The Psychology of Money

Introduction

The most valuable part of this book is that it explicitly links personal finance with psychology.

Saving, investment strategies, and decision-making—these have all been known as key parts of personal finance, but the psychological side is rarely explored, and that's what this book is all about. (that’s one of the key reasons why I choose this book. Because I felt like the psychological part of money)

Key Takeaways

• Financial success is far more about how you behave than what you know.

• Luck and risk play a role in almost all outcomes. Individual effort can only get you so far. (Being lone crusader won’t make you Financially stable)

• Be careful about looking at specific examples of outcomes, and look for general patterns. (just following a few Finance Gurus might won’t make any difference, but it’s up to you and your circumstances)

• The hardest financial skill is getting the goalpost to stop moving. (😅) And to do that, you have to stop comparing yourself to others, and start determining what is "enough" for yourself.

Alright, this is something real Fuckin important and an area where I’m struggling mentally. As of now, all my friends have a new car. I can’t stop emphasizing how crucial it is to get the right car at the right time of your Career. Literally, getting the right car is the second step in Iman Gadzhi's Finance YouTube Video.

Buying a new car costs around $700 EMI a month (Canada )> that’s two weeks' paycheck > you’ll get mobility. But you’ll be trapped in that loop. I’ve seen few people who are smart and still in a loop to pay their Car loans. I don’t want to be that guy. I can ride a used Honda Civic and think I’M THE KING 😁 The real issue here is the constant comparison with others. LIKE, I’m not good enough without a new car, oh, I’m walking a lot.

Still, some part of my Brain catches up with -ve patterns and starts comparing myself to others. What to do about it?
Stick to your Game,
Honda Civic or Shelby GT500?
The choice is yours.

• One of the single most important things you can do as an investor waits mean extending your time horizon.

• Staying wealthy requires some combination of paranoia and frugality.

• Always plan for something to go wrong, and for some large, unexpected expense.

• Controlling your time is the highest dividend money pays.

• No one is impressed by your possessions as much as you are. (I FELT LIKE GETTING A SLAP)
  No matter what materialistic stuff you own it all comes under how you see yourself in the real world.
  GUCCI bag or 20-dollar backpack

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

• Past a certain level of income, what you need depends only on your ego.

• Aim to be reasonable with your finances, not completely rational. This will be more realistic long term.

• We can't predict future outlier events. That's what makes them outliers. So, factor it into your plan.

• You need to add room for error and avoid financial ruin. Leverage—going into debt—pushes routine risk into the potential for ruin.

• Assume your priorities will change in the future, and avoid the extremes of financial planning. Examples include assuming you'll be happy with a very low income, or willing to work very long hours for a higher income.

• Everything has a price. The price of immediate consumption is much more visible than the price of neglecting long-term investment.

• Know what game you are playing, and avoid taking financial cues from people playing a different game.

• Stories are the most powerful force in the economy. Beware the stories you tell yourself.

• Short takes:

• Less ego, more wealth.

• Use the money to gain control of your time.

• Be nicer and less flashy.

• Save.

• Worship room for error.

• Avoid extremes.

Notes

The Greatest Show on Earth

• One, financial outcomes are driven by luck, independent of intelligence and effort. That’s true to some extent, and this book will discuss it in further detail.

• Or, two (and I think more common), that financial success is not a hard science. It’s a soft skill, where your behaviour is more important than what you know.

1. No One's Crazy

• Your personal experiences with money make up maybe 0.00000001% of what's happened in the world, but maybe 80% of how you think the world works.

• The 401(k)—the backbone savings vehicle of American retirement—did not exist until 1978. The Roth IRA was not born until 1998. If it were a person it would be barely old enough to drink.

2. Luck & Risk

• Nothing is as good or as bad as it seems.

• Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other.

• Be careful when assuming that 100% of outcomes can be attributed to effort and decisions.

• Focus less on specific individuals and case studies and more on broad patterns.

• Studying a specific person can be dangerous because we tend to study extreme examples—the billionaires, the CEOs, or the massive failures that dominate the news—and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life because the more likely the outcome was influenced by extreme ends of luck or risk.

• The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favour.

3. Never Enough

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

• Modern capitalism is a pro at two things: generating wealth and generating envy.

• Happiness, as it’s said, is just results minus expectations.

2. Social comparison is the problem here.

• The point is that the ceiling of social comparison is so high that virtually no one will ever hit it. This means it’s a battle that can never be won, or that the only way to win is to not fight to begin with—to accept that you might have enough, even if it’s less than those around you.

3. “Enough” is not too little.

• Having “enough” might look like conservatism, leaving opportunity and potential on the table.

• “Enough” is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.

4. There are many things never worth risking, no matter the potential gain

• Reputation is invaluable.

• Freedom and independence are invaluable.

• Family and friends are invaluable.

• Being loved by those who you want to love you is invaluable.

• Happiness is invaluable.

• And your best shot at keeping these things is knowing when it’s time to stop taking risks that might harm them. Knowing when you have enough.

