Many people are focused on the hard numbers and simple truths when it comes to money. But they forget one important point: how you view money is crucial.
I have always been curious about how to change my money mindset and look at the relationship between money, mental health, and money. I was so excited to read the book ” The Psychology of Money” by Morgan Housel.
The book is divided into practical lessons that you can use to improve your finances. Four lessons from the book helped me to improve my money mindset, and help me invest more.
Below are The lessons Which I have learned from “Psychology of Money” .
1. Your Past is your Present
How you have dealt with money in the past will determine how your attitude to money and financial decisions. My Dad believes that investments should be made in fixed income securities. This is not my attitude.
As Fixed Deposits can barely beat inflation, it would appear that he is insane. However, if you look at the interest rates he earned when he began earning, they were around 12%. This is an average return of equity. It also comes with no risk. The author points out that while no one is a maniac about money, their attitudes can vary depending on their economic background, their mentality, income, generation and their financial history.
Luck is also a key factor in shaping wealth. It is not just a matter luck, but where you were born. You can take greater risks if you’re born into a financially strong family than someone who is born into a poorer family.
According to the author, most Americans invest in lottery tickets in America. This is more than all their spending on movies, TV, video games and books. An American averages spending 412 US$ per year, which is close to 30,000 INR.
Surprisingly, 40% of Americans do not have USD 400$ to save for an emergency fund and will spend $412 on lottery tickets. They believe they lack exceptional skills and only earn what they need to live. They feel that lottery tickets are their only chance to escape.
2. What is enough?
Many people feel that there is never enough money. Housel points out that the goalpost is always moving and that people often compare themselves to others.
I often think about myself and what it would have been like for me to have the same income as I do. But, it is not enough. The goal has changed.
Housel tells stories about greed and risk in his book. They can make progress look bad and cause failure. Housel also notes that it is important to find what is enough for you when investing and managing your money.
Housel states, “If your expectations rise with the results, there is no logic to striving for more. You’ll feel the exact same after you put in extra effort.” It’s dangerous when you get more of the same — more money, power, prestige — than you are satisfied with.
3. How Luck and Risk can favor you
Out of all the financial lessons, the second lesson I learned is that your financial success will be influenced by your luck and your risk. This is what Bill Gate’s case study demonstrates.
Bill Gates was very fortunate to attend LakeSide School, which was the first school to have a computer in 1968. It was located in Seattle, Washington. Bill Dougall was a teacher at the school in Maths and Science. He believed that practical knowledge should be as important as what is being taught in books.
He was the one who leased a computer to use in school. In 1960s America, there was no college with such an advanced computer. Bill Gates was in 8th class and became an expert in programming language. Now, he is the owner of a Trillion Dollar business, Microsoft.
He is, I think, lucky. In 1968, there were 303 million high school graduates around the globe. Only 300 students attended LakeSide school out of the total 18 million high school students. If we do the quick math, 1 in 100 people had access to computers in 1968.
Mr. Morgan urges us to not judge others because they may not have had the chance to succeed and those who are successful today are because they used 100% of that opportunity.
4. Power of Compounding
The author explains how you can make a lot of money if you invest in assets that offer decent returns and stay invested for a longer time. It helped Warren Buffett to become one of the most wealthy people in the world, he explained.
You can accumulate 53 crores of rupees even if you start with just one rupee per day.
Warren Buffett is the subject of more than 200 books. These books will show you how to be like him. Most people don’t realize that Buffett has held onto his investments since he turned 10. His ability to accumulate wealth was due to his long-term commitment to the market over 70-80 years.
His net worth would have been only $12 million if he had started in his 30s and retired in the 60s. He is skilled at investing, but his secret to success is time.
If you’re in your 20s, it’s a good idea to start investing now. As long as you are not wasting your time, it doesn’t matter how overvalued or inflated the market may be.
5. The dangers of not having enough cash
Rajat Gupta was raised in a Kolkata orphanage. At the age of 40, he became the CEO at McKinsey Company, which is one the most respected consulting firms in the world. Rajat later worked for the United Nations and World Economic Forum. Bill Gates was also a patron of Rajat’s charitable programs.
His net worth in 2008 was 100 million US dollars. He did something unprofessional during 2008’s financial crisis, which landed him behind bars. Warren Buffett was on the Goldman Sachs board and decided to invest 5 million US$ when the company was experiencing losses in 2008.
Rajat, who was part of the board, took advantage of insider information and asked Raj to purchase 1,75,000 shares from Goldman Sachs. Rajat and Raj both received 17 million US$ from this trade.
It is easy to wonder why someone who is so successful in life would take such a foolish step. This behavior is described by the author as “No sense or enough”. He never felt satisfied with the things he had. If you want to be financially independent, the author suggests that you have very low expectations of money.
If you think about money, you will never be content. If you find out that your colleague makes more than you, and you do the same job, it is impossible to be happy. This could lead to a decrease in your performance.
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