Money Mastery: A Deep Dive into the Psychology of Money and Happiness

Key Takeaways 

1. All subjects are governed by defined rules — be it physics, chemistry, mathematics, or any other. Finance, however, is driven by emotions and the psychology and behavior of people.
2. 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.
3. Controlling your time is the highest dividend money pays.
4. The freedom to do what you want, when you want, with whom you want, for as long as you want, is true freedom.
5. Good investing is not about getting very high returns. That’s not replicable over many years. Good investing is about getting decent enough returns over decades. That’s when compounding turns wild.

Introduction 

Welcome to “A Deep Dive into the Psychology of Money and Happiness.” Here, we’re going on a journey to understand how money and happiness are linked. We’ll share stories, research, and helpful advice to uncover why we make the money choices we do and how they affect our feelings. 

Learn how what we think about money, what we believe, and how we act can impact our finances and how happy we feel in life. Come with us as we figure out money’s complexities, aiming to make things clearer and give you the power to grow and feel fulfilled.

The more interesting facts about Psychology of money it can change your life forever

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1. Saving is more a battle in self-control and Ego than making more money. Making more money can help, but reducing lifestyle costs is an available resource at every stage of life.

2. Uninterrupted consistency of investing is the fuel that powers compounding and compounding is the primary driver to nearly every long-term success story.

3. Everybody’s investment strategy is different and that’s okay just be sure to define yours and not allow people with different strategies to change your mind so easily, however, there are a few universal laws that will bold well for your success: Leave room for error in your investing (nothings completely predictable), avoid financial extremes and ruin, every strategy comes with sacrifices (know them and be prepared), and finally, make sure your strategy doesn’t require you to act rationally forever. Cause you won’t.

“The hardest financial skill, and one of the most important ones, is to get the goalpost to stop moving. It gets dangerous when the taste of having more — money, power, or prestige — increases ambition faster than satisfaction.”

“Rich is the current income. Wealth is income not spent. Wealth is hard because it requires self-control.”

“Happiness is just results minus expectations.”

“Failure can be a lousy teacher, because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk.”

“Arrange 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 favor.”

“There is an iron law in economics: extremely good and extremely bad circumstances rarely stay that way for long because supply and demand adapt in hard-to-predict ways.”‍

“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.”

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How Understanding the Psychology Behind It Led to Financial Freedom

Here are the 6 most important lessons you must learn, just because your school or colleges never teach you these things:

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

Knowing when to stop in financial matters involves setting clear and achievable goals. To do this, start by defining what you want to achieve financially, whether it’s saving for a house, paying off debt, or building an emergency fund. 

Break these goals down into smaller, manageable steps, and regularly review your progress. By setting specific targets and sticking to them, you’ll avoid the temptation to constantly move the goalpost and stay focused on achieving financial stability and success.

Lesson no 1 comes in “the hardest financial skill is getting the goalpost to stop moving” which tells us that we should know when to stop.

Also Read: The Wealth Mindset: How Rich People Think About Money?

2. Confounding compounding

Understanding compound interest, the second lesson, can be challenging, as it doesn’t come naturally to us. However, to grasp its power, start by educating yourself about how it works. Begin investing early to take advantage of compounding, where your money grows over time. 

Instead of feeling discouraged by slow initial growth, trust in the compounding process and stay committed to your investments. By learning and applying this concept, you can build long-term wealth and overcome the inclination to reduce investments due to perceived lack of growth.

Second lesson was confounding compounding.. In which we learned that we do not understand compounding intuitively… and this is the reason why we analyze people like Warren Buffett in very different ways. And we reduce our own investments because we feel that our money is not growing.

3. Getting wealthy vs staying wealthy 

Let me tell you about Jesse. He was a successful business owner who made a lot of money. At first, Jesse felt really happy with his success. But as he made more money, he wanted even more. He became obsessed with getting richer and richer. Even though he already had a lot, he kept wanting more. 

This made him very stressed and unhappy. Sadly, Jesse’s desire for money became so overwhelming that he felt like he had no choice but to end his own life. His story shows us how dangerous it can be to always want more money and how important it is to be happy with what we have.

The third lesson was getting wealthy vs staying wealthy in which we saw that it is difficult to remain rich even after becoming rich because our greed keeps increasing. In this we saw the story of Jesse that because of greed he had to commit suicide.

4. Tails you Win

Like venture capitalists who invest in many startups, even though most fail, we can achieve overall gains because a few successful investments can outweigh the losses from the others. Diversification helps us benefit from the potential upside while minimizing the impact of individual failures, ultimately increasing the likelihood of financial success over the long term.

“Tails you Win,” teaches us the importance of diversifying investments to mitigate risks. By spreading our investments across different opportunities, such as stocks, bonds, and real estate, we increase our chances of success. 

Fourth lesson we saw:- Tails you Win in which we saw that we can still win in investments even if our 2-3 investments fail. In this we saw the example of VC’s i.e. venture capitalists that 65% of the startups invest money in them. They sink but despite that they get good returns because only 0.5% of the investments give good returns which cover the losses of the rest of the investments.

5. Money is about freedom

The fifth lesson highlights the true value of money: freedom. To achieve this freedom, prioritize financial independence by budgeting wisely, saving regularly, and investing smartly. By living within your means and avoiding unnecessary expenses, you can build a financial foundation that provides you with choices and flexibility in life. 

Remember that true happiness comes from having control over your finances and the freedom to pursue your passions and dreams without financial constraints.

The 5th lesson was that money is about freedom. We learned that money gives us something more important than expensive cars or expensive bungalows and that is freedom. We have control in our life which is directly related to our happiness.

Also Read: Money Matters: What Schools Didn’t Tell You About Building Wealth

6. Always plan for room of error

The sixth lesson reminds us to always prepare for mistakes in our financial plans. To do this, we can start by creating an emergency fund to cover unexpected expenses. It’s also wise to avoid putting all our money into risky investments and instead diversify our portfolio. By setting aside some money for unexpected events and spreading our investments, we can protect ourselves from financial disasters and ensure that we have a safety net in place.

Finally 6th lesson we learned that ALWAYS plan for room of error i.e. we should not take extreme financial decisions and should leave the path of error.. so that even if we make this mistake we will not drown.

About the Author

Morgan Housel is a partner at The Collaborative Fund. He is a two-time winner of the Best in Business Award from the Society of American Business Editors and Writers, winner of the New York Times Sidney Award, and a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism. He lives in Seattle with his wife and two kids.

Amazon ratings: 4.7 out of 5 stars 50,313 ratings, 4.3 on Goodreads and 179,332 ratings.

Additional references:

1. Mastering Wealth and Happiness: A Deep Dive into “The Psychology of Money” by Morgan Housel
2. The Psychology of Money By Morgan Housel — A Review & Summary

Conclusion

Knowing why we do what we do with money is super important for being financially free. When we understand how our thoughts and actions affect our money choices, we can make better decisions. 

This helps us build good money habits, make smart choices, and eventually, have the freedom to live the life we want. It’s not just about the math; it’s about understanding ourselves and how we deal with money to make our future brighter and happier.

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