The Psychology of Money by Morgan Housel - book review, summary, and quotes

Summary and Review

The Psychology of Money by Morgan Housel has taken the investing and personal finance world by storm in recent times, and for good reason. Using a simple, relatable writing style, Morgan stitches together psychology, economic history, short stories, and many brilliant money quotes into a masterclass in how to think about your personal finances in the context of your life.

The book incorporates some of Morgan’s best public writing over at the Collaborative Fund blog, so if you follow his writing there, then many of the ideas within the book will sound familiar.

Here are the key themes that Morgan focuses on:

  • The magic of compounding
  • Being rich versus being wealthy
  • The importance of saving
  • Getting your own personal goalposts to stop moving
  • Maintaining a long-term mindset
  • Managing risk in your investments and in your life

Whether you are just getting started on your investing journey or are deep into Boglehead territory, I absolutely recommend this book to build and refine how you think about your money.

I found Morgan's writing style to be easy to digest and full of one liners that really stuck with me. That’s enough of my summary, I’ll just let quotes from the book speak for itself.

Quotes

Rich vs wealthy

"Money has many ironies. Here’s an important one: wealth is what you don’t see."

"We tend to judge wealth by what we see, because that’s the information we have in front of us. We can’t see people’s bank accounts or brokerage statements. So we rely on outward appearances to gauge financial success. Cars. Homes. Instagram photos. Modern capitalism makes helping people fake it until they make it a cherished industry. But the truth is that wealth is what you don’t see."

"Rich is a current income. Someone driving a $100,000 car is almost certainly rich, because even if they purchased the car with debt you need a certain level of income to afford the monthly payment. Same with those who live in big homes. It’s not hard to spot rich people. They often go out of their way to make themselves known."

"...but wealth is hidden. It’s income not spent."

"The value of wealth is relative to what you need."

Saving

"Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself."

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

"One of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility."

"Saving money is the gap between your ego and your income, and wealth is what you don’t see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future."

Happiness

"You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does - especially from the people you want to respect and admire you."

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

"Aiming, at every point in your working life, to have moderate annual saving, 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."

"Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want, pays the highest dividend that exists in finance."

"Independence, to me, doesn’t mean you’ll stop working. It means you only do the work you like with people you like at the times you want for as long as you want."

"Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand-in-hand; wanting to surpass your peers can be the fuel of hard work. But life isn’t any fun without a sense of enough. Happiness, as it’s said, is just results minus expectations."

"Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think that you want a fancy car or a nice watch. But what you probably want is respect and admiration. And you’re more likely to gain those things through kindness and humility than horsepower and chrome."

Investing

"Charlie Munger says the first rule of compounding is to never interrupt it unnecessarily."

"...few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are."

"...the 401k - 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."

Psychology / Mindset

"The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach, even to really smart people."

"...the economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation - especially experiences early in their adult life."

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

"A barbelled personality - optimistic about the future, but paranoid about what might prevent you from getting to the future - is vital."

"Optimism is the best bet for most people because the world tends to get better for most people most of the time."

Risk

"There is no reason to risk what you have and need for what you don’t have and don’t need."

"The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking."

"If there’s one way to guard against the damage of unknown risks, it’s avoiding single points of failure. The biggest single point of failure with money is a sole reliance on a paycheck to fund short-term spending needs, with no savings to create a gap between what you think your expenses are and what they might be in the future."

"Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another."

"The correct lesson to learn from surprises is that the world is surprising."

"The volatility/uncertainty fee - the price of returns - is the cost of admission to get returns greater than low-fee parks like cash and bonds."