Book Review: The Psychology of Money

Introduction 🧠💵

The Psychology of Money explores how behavior and psychology, rather than just technical knowledge, play a crucial role in financial success.

The book challenges conventional knowledge about wealth by showing how factors like personal experience, luck, risk tolerance, and disciplined saving habits can shape our financial outcomes.

Personal Experience Shapes Financial Decisions 👤

Housel describes how our unique life experiences can shape our approach to money.

He states that we combine our personal history, unique perspective of the world, and influence into one narrative that works for us.

Our environment can play a role in our financial perspective as well. A person who grows up in poverty thinks about risk and reward differently than the person who grew up in wealth.

I recently watched the Netflix show on the Menendez brothers and related it to this concept. The boys did not have that same hunger their father had been built with in order to value their upbringing. They did not share the same experience as their father, who had to hustle and work hard to attain his financial success. The brothers’ lack of experience and financial hardship eventually led them to develop care-free attitudes about their wealth leading to their negative actions. We see two different generational upbringings in the characters of the show and as a result, two different financial views.

Luck 🍀 and Risk 🎲

Outcomes in life are often a result of both luck and risk. Housel explains that this is not only true in our lives but also in financial success.

An example of this is Bill Gates’ story. His early access to a computer in high school (a rare privilege at the time) allowed him to develop programming skills way before other students in the U.S, significantly influencing his future success.

Housel emphasizes that financial outcomes aren’t solely determined by individual effort or talent, but are also shaped by circumstances beyond our control.

I really enjoyed this section and made a mental note to have the wisdom to recognize and benefit from fortunate situations while trying to build resilience against unfavorable ones. All while remaining grateful for both outcomes.

The Pursuit of Enough 🙂

Housel encourages us to know how much “enough” is, and how it is key to financial success.

Everyone’s definition of “enough” is different but the man who is able to have a basic definition for it will always be rich. He who is satisfied with less will always have more.

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

Social comparison and never feeling satisfied can prevent us from true wealth and happiness.

Knowing when we have enough allows us to avoid unecessary risks like purchasing that new car, surgery, or possession that we don’t really need.

Getting Wealthy 💵 vs. Staying Wealthy 💸

Different strategies are needed to acquire wealth versus maintaining it. He encourages us to continue to reflect on the importance of humility, flexibility, and planning for the long-term to ensure financial security over time.

Often times, we create our lifestyle based on our income. We make more, we spend more. This can lead us in a revolving door where we stay broke because we spend according to our new means of life.

Often times we think , “I just want to be rich”. But is that really the end goal? What happens when we get rich, is the game over?

No. We must maintain the wealth! Once we’re at the top, we can only go down.

I like to think of this with a gym analogy. Often times we talk about how much we want to be “jacked”. But what happens when we achieve that dream physique through hard work and proper nutrition. Do we simply stop working out and go back to eating junk food? No, we must maintain the physique by continuing to do the things that got us there! Continuing to learn, adapt, and stay hungry enough to maintain the physique. Same goes with financial success.

The Role of Failure in Financial Success 🥲

We underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do. As kids we’re often scolded for failure and so this makes us anxious, scared, and fearful of failure.

In most fields we only see the finished product, not the losses that led to the final successful product.

Acknowledging that failure is a part of success can help individuals build a more resilient financial strategy and avoid overreaction to setbacks. This also relates to life in general. Things don’t always go according to plan and we must be okay with this.

“You plan , god laughs. 🙃”

I know I personally have trouble with this and tend to try to micro-manage every aspect of my finances at times. But inevitably, things happen, like an unexpected bill or situation that comes up.

Housel recommends learning to shift our attitude towards failure. Suggesting to not be too hard on ourselves or create more stress than necessary. It’s part of life!

It also makes for a great comeback story 😉

Freedom 🆓 + Time ⌚ = Happiness 😁

Housel talks about how time and control over it are essential components of happiness.

“Time and being in control of it is the biggest variable to happiness.”

I totally agree with this statement. I find myself being extremely content with my life when I am in control of what I get to do and when I get to do it.

Money plays a role here because it can provide that time and freedom. An example of this is having enough saved to know if you don’t like a certain job you can easily take time off without it hurting you financially to look for a new one.

This leads us to our next point on creating that freedom.

The Importance of Saving 💰

Saving without a specific goal is key to long-term freedom.

Saving without thinking about how you will spend it allows you to have flexibility in case of emergencies or opportunities. I really like how Housel brought up thinking about this savings as an Opportunity Fund versus an Emergency Fund.

Having a financial cushion for future opportunities sounds way more appealing than saving for something unfortunate to happen.

Not to say that something negative won’t happen, but the perspective of having the opportunity to be financially secure to handle it is what I am tryijng to get at here.

Saving as a foundation for wealth and having financial security offers peace of mind. It allows us to sleep better at night knowing that we will be okay.

Managing Your Financial Game 💲🎮

Don’t pay attention to other people’s decisions on money and you are in no danger of being persuaded by them. Define the financial game that YOU ARE playing.

Being tricked by people playing a different game can also throw off how we think we’re supposed to spend our money. So much consumer spending is socially driven. I definitley see this especially in this modern world of social media, where the most extravagent posts get the most attention and appeal.

It’s important to understand our own financial goals and to resist the temptation to follow the financial paths of others who may have different priorities or circumstances than ourselves!

The Role of Humility and Ego 🫳🏼

Being rich and being wealthy is different. Wealth is not seen. This is why it’s so hard to find wealthy role models Housel states.

They are lowkey. We only see the rich and social media personalities and aspire to be like thesm but these people are often the least financially stable.

He promotes managing your money in a way that helps you sleep at night. To be humble.

“No one is impressed with our possessions as much as we are.”

Conclusion 👍🏼

The Psychology of Money provides valuable information on the impacts of our psychology and experiences to our financial choices. Additionally, he gives us financial gems of advice throughout the book for us to learn from.

This is a great read that I highly recommend to anyone wanting to further investigate their own finanicial relationship and realize how they can cultivate good financial habits.

The book made me reflect on how little financial literacy is taught to us and how we must take ownership of our education and invest time to learn more about it.

Regardless of how we’ve been taught to think about money, with the information in this book, we can now carry an updated perspective on our financial decisions.

Those looking for a deeper understanding of money, individuals seeking financial independence, or anyone interested in the psychology behind financial decisions will enjoy this book.

⭐⭐⭐⭐⭐ 5/5