The Psychology of Money

In this world, there are a lot of things to talk about, but two common topics which are discussed in any group are Money and Health, even if you are not interested in them.

Compared to health, money is something on which you’re judged constantly or you judge someone else. That’s one of the biggest issues we have about money. The thing we need to learn about money is, how it works and what it really takes to become wealthy.

Humility, Kindness, and Empathy

We think that to become rich or get more money, we need to be super smart and work hard. While it’s true in some cases, that’s not how it works most of the time. Being super smart and working hard is one of the few reasons to get more money.

In reality, money has a lot to do with how you behave. How much humility do you have? How much kindness and empathy do you show towards other people.

It’s not hard science. It’s a soft skill, where how you behave is more important than what you know and how hard working you are.

And sometimes we focus so much on numbers, statistics, market, and skill that we neglect the huge role of luck.

Getting Lucky

Everyone knows Bill Gates, but very few people know about Kent Evans. He was Bill Gates’ 8th-grade classmate, and Bill mentioned in many interviews that Evan was a more skilled programmer than him. They thought of starting a company together, but unfortunately, Evans died in a mountaineering accident.

Bill Gates got a computer at a very early age, which was a dream for many students.

The point is, for every Bill Gates there is a Kent Evans who was just as skilled and driven but ended up on the other side of life’s roulette.

This does not mean you should not work hard and solely rely on luck. Remember, luck happens when preparation meets opportunity. Timing is the key here. Even if you have a half-baked idea or product, when it hits the timing, it will make fortune.

For example, the majority of the success of the Android OS happens because of timing. The team which built the Android OS had previously built many other mobile OS, but they did not succeed. The timing of the iPhone launch changed everything for Android OS.

Save money, like your life depends on it

Forty percent of Americans cannot come up with $400 in an emergency. It’s because we have the habit of solely living paycheck to paycheck. What comes in, goes out. Nothing left.

One of the underrated values that money brings is time and freedom, which can be achieved by having a higher saving rate.

The calculation should not be like this

 Income - Expenses = Savings

Instead, it should be

 Income - Savings = Expenses

Managing Money

First, we need to identify between what is luck, what is a skill, and what is a risk.

In my personal experience, people always misjudge it. When skill plays an important role, people think it’s luck, and when luck plays out, people think it’s a skill.

And the second is, expected the unexpected.

Most things are not that bad; it is just how we respond to them. Plan first, but always prepare for the unknown; you become better by handling unexpected situations.

We cannot completely identify all the unknowns. The only way to deal with them is by increasing the gap between what you think will happen and what can happen.

Time is money

Compounding is the 8th magic of the world. We assume overnight success to be luck. But in reality, it took years to build the business which exponentially increased over time due to the compounding effect.

This thinking comes because the majority of people think in the short form rather than in the long term. Because linear thinking is so much more intuitive than exponential thinking. And computing does its magic if we never interrupt it unnecessarily.

Warren Buffett started investing in his 20s and today the majority of his wealth came from the last two years in his 60s.

We work so hard to get more money because the most valuable currency in the world is to have more control over our time and the freedom to choose from many options.

Things we should focus on

Time with loved ones. You spend all your effort to get more time and freedom by having more money, but what’s the point if you cannot spend it with your loved ones. Because your kids don’t want your money (or what your money buys) anywhere near as much as they want you. Specifically, they want you with them.
Focus on Broad Pattern Don’t go with celebrity culture where you follow a person blindly. Focus less on these specific individuals and case studies and more on broad patterns of what they do, and how they do it. Finds mental models of multiple individuals and finds patterns.
Have a sense of enough, because happiness, as it’s said, is just results minus expectations.
Making money is hard, because if it was easy then everyone would have done it, and if everyone did it there would be no opportunity.

That’s it. Thanks for your time reading. You can get this book from amazon.

Author: Morgan Housel

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