Three important lessons from the book- The Psychology of Money
The Psychology of Money is one of the most impactful books I read recently. The book tries to explain why we behave the way we do with money and how little we understand the reason behind it. It also talks about how our behaviour with money can determine how much wealth we create, not the job we have, not how much money we make, and not how much power we have. There are many lessons to learn from this book, but in this article, I will talk about the three I think are important.
- Knowing how much is enough
- The Power of Compounding
- Wealth is what you don't see
Knowing how much is enough
Life isn’t fun without the sense of enough.
We all have ambitions to achieve many things and having them is essential as it drives us toward the goal and makes things possible. But it is also crucial to understand how much is enough, the amount of money we require to sustain and be happy. Without a sense of enough, you might mindlessly chase money without ever appreciating what you have.
Rajat Gupta, the former MD of Mckinsey and Founder of ISB, was convicted of insider trading in 2012 when he was already worth millions and had enough to buy possibly most things. Why would he risk his reputation and wealth for more?
The book gives another example of a Janitor, who earned a meager sum compared to Mr. Gupta, but his net worth was more than a million dollars at the end of his life. What did he do differently? He regularly kept investing in blue chip funds and let the compounding do the magic.
The Power of Compounding
We all have heard the cliche line - "Compounding is the eighth wonder of the world", but we still fail to appreciate its magic. I think the reason is that it takes time for compounding to work, and we all are accustomed to instant gratification.
The advantage Warren Buffett had over other investors was time. He started investing at the age of ten, so he could let compounding work for the longest time. Many fund managers could generate a higher return than Mr. Buffett, but they didn't have as much time as the latter. And Mr. Buffett accumulated most of his wealth in the later years of his life when compounding started showing its wonders.
Wealth is what you don't see
Richness is visible, wealth is not. The world is filled with people who look modest but are wealthy, and people who are rich but are on the thin line of insolvency.
And our understanding of money would largely determine on which side we fall.
Savings is the gap between your ego and your income. You will desire less if you care less about what others think of you.
We all know that consistently saving money can create good wealth, but the desire to be popular is more predominant than being wealthy. We buy certain things thinking it will give us respect and make us feel better, but it hardly ever does.
Humility, kindness, and empathy will bring you true admiration and respect.
It is vital to undertake financial decisions that you can be consistent with and those that lets you sleep at night. Somebody might be making good returns from some investment strategy, but you might not know their financial goals and time horizons, and they might be playing an entirely different game than you.
The vital thing is going out of your way to identifying what game you are playing.
The book has truly changed my view of money. It has also solidified some of my beliefs about how I want to utilize money in my life. There are plenty of learnings that one could derive from the book, and I would highly encourage everyone to give it a read.