Sam Radford

March 18, 2021

Book Notes: “The Psychology of Money” by Morgan Housel

The Psychology of Money is one of those books that has been drifting on and off my radar for several months. I’ve seen various people on Twitter recommend it. And several authors I respect – Daniel Pink and James Clear – gave it a strong endorsement.

I don’t get at lot of my reading ideas from Twitter, but in this case I’m glad I did!

Housel’s main point in the book is that doing well with money has far more to do with behaviour than it does being smart. Our day-to-day habits around money shape our ability to become wealthy far more than whether we are some super-smart investor.

I appreciated the fact he was honest about luck early on in the book too. It’s easy to look at a rich person, believe their simplistic story of how it happened, and fail to see just how much luck it involved. Because luck is involved with anyone making money. No one’s success or failure with money, Housel writes, is as good or as bad as it seems. 

In many ways, the book is full of ‘obvious’ advice. But I’m sure I’m not alone in benefiting from the reminder. This, from a chapter titled ’Never Enough’, is a great example:

The hardest financial skill is getting the goalpost to stop moving. 

Like I say, it's obvious. But it’s also very hard!

Reaching a place of contentment isn’t easy. We’re seduced by our materialistic world into thinking we need more and more. And when we get a pay rise, we tend to up our spending (shifting the goalpost), not our saving. But all this is a psychological challenge, not a financial one. Hence the title of the book. 

I found his observation on wealth helpful as well:

Wealth is hidden. It’s income not spent. 

Thinking of wealth this way is why it’s also necessary to distinguish between ‘wealth’ and ‘riches’. We often use the two words interchangeably, but they’re very different. When we look at what someone spends, we may get a glimpse of how rich they are. What we don’t see though is what they don’t spend (that they could). And so we have little idea how wealthy someone is.

As Housel goes on to say:

Building wealth has little to do with your income or investment returns, and lots to do with your savings rate. 

In the book, Housel offers plenty of warnings about financial planning. He makes the point that we need to get better at planning for our plans not going to plan! We should always have a margin of safety and avoid single points of failure with our finances, he counsels.

All told, there’s a lot of wisdom in this book. And it has got me thinking about my own finances and changes I need to make.

It’s hard to imagine anyone not benefiting from taking the time to think about money under Housel’s tutelage.