Building the Right Financial Mindset — My takeaways from reading ‘Psychology of Money’
From ‘The Wolf of Wall Street’ to ‘The Big Short’, money related movies are deemed to be a hit in the movie theatre every other year. It is actually present in all aspects of our life — The tax invoice from the government, the cold call lady persuading you to take out a loan on a random morning, negotiating for the best deal on a water market in Thailand…..yet not in the most important place that it should be — our school’s syllabus. Often times we are only taught how to earn more money, but not managing it and the mindset that we should carry, that is why a huge chunk of ‘broke professionals’ — the high earners that find themselves drowning in debt due to poor financial decision.
This is where the book ‘Psychology of Money’ came in handy for all of us who want financial freedom. It’s not about stock picking, investment strategies — all that stuff that makes you feel stupid only listening to it.
Published by the columnist of WSJ — Morgan Housel, the book covers the lessons on wealth, greed, and happiness, which are all the by-products of money, depending on how we use them. The relatable examples raised in the book makes it easy to understand the ideal mindset that we should have when handling money, in order to let money be a tool for achieving financial freedom, instead of a source of stress. So here we go! Lets have a look on the main takeaways
1. Take implicit cost into your Investment Consideration
*Just a note: Explicit cost is the monetary cost in your investment (the amount of money you used to purchase stocks/bonds etc) while implicit cost are the ones you cannot quantify (ie emotion/time)
Oftentimes people only consider the explicit cost while making investments and not realizing that it is putting their mental and emotional stability on edge. While it drains your mind it's also addicting, fooling people to go deeper and deeper into the rabbit hole. There is a quote in the book that I really like:
“Spreadsheets are good at telling you when the numbers do or do not add up. They are not good at telling you how you’ll feel when you tuck your kids in at night wondering if the investment decision you’ve made were a mistake that will hurt their future. ”
— Morgan Housel
This quote demonstrates the reason to count in your mental/emotional investment into your investment appetite.
So ask yourself this question before raising your risk tolerance: Can I suffer the emotional drain and the guilt if 50% of my wealth are gone tomorrow?
You will get your answer😏
2. What is Enough For you?
Everyone’s definition of ‘enough’ differs financially. While the manufacturer living in Wisconsin might be extremely satisfied with his $50,000 annual income, an investment banker in NYC might be beating himself up after losing $50,000 of his billions of net worth that made him even more desperate of more money and risked everything in pursuit of even more. That is when the danger of greed chimes in.
So….. What can I do with that? 🤦♀️ I always feel like I don’t have enough
I get you. greed is unlimited and this is human nature, so don’t eat yourself up for that! Instead, sit down and ask yourself
‘What is my ideal lifestyle?’
Calculate the money you need to sustain that kind of lifestyle, and tell yourself — with that money, you have enough and stop taking risk that might harm yourself
3. Financial Success can really be dependent on luck
Have a look at this chart
Basically, the chart is drawn by the difference of amount of money (y-axis) people are willing to put in to buy a stock over a period of time (X-axis). So when human factor takes such a big part in the decisions it make sense that making a gain in the stock can be dependent on luck, we humans are just not as rational as we though we are 🤣 Especially now with social media allowing people to discuss on investment and stock picking (aka the r/WallStreetBets brothers) There is often FOMO🚀🚀🚀 in the stock market that causes people to buy a stock at a wrong timing out of emotional fear.
Gamestop (GME) is a great example to illustrate the role of luck in finance. When most people started to buy GME for whatever purpose, being the first few to buy at a lower price have already guaranteed you a 10-times profit. (Of course, given the pull out game strong too). So just remember luck always play a role in your investment game and be aware of the opposite of that luck!
4. Always be Cautious of a potential crisis
Given that financial success is dependent on luck, it is easier to become wealthy than to stay wealthy. You can just bet on the right stock at the right time and already be making huge gains in split seconds. However, things might all of the suddenly go wrong too! and this is proved in history — Have a look at the events below:
- Great Depression
- World War 1, 2
- Dot Com Bubble
- 911
- 2008 Financial Crisis
What is common among them is that they have all happened within the past 100 years and has crashed the stock market. With the coronavirus happening, we are also experiencing a huge crisis and who could predict that we will all be working from home a year ago? No matter what scale, there might always be a potential crisis, like losing your job, suffering from illness etc. So take that into consideration while making money-related decisions and have a back up plan
5. Invest in Yourself
As cliché as it is, investing in yourself is the best investment decision that you can make. This can be in all form, like learning to play the guitar, reading a book about finance, taking an online course on photography, doing a masters degree etc… and the best part is that some of them are free! There are loads of great resources on Youtube, Skillshare, Coursera that can help you to learn any skill you can name. You can lose your money and possessions in a crisis, but the knowledge, skills, and education you gain through investing in yourself are long-lasting and cannot be taken away by anyone, it will only be deepened throughout the course of life. It’s never too late to start!
A Quick Sum Up
Psychology of money is a really short book yet with knowledge that inspires and benefits you for the rest of your life. It helps us to rethink our relationship with money and acknowledge that we can not only build wealth, but alsomanage our wealth properly.
Investing isn’t a race to be won; it’s a more of a test of our character.
I would recommend this book to all young adults, especially when you are just starting out and looking into investing
If you want to go into deeper details of the book, feel free to check out this video!
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