The Psychology of Money – Learn the greatest lessons

The Psychology of Money is a book by Morgan Housel, a partner at The Collaborative Fund.

More than 4 million copies of this book have been sold, and in addition to this work, the author has other books such as the New York Times bestseller, Same As Ever : A Guide to What Never Changes.

Housel has won the New York Times Sidney Award and has twice won the Best in Business award from the Society of American Business Editors and Writers.

In addition, he was named by MarketWatch as one of the 50 most influential people in the markets.

Certainly, this is a man who has a number of interesting financial teachings, something that we will cover in this content, with the book The Psychology of Money as a basis.

Control is the best thing money can buy

“Having control of your own time is the greatest dividend money can pay”

According to Housel, control is related to freedom.

It’s the ability to do what you want, when you want and with whom you want.

All of this is also related to emotions because it’s not enough to be smart enough to earn a lot of money if you don’t know how to control your emotions.

Therefore, without the Psychology of Money and emotional intelligence in finance, it is impossible to be financially successful.

This intelligence allows you to make more conscious financial decisions.

This way, your decisions are based on rational analysis, not just emotional impulses.

As a simple example, a person who has emotional intelligence will never buy a product because they feel very sad.

This person will try to understand the reason for the feeling and try to resolve it in some other way than by spending their financial resources.

Therefore, this type of awareness avoids overspending, unnecessary debt and allows you to plan for the future.

Another interesting aspect of developing emotional intelligence in finance is that you learn to deal with the ups and downs of the financial market.

As a result, those who know the Psychology of Money avoid rash actions in times of crisis.

At other times, they learn to take advantage of opportunities for growth.

This makes us more resilient in the face of economic challenges and contributes to achieving greater financial stability.

The last advantage of emotional intelligence in finance

It also has a positive impact on your relationships.

When you learn to understand and deal with your emotions, you also become capable of understanding other people’s emotions.

And this becomes essential in professional life in general and in times of negotiation.

Those who are emotionally intelligent in finance and know the Psychology of Money are also empathetic and understand the other person’s point of view.

As a result, they begin to look for solutions that meet the needs of both parties, something that strengthens the relationship and opens the door to advantageous and long-lasting partnerships.

We have content that deals specifically with emotional intelligence in finance, where you can learn how to develop this quality.

The author states that:

“The highest form of wealth is the possibility of waking up every day and saying: I can do whatever I want today”.

When you take control of your financial life and your emotions, you start to have a more enjoyable life because you are able to determine what you do with your time.

That really is freedom.

Advice from The Psychology of Money – Be careful when listening to investment advice and diversify

The author also points out that the best time to invest is now.

In the book, an example is given of the investor Warren Buffett:

If he had started investing 15 years later, he wouldn’t have half the fortune he has today.

But many people who hear that they should start investing right away make a big mistake:

They listen to bad advice.

This doesn’t mean that the advice is bad, but it does mean that it doesn’t apply to you.

Each person has a different experience, background, upbringing and education.

As a result, each person invests differently.

For example, imagine that a conservative person decides to take advice from an aggressive investor.

The likelihood of losing money and frustration is enormous.

So learn from the Psychology of Money that there is no point in listening to financial advice from someone who has a different profile to you.

As for the idea of diversification, you’ve probably heard the story about baskets:

It’s not worth putting all your eggs in one basket.

That’s not news to anyone, but we often fail to consider the basics.

“One thing I’ve learned from investors and entrepreneurs is that nobody makes good decisions all the time”.

This quote from the author indicates that there are possibilities for you to make mistakes with your investments.

And to reduce the possibility of losing money, diversify.

Benefits of diversification 

First of all, know that this Psychology of Money strategy helps you achieve your objectives and goals.

Allocating all your investment resources to one asset or company may not be enough to achieve your goals.

Portfolio diversification allows you to realize the ideal combination of assets in different sectors to achieve your goals more effectively.

In addition, diversification reduces the impact of market fluctuations.

The strategy even allows you to profit from market volatility.

It also gives you greater peace of mind.

If you don’t invest your money in several asset classes, you’ll have a lot of anxiety.

That’s because if a single market fluctuation causes your investment to fall in value, you could become desperate.

Finally, know that Psychology of Money diversification allows you to have more opportunities and increase your book potential.

Through this strategy, you can allocate part of your capital to lower-risk investments and still safely exploit the potential of higher-risk assets.

Peter Lynch says this:

“If you are excellent at this business (investments), you will get it right six times out of ten”.

This means that, in fact, you must diversify your investments in order to be successful.

Lynch is one of the most successful investors of all time. Much of this is due to his period as manager of the Fidelity Magellan Fund, where under his leadership the investment fund became one of the world’s first in the segment.

Remember Warren Buffett?

This investor has an estimated net worth of US$117.5 billion (August 2023).

