I've read a lot of personal finance
books but none goes into how we think
and behave around money better than this
book the psychology of money by Morgan
housel .
So in today's article let me share
with you the 18 wealth lessons from this
amazing Book lesson number one recognize
that when it comes to our money no one
is crazy we easily judge people based on
their worldview or where they decide to
invest their money we judge someone who
is putting all their money into gold as
someone who is still living in the 16th
century we judge someone putting all
their money in nfts as someone living in
a fantasy world and we judge someone
putting all their money in vtsax as
someone void of a personality however
every decision people make with money is
justified by taking the information they
have at the moment and plugging it into
their unique mental model or how the
world works both my parents were born
during the Korean War and they spent
most of their adult lives in a war-torn
country that was trying to rebuild
theirself so they have a certain
worldview based on their experience food
isn't something you throw away because
you never know where your next meal will
come from you work when you can and then
whatever job is available because
freedom to choose your work is a fantasy
and the stock market sounds like a scam
because frankly where they grew up the
stock market didn't exist so let's be
careful before we judge I might think
investing all my money in a low-cost
broad market index fund is safe but
someone else might see that as being
crazy we all make decisions based on our
own unique experiences and world view
let's first seek to listen and
understand before we jump to judgment
number two wealth lesson understand luck
and risk when it comes to wealth
building whereas I like to think we have
no idea how luck and risk will play into
building our future the line between
inspiringly bold and foolishly Reckless
can be a millimeter thick and only
visible with hindsight we live in a
world of extremes we praise Mark
Zuckerberg for having turned on Yahoo's
2006 one billion dollar offer to buy his
company what a genius he saw the future
and took bold risks that ultimately paid
out however in the same sentence we
criticized Yahoo for having turned down
a big buyout offer from Microsoft what a
bunch of fools didn't they know what a
great deal Microsoft was offering but
the truth is that we honestly don't know
depending on how Facebook and Yahoo's
future Panda are opinions their approach
to these by out offers could be
completely different we can never know
what is luck and what is skill so
therefore take a conservative approach
with money arrange your financial life
in a way so that not one bad investment
or a misfinancial goal can wipe you out
hold a good amount of reserving cash
diversify your investment and keep your
household expenses low number three
wealth lesson recognize the power of
enough or better yet the danger of not
knowing are enough when it comes to
Growing our net worth we tend to
attribute high value to technical
knowledge such as investing tax planning
and financial forecasting however the
hardest Financial skill is getting the
goal post to stop moving is so human
nature I was so happy with my brand new
Civic that is until I saw my neighbor
drive up in a brand new Tesla I was
overjoyed by my 2000 year-end bonus that
is until I found out my colleague
received a three thousand dollar bonus
when you have no sense of your enough
you will spend your life constantly
chasing a moving goal post a life never
fulfilled because the ceiling of social
comparison is assuming that no one will
ever hit so identify you enough by
knowing what is most important to you
not what is important for your neighbor
or your co-worker identify what level
wealth is enough for you and stick to
that number number four wealth lesson
recognize the ridiculous power of
compounding Albert Einstein said it best
compound interest is the most powerful
force in the universe Warren Buffett's
net worth is well over 100 billion
dollars at the time of this article.
however what many people have a hard
time comprehending is the fact that 99
of Warren Buffett's net worth was earned
after his 50th birthday in 1986 when he
was 56 years old Warren Buffett became a
billionaire Warren Buffett by any major
comparison is a phenomenal investor
however it wouldn't do justice to
compound interest if we attributed all
his success to his stock picking
abilities alone because the real Secret
Sauce to his success is actually time
the fact that he's been a great investor
for three quarters of a century the main
takeaway is this don't try to find
winning stocks good investing isn't all
about earning the highest returns
because High returns most often can be
attributed to luck as we mentioned
earlier it's hard to tell if it's based
on someone's phenomenal skill or if
they're just lucky so aim to earn okay
returns for a long period of time
leverage the most powerful force in the
universe compound interest to your
benefit number five wealth lesson
recognize that there is a clear
distinction between getting rich and
staying Rich it's easy to bucket the
skills required to making money and
keeping that money as the same skills
however they're completely different
Mike Tyson was excellent at making money
at the peak of his career Mike Tyson
could command 30 million payout for each
of his fight however due to his lavish
lifestyle he filed for bankruptcy in
2003 with 27 million dollars in debt as
good as Mike Tyson was in the boxing
ring and then making ridiculous amount
of money he really sucked at keeping his
money Tyson once built a mega mansion in
the dreams in Connecticut and an iconic
feature of this home was a 2.2 million
dollar bathtub made of pure gold he also
once owned three Bengal tigers named
Kenya storm and Boris spending two
hundred thousand dollars in annual food
budget alone making money takes risks
risks such as trusting the stock market
to grow our net worth however keeping
our money requires the opposite of
taking risks humility and fear that what
we've made can be taken away from us in
a blink of an eye number six wealth
lesson understand the tale follow the
average what do we mean by