The Psychology of Money

Vineeth Pothulapati published on
10 min

Categories: Reading


The Psychology of Money

   

Money plays a vital in everyone's life and I wanted to understand the concepts around it and how it impacts our lives. In this blog post I will write all my notes & take aways from each chapter of the book.

No one's crazy

The difference I noticed frequently is the choices I make and the way I think to spend, save money is totally different when compared to my friends and others. I felt it's one's priorities that cause the difference in choices me make.

But after reading the first chapter of the this book. I realized everyone has a unique mental model on how world works which always drives the thoughts and decisions that one makes. This topic totally illustrates the emotion over facts and how it influences our behavioural thinking.

Luck and Risk

This is one of the hardest and challenging topic to emphasize as luck is hard to calculate in one's success.

  1. Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
  2. Focus less on specifc individuals and case studies and more on broad individuals.

Not enough

The hard skill one can have is knowing when it's time to stop taking risks. Having the greed or trying to achieve more and more would put everything that you achieved in stake. The risk appetite is very important. If you are risking something which is very important to you on something you don't have or don't need this doesn't make any sense in the equation of taking risk. Life isn't any fun with the sense of enough. Happiness as it's said is just the results minus expectations.

  1. The hardest financial skill is getting the goalpost to stop moving.
  2. Social comparison is the problem here.
  3. Enough is not too little.
  4. There are many things never worth risking, no matter the potential gain.

Confounding and Compounding

Anything that is started way earlier as the time passes will yield potential outcome with the decisions we made in the past can be compounded as we do things consistently and this over period of time confounds us with impressives outcomes. This is applicable for both positive and negative things one does over a period time will result it much greater outcomes.

Getting Wealthy vs Staying Wealthy

Getting wealthy is compartively easier than staying wealthy, As getting wealthy is waiting for opportunities, taking risk and making most out of the opportunities. But staying wealthy is making sure we don't end up with wrong choices which will but all the wealth in stake. The ability to stay longer will yield large returns with the intervention of magic called compounding. The success in money is survival.

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

Tails, You Win

Onething I personally learnt from this section is I always try to be right in everything I do and though many of them or atleast few of them fail. I try to understand why others were wrong and feel low for my mistakes but I should build an equation in a way that everything I do may not be right so trying to make as many decisions as possible to be right is definitely good. But I am sure there will be few wise decisions which can make sure when most of my decisions are wrong still there is a room for celebration on success.

Naploleon's definitation of military genius was, The man who can do average thing when all those around him are going crazy.

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

Freedom

Controlling your time is the highest dividend money pays.

Freedom is usually misunderstood or wrongly evaluated but freedom aggregatively is something which gives us the ability to control over what you want, when you want to, with who you want to, where you want, for as long as you want, is the broadest lifestyle that makes people happy. Aligning your money towards a life like this gives you an incredible returns.

Man in the Car Paradox

No one is impressed with your posssessions as much as you are

Usually we see people buy fancy and luxury assets like phones, cars, watches, houses etc.. thinking that having these things can provide respect and the value in the society. The author illustrates that the general tendency of others viewing this things will not think that you are smart or a great man. Instead people pay more attention towards the things you own and imagine them having it. So, getting respect through fancy and luxury things isn't right & sustainable.

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

Usually many think that becoming millionaire is equivalent to spending million. But it isn't as you spend your money you become poor. When we see a man drviving a $100,000 car. we think the man is wealthy but one thing we should realise is the man has $100,000 less then what he had before by owning that car.

If you think you have money and keep spending your money on things, you will end up with things and not the money.

Firstly, we should understand the difference between being rich vs wealthy. Being rich is current income. People buy things with debts. It's not hard to spot rich people. They often go out of their way to make themselves known. But being wealthy is hidden. It's income not spent. Wealth is an option not yet taken to buy something later. Its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now. There are, ofcource wealthy people who also spend a lot of money on stuff. But even in that cases what we see is their richness, not their wealth.

The world is filled with people who look modest but are actually wealthy and people who look rich live at the razor's edge of insolvency. Keep this in mind when quickly judging others success and setting your own goals.

Save Money

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

Save money is something we keep hearing. But what's the reason? Is it to buy a car or something? In my personal opinion money carries more value than just buying things. It gives us the confidence, strength and luxury to our mind to decide on what exactly we need and the control over our present and future. We should always save money to own the luxury of controling our lives.

  1. 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.
  2. More importantly, the value of wealth is relative to what you need.
  3. Past a certain level of income, what you need is just what sits below your ego.
  4. So people's ability to save is more in their control than they might think.
  5. And you don't need a specific reason to save.
  6. That flexibility and control over your time is an unseen return on wealth.
  7. And that hidden return is becoming more important.

Reasonable > Rational

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

We usually see many financial decisions are made being rational but being rational doesn't help in all scenarios. As humans are driven with emotions. Being rational is taking decisions mainly based on facts but many facts can change by external factors and taking the risk with facts may not suit you. Being reasonable adds the emotional side of you the decision one makes must match personal context and your goals.

Surprise

The world of economy and finance always surprises you things do not repeat or happen same as in the past. We all should be aware that the future may not be as same as past, things keep changing and result in surprises.

Room for Error

Everything we plan or we do may not end up as expected there is always a room for error and things go south. One shoould be prepared on room for error. This increases the odds on not getting affected with errors. The most important part of every plan is planning on your plan not going according to the plan.

Nothing is Free

Every thing we do needs a price. But many in investment may not have price tag, this gets priced as we progress. We see compounding pays a noticable returns but it isn't free to achieve compounding one must go with hold through all it's up's and down's without getting panic on investments. This is the price one pays to let compounding work.

You and Me

In the world of finance we always tend to get influenced by someone or we bet on something others do. But onething we should strongly consider is everyone is different with their financial background, ability to take risk, priorites, short-term and long-term goals etc... What works for others may not work for you. So, make sure to opt for options which are well suited for you and your goals.

The Seduction of Pessimism

The opposite of optimism is pessimism and unfortunately people tend to believe in negative outcomes and they get influenced by worste thing that can happen over specifc action as worste things happen in no time and best things take good amount of time to turn out to be be good and which is unnoticed most of the times. Many will not agree on the best things that can happen in future and if pessimism over something is expressed many tend to believe in it rather believing in optimism.

When will you believe anything

When you are put in a situation nothing seems to workout or don't see a solution, you tend to believe anything. we as humans build stories in understanding how the world works. Everyone has their own story on how things work and how the future would look like. This is more precisely one's perspective towards anything.

The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

Everyone has an incomplete view of the world. But we form a narrative to fill the gaps.

All together now

The psychology of money is all about how you deal with your finance and what matches your personaility what works for others may not work for you and vice versa. We need to adopt all the qualities explained in different segments of this book for better decision making and in making progress with finance. This book aggregatively changes one's perspective towards money and explains what matters the most.

Cheers!