There’s nothing new to the basics of being smart with your money: save more, avoid huge risks, let compounding do its job, don’t get a pet Siberian tiger, blah, blah, blah.
You’ve heard it all before.
But these are wild times. Head-spinning new technologies and trends like cryptocurrencies, NFTs, SPACs, Robinhood rabble-rousers, and one-click shopping are changing the game. And are they changing the rules for being smart with money?
That’s where Morgan Housel comes in.
Housel’s a formerMotley Fool and Wall Street Journal columnist who proved to be so smart with his money that other people gave him theirs to manage as partner of The Collaborative Fund. In his bestselling book, The Psychology of Money, he relates his top personal finance advice in the form of nineteen stories that are all tied to one overarching premise:
“Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”Morgan Housel
I recommend you read the book, but if TikTok’s taking too much of your time, here are my five favorite takeaways.
1. Enjoy enough.
Here’s my favorite of The Psychology of Money’s nineteen stories:
This anecdote got me asking myself, What is enough for me?
It can’t be that much, or I wouldn’t be blogging. But I’d be lying if I said I don’t dream of The Unconventional Route making it big time.
But why? To a vast majority of people in the world, my financial situation is already “big time.” I’m a millionaire. I earn passive income from the crappy ads plastered all over this blog. How much more do I need?
This made me realize that I should stop lusting after more like some spoiled little rich kid. And I don’t need to take any crazy financial risks to make it big time. As long as I keep doing what I’m doing, I already have more than enough.
What about you?
2. Play good defense.
Protect your compounding.
“Progress happens too slowly to notice, but setbacks happen too quickly to ignore.”Morgan Housel
The challenge with money is it’s not so easy come, and very easy go. One freak occurrence, unfortunate accident, or hasty decision can wipe away decades of patient penny-pinching.
So what’s the smart money approach?
Survive. Be content with pretty good returns that can be protected rather than lust after greater returns that put your precious compounding at peril.
And don’t sacrifice what’s priceless.
“If you risk something that is important to you for something that is unimportant to you, it just does not make sense.”Warren Buffett
You’d probably agree with me that your reputation, freedom, physical and mental health, and certain friends and family are priceless. Rationally, then, you shouldn’t put them at risk when chasing cheddar.
But who hasn’t made such stupid risks?
I sure have. I’ve lost friendships over risky investments, lost my mind over trifling amounts of money, and lost out on memorable experiences by working too hard. Clearly, I need to be more careful with my calculations.
3. Plan for the unplanned.
“Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.”Morgan Housel
The world’s unpredictable.
History studies never-seen-before surprising events like wars, pandemics, and bubbles to predict the future. But that future never becomes reality because of new surprises that history has never seen before.
According to Housel, these surprising historical events moved the financial needle more than anything else.
So the only prediction you can safely make is that surprises will continue to make all the difference.
And you’re unpredictable.
“An underpinning of psychology is that people are poor forecasters of their future selves.”Morgan Housel
Even though I like to think I know myself pretty well, I don’t know my future self as much as I think. But I’ve still got to make financial decisions on his behalf.
What does Housel recommend doing about this dilemma?
Avoid financial extremes.
On the lower extreme, that means to not expect my future self to be content living off the minimalist budget Kim and I get by on today. And on the higher extreme, that means not sacrificing myself in pursuit of extra big bucks my future self might not even care about.
Manage your money accordingly.
Since I don’t know my future self, I ought to manage my money like I would for a stranger.
And I should save money for no particular reason—that is, not only specific reasons like home buying, tuition, and retirement—because nobody has any reasonable idea of what surprises I’ll need it for.
Doing so will give me the best chance of surviving long enough to make the most of an unpredictable future.
4. Keep it to yourself.
“Less ego, more wealth. Saving money is the gap between your ego and our income, and wealth is what you don’t see.”Morgan Housel
Don’t let others’ appearance impress you.
You don’t see wealth. You only see spending. So when you see people who look rich, think twice about emulating them.
Maybe they took crazy risks and got lucky. Or maybe they’re not rich at all. And maybe the not so impressive-looking person beside them is the truly wealthy one you should want to emulate.
Don’t try to impress others.
If you try to impress people with your possessions, you’re not impressing them. Your possessions are.
And try not to care what others think.
“People with enduring personal finance success—not necessarily those with high incomes—tend to have a propensity to not give a darn what others think about them.”Morgan Housel
Not caring what others think is one of the few smart with money strategies I think I’m already pretty good at.
My go-to approach?
Redirecting that worry toward what my future self will think. Even if I can’t predict what he’ll want, I bet he won’t give a crap about whether or not I impress random strangers he won’t remember.
5. Pursue true wealth.
“The highest form of wealth is the ability to wake up every morning and say, ‘I can do whatever I want today.'”Morgan Housel
The ultimate goal of building wealth, says Housel, is independence.
I don’t know about you, but in that case, I’m already ultra-wealthy!
And if you’re reading this now, you can probably achieve the same. It starts with knowing what’s enough, not risking what’s priceless, and protecting what matters from what can’t be predicted. Do so, and you’ll impress your future self by giving them the one thing you can be sure they’ll thank you for: independence.
That sounds doable, doesn’t it?
Not easy, though. It takes controlling your behavior and, as Housel writes, “Behavior is hard to teach, even to really smart people.” And it’s certainly not exciting. But, on the bright side, you don’t have to be super smart to do it.
Keep getting smarter. (Or less boring, at least.)
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