The Psychology of Money by Morgan Housel

Your behavior about money is more important than how much information you know about managing finances. This time I will discuss the book The Psychology of Money by Morgan Housel. This book discusses the human relationship with money from the point of view of human behavior. You can use money well, not from what you know, but from how you behave about money.

We are taught that investing, personal financial planning, and business decisions are math problems where data and formulas tell us what to do. The reality is different. The majority of people don't make financial decisions based solely on reports. Instead, they make that decision at the dining table or in the meeting room, where all feelings are mixed, from arrogance, greed, the marketing of their good products, our view of the world, and so on.

In this book, Morgan will write 19 short stories that explains the strange way people think about money and teach you about money itself. I summarize it into three important points from this book: First, Managing money doesn't have to be smart. Geniuses who lose their cool in managing their finances, will have fatal consequences.

On the other hand, an ordinary person who does not have a financial background can become rich if they have certain behavioral characteristics about money, this has nothing to do with intelligence. There is an interesting example.

Ronald James Read is a gas station janitor and philanthropist in the United States. Ronald lived a simple life, saved up regularly, and at the end of his life he was able to collect $ 8 million. The majority of his wealth is then donated to local hospitals and libraries. The second story is from a man named Richard Fuscone.

He is a Harvard graduate and an executive at an investment management company called Merrill Lynch. Throughout his life, he was in great debt and lived a very extravagant life. Until finally, bad luck arrived during the 2008 financial crisis. This incident forced Richard to declare bankruptcy.

The difference in the fate of the two people is not due to a person's intellectual level, but based on how they behave about money. Ronald lived a simple life and managed his money well, while Richard lived a greedy and extravagant life.

Financial success is not a rigid science, but rather soft skills where your behavior about money is more important than how much you know about money. The experience we have so far has greatly influenced our judgment about money.

There is an interesting example. People born in the 1950s and 1970s have a different view of the United States stock market. For people born in the 1950s, they felt for themselves how small the returns on the stock market in the 1960s and 1970s were, because at that time the average yield was only one digit.

Meanwhile, people born in the 1970s have different perceptions. They saw the stock market in a rising state in the 1980s and 1990s. This is what makes people born in the 1970s have a more positive perception of the stock market than people born in the 1950s.

This example proves that we cannot forget the importance of one's personal experience in making a decision. Second, unique facts about money There is an interesting story between two writers Kurt Vonnegut and Joseph Heller who were at a billionaire's party. Kurt told Joseph that the billionaire's income in a day was greater than all of Joseph's income from his most popular novel.

Joseph also replied, yes, but he had something that the billionaire could not have that is the feeling of content. We have a habit of comparing ourselves with others. It is an endless process and there will always be people above us. It is like there will be a sky above the sky. Most importantly, we must know the feeling of content.

This means that we avoid actions that in turn make us sorry. For example, like the story of Bernie Madoff, he is the biggest ponzi convict in history. The fraud lasted 17 years and involved thousands of investors with an investment of billions of dollars. This is an example of a case where a person doesn't know the feeling of content.

They lead themselves into the abyss because they are greedy and don't know when to stop. We need to understand, many things in the world are not worth the risk, for example in pursuing wealth, we actually have the risk of losing our reputation, freedom, friends, family, and so on.

Another unique fact is that wealth is something you don't see. For example like this, when someone drives a car worth 1 billion, maybe that person is rich. However, the fact that you know about his wealth is that he already spent 1 billion to buy a car.

Morgan reminds us that actually when people say that they want to be billionaires, what they really mean is that they want to spend billions of money, they simply want a glamorous lifestyle. However, this logic counters to being a billionaire. Morgan gave an example that there is a fundamental difference between wealth and rich, maybe in Indonesian both of them mean rich.

However, there are fundamental differences between the two. Rich is a person who lives in a big house and rides in luxury cars. People with big income are rich. They show that they are rich. However, wealth is different. Wealth is hidden. Wealth is income that is saved, not what is spent.

So, what we actually see is rich, not wealth. Maybe there are people who look rich but are actually deep in debt. However, there are also people who have great wealth, but they just don't look rich.

Third, Maintaining wealth is not the same as building wealth. There are many ways to acquire wealth. But, according to Morgan, there is only one way to stay rich, which is a combination of living modestly and having fear. Acquiring wealth and maintaining wealth have different approaches. In obtaining wealth, you need to take risks and be optimistic.

Meanwhile, in maintaining wealth, you need a mindset that is 180 degrees contradictory, that is, must be modest and a fear that what we have accumulated over the years can disappear in an instant. That is why we must have a survival mindset in maintaining wealth.

First, a strong financial condition. We must have good money management, for example how much is for conservative investment and for aggressive investment. This division must be clear and well observed. This is so that we are able to enjoy good financial conditions in the long term. Second, the plans we put together may not happen.

A good plan must be able to leave room if it fails, meaning that we must be prepared with the second option if the first option does not work. A venture capitalist named Michael Moritz once said that we cannot assume tomorrow will be like yesterday and we also cannot assume that yesterday's success will generate wealth in the future.

Third, optimistic but also afraid. Maybe for some people this is quite confusing, but the essence is that we must be optimistic about the future, but we can feel paranoid about the obstacles we face while getting there. Of course, this emphasizes that you must always be careful and vigilant in maintaining your wealth.

There is a simple fact that people rarely understand about Warren Buffett's wealth. He's not only a great investor, but he's been a great investor for over 75 years. This is the secret. Warren's financial success does not come from looking for the highest returns, but how you can get relatively good returns in the long term.

This is what ultimately makes the compound effect roll very fast and the mindset we should have when accumulating wealth. You can build wealth without a large income. However, you cannot build wealth without the right mindset about money. Please comment in the comments column, what lessons did you get when reading this book.

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