To give you an idea of the importance of diversification, Buffett has invested in more than 400 companies and his fortune was the result of investing in just 10 of them.

Psychology of Money – The best financial decision isn’t always the one the spreadsheet shows you

“You are not a spreadsheet. You have your emotions and doubts. Don’t try to be coldly rational.

For you to understand this sentence, answer the following question:

Paying a mortgage or paying rent?

You may have heard that it’s more financially worthwhile to live on rent.

However, some people feel more comfortable living in their own home.

They have greater peace of mind and mental health if they pay off their mortgage.

Others prefer to rent because they have the freedom to move to another country or city.

Therefore, with this sentence, the author indicates that when making financial decisions, take into account the personal side.

Housel states in The Psychology of Money that “reasonable beats rational”.

In this sense, he shows that when investing, you shouldn’t forget that you are a person.

As a result, an essential tip emerges:

Don’t choose the strategy that is best in mathematical matters, choose the strategy that brings the best return without having to take away your night’s sleep.

This opens you up to thinking about others around you.

Maybe you decide to pay off the mortgage because your job won’t require you to move cities in the future, but have you thought about your family?

If there’s a chance that in five years’ time your partner will be offered an irresistible job abroad, what will you do?

Beware of the “status” game

In his book The Psychology of Money, Housel also points out a major danger:

Saving little or almost nothing to maintain a standard of living for appearances.

That’s why he warns against people who work only to show off their wealth:

“You can save more money if you spend less. And you can spend less if you want less. And you’ll want less when you stop caring what other people think of you”.

He also says that fortune is what you don’t see.

This is a difficult concept for us to understand because we have the misconception that whoever shows the most wealth is the richest.

But that’s not true.

To clarify things further, Housel talks about being rich and being wealthy in the Psychology of Money.

A person that is wealthy is someone who has several financial assets that have not yet been converted into things that can be seen.

In this case, there are people who appear to be modest, but have large fortunes.

At the same time, there are individuals who flaunt wealth and are in debt.

It is therefore essential that you learn to be content with what is enough.

Greed and the idea of showing a different reality from your own can cause you to lose what you have achieved so far.

Warren Buffett says:

“Risking something that is important to you in exchange for something that is not important to you makes no sense at all. It’s pure stupidity.”

That’s why Housel says that a little dose of fear is good for you as an investor.

Psychology of Money – Revise your plan, because you’re going to change!

People are terrible at predicting their own future because they don’t worry about it.

If you stop to think about it, you’ve changed.

You’re not the same person you were 10 years ago. 

But when making your financial plans, how often have you considered how much you will change in 10 years’ time?

According to a survey published by ngpf.org, around 29% of graduates say they currently work in a different field.

In addition, 16% under the age of 54 say they are unemployed.

Age is important in the second statistic because it indicates that these people probably haven’t retired yet.

Now think about the future according to Psychology of Money:

Of those people, how many do you think made plans 10 years ago with their salaries that they don’t get today?

Certainly, most of them made plans that didn’t materialize, so you might think:

So there’s no point in making plans?

On the contrary, you should make plans, but you also need to review them annually.

Each year, take a moment to review each plan individually.

In this way, limit those that no longer make sense, include new ideas and reprioritize the plans that remain.

In other words, see what needs to be achieved first.

In addition, a key tip from Psychology of Money is that you shouldn’t spend hours drawing up plans and then hide them in a drawer.

Make your plan visible so that every 365 days of the year, you can see and remember why you get out of bed every day.

Analyze the worst-case scenario

As well as not considering how much we’ll change in 10 years, we also have a bad habit of never considering the worst-case scenario.

This way, you spend hours and hours of your day thinking about how perfect your life will be when you get a new job.

You think about the dream house you’ll have in a few years’ time, as well as the car you’ve always wanted.

But if everything goes wrong, what will your situation be?

The author says in The Psychology of Money:

“Just as important as the plan is having a plan for when the plan isn’t going according to plan”.

You’re not the only one who changes over time. Specimens change too.

In this sense, for every big decision you have to make, consider the worst-case scenario.

For example, if, in the year 2024, you intend to become an entrepreneur, think about it:

Is it worth leaving a job you like, with people you admire and with a good salary, to follow your dream of entrepreneurship?

If the project goes wrong, how much money will you lose?

In an unfavorable scenario, how long would it take you to get a job in your field again and with the same salary?

Do you have enough money to support yourself during the period of unemployment and after losing what you invested in the idea of entrepreneurship?

At the same time, when working with the Psychology of Money, you should analyze the difficult scenario if you stay in your current job.

If you remain stagnant in your career and the country’s inflation rises, will you be able to maintain the same standard of living?

The author says that it is essential to consider the worst-case scenario so that you can make an intelligent decision.

Daniel 25 de March de 2024