index Fund investing a simple low-cost and most effective for average investors like you and I so it's easy to assume that there is no cost to this way of investing however there is it may not be in dollars and cents but in motion markets

don't move in the way we want it spikes up and spikes down at a moment's notice you watch the stock market long enough you'll go through all stages of emotion Joy fear excitement doubt and regret you name it you'll experience them all this is because even if you have Steel in your blood veins very few investors have the ability to say I'm actually fine if I lose 20 of my money this is even more true for new investors who have never experienced a 20 or even a 10 decline ever before but except that this is

the price we have to pay if we want to reap the benefit of investing in the market and build wealth in the long run if we can accept that market volatility is the fee we have to pay to invest in the market we can stick around long enough for investing games to really work for us number 16 wealth lesson I identify what specific money game you're playing it's easy to assume that when we're talking about money and Building Wealth we're all pursuing the same goal playing the same game ultimately to get rich however when we

unpeel the layers what we'll often find is that there is a great deal of variability to what Rich looks like for each person for one person it may be having a comfortable middle class retirement when they turn 60. for another person it might mean being able to live in a 16 room mansion and fly in a private jet every weekend therefore the money strategy or the money game that each individual is playing is and has to be completely different the 60 year old retiree will be fine saving 20 percent of their income in a low-cost

Index Fund however the aspiring private jet passenger must take greater risks either starting their own business or investing in very risky assets so be worth taking Financial cues from people playing a different game than you are understand what money game you want to play and adhere to advice from individuals that are in the same game as you number 17 wealth lesson Embrace optimism people naturally gravitate towards pessimism it's more captivating and frankly more plausible tell some one that everything will be great and they're likely to either shrug you off or offer a skeptical eye however

tell someone that they're in danger and you have their undivided attention what do you think we have so many Doom and Gloom news and content out there no news coverage is about how good times are ahead rather they're all about how we're at the brink of a new Great Depression or another worldwide Financial catastrophe but optimism is what will enable us to take Smart Financial risks and build wealth if we believed everything in the news and truly believe that the world was going to end tomorrow there's no way we would put a penny into the

stock market but the fact is that the stock market has gone up 17 000 fools in the last century it's easier to create a narrative around pessimism because the story pieces tend to be fresher and more recent optimistic narratives require looking at a long stretch of history and development which people tend to forget and take more effort to piece together embracing pessimism is easy but don't choose an easy path Embrace optimism number 18 wealth lesson be okay with knowing we don't know I have not met an investor who genuinely thinks Market forecasts as a whole

are accurate or useful but there's still tremendous demand for forecast in both media and from financial advisors why does this happen it's because we all want the complicated world that we live in to make sense and forecasts are stories that help to fill that blind spot psychologist Philip tedlock once wrote we need to believe we live in a predictable controllable world so we turn to authoritative sounding people who promise to satisfy that need but we must be careful we must come to terms with accepting that we really don't know no one really knows the future

this also means accepting much of what happens in the world is out of our control this could be a hard pill to swallow but the sooner we accept it sooner we can make financial decisions that can leverage this fact why hold a lot of cash because we don't know what calamity is right around the corner why live way below our means because we don't know what could happen to our income tomorrow why invest in a broad market index fund because we have no control over a single individual company or even a group of companies follow

the market don't try to beat it sooner we accept the fact that there is more we don't know than we know sooner we can make financially smart decisions thank you guys for watching and this Spirit of making smart decisions if you'd like to learn 12 of my favorite non-money books that changed my life please check out my video here until next time all the best foreign [Music]