4. Confounding Compounding

• $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities.

• Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three-quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him.

5. Getting Wealthy vs. Staying Wealthy

• Good investing is not necessarily about making good decisions. It's about consistently not screwing up.

• But there’s only one way to stay wealthy: some combination of frugality and paranoia.

1. More than I want big returns, I want to be financially unbreakable. And if I’m unbreakable I actually think I’ll get the biggest returns, because I’ll be able to stick around long enough for compounding to work wonders.

2. Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.

3. A barbell personality—optimistic about the future, but paranoid about what will prevent you from getting to the future—is vital.

6. Tails, You Win

• You can be wrong half the time and still make a fortune.

• A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.

• Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.

7. Freedom

• Controlling your time is the highest dividend money pays.

• The highest form of wealth is the ability to wake up every morning and say, “I can do whatever the Fuck I want today.”

• Campbell wanted to know what made people happy. His 1981 book, The Sense of Wellbeing in America, starts by pointing out that people are generally happier than many psychologists assumed

The most powerful common denominator of happiness was simple. Campbell summed it up:

• Having a strong sense of controlling one’s life is a more dependable predictor of positive feelings of well-being than any of the objective conditions of life we have considered.

• Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time.

8. Man in the Car Paradox

• No one is impressed with your possessions as much as you are.
  No matter whether you buy a Lamborghini or Mustang gt500 no one is going to be impressed more than you.

9. Wealth is What You Don't See

• Spending money to show people how much money you have is the fastest way to have less money.

• It is excellent advice, but it may not go far enough. The only way to be wealthy is to not spend the money that you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth.

10. Save Money

• The only factor you can control generates one of the only things that matter. How wonderful.

• The first idea—simple, but easy to overlook—is that building wealth has little to do with your income or investment returns, and lots to do with your savings rate.

• More importantly, the value of wealth is relative to what you need.

• Past a certain level of income, what you need is just what sits below your ego.

• Think of it like this, one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

• Intelligence is not a reliable advantage in a world that’s become as connected as ours.

• But flexibility is.

• If you have the flexibility you can wait for good opportunities, both in your career and for your investments. You’ll have a better chance of being able to learn a new skill when it’s necessary. You’ll feel less urgency to chase competitors who can do things you can’t, and have more leeway to find your passion and your niche at your own pace. You can find a new routine, a slower pace, and think about life with a different set of assumptions. The ability to do those things when most others can’t is one of the few things that will set you apart in a world where intelligence is no longer a sustainable advantage.

11. Reasonable > Rational

• Aiming to be mostly reasonable works better than trying to be coldly rational.

• With it comes something that often goes overlooked: Do not aim to be coldly rational when making financial decisions. Aim to just be pretty reasonable. Reasonable is more realistic and you have a better chance of sticking with it for the long run, which is what matters most when managing money.

12. Surprise!

• History is the study of change, ironically used as a map of the future.

• Two dangerous things happen when you. too heavily on investment history as a guide to what's going to happen next.

  1. You'll likely miss the outlier events that move the needle the most.

  2. History can be a misleading guide to the future of the economy and stock market because it doesn’t account for structural changes that are relevant to today’s world.

13. Room for Error

• The most important part of every plan is planning on your plan not going according to plan.

• Benjamin Graham is known for his concept of margin of safety. He wrote about it extensively and in mathematical detail. But my favourite summary of the theory came when he mentioned in an interview that “the purpose of the margin of safety is to render the forecast unnecessary.”

• “The best way to achieve felicity is to aim low,” says Charlie Munger (felicity = happiness, bliss). Wonderful.

• Leverage is the devil here. Leverage—taking on debt to make your money go further—pushes routine risks into something capable of producing ruin. The danger is that rational optimism most of the time masks the odds of ruin some of the time

• If there’s one way to guard against their damage, it’s avoiding single points of failure.

14. You'll Change

• Long-term planning is harder than it seems because people's goals and desires change over time.

• The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much they’ve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.

• We should avoid the extreme ends of financial planning. Assuming you’ll be happy with a very low income, or choosing to work endless hours in pursuit of a high one, increases the odds that you’ll one day find yourself at a point of regret.

• Aiming, at every point in your working life, to have moderate annual savings, moderate free time, no more than a moderate commute, and at least moderate time with your family, increases the odds of being able to stick with a plan and avoid regret than if any one of those things fall to the extreme sides of the spectrum.

• Sunk costs—anchoring decisions to past efforts that can’t be refunded—are the devil in a world where people change over time.

15. Nothing's Free

• Everything has a price, but not all prices appear on labels.

• The question is: Why do so many people who are willing to pay the price of cars, houses, food, and vacations try so hard to avoid paying the price of good investment returns?

• The answer is simple: The price of investing success is not immediately obvious.

In conclusion, the psychological part of the Mind is something a wealthy person develops through constant failure and correction. If you could read and Meditate on the key points in this Essay, you’ll be one step ahead of the Games people

play in Real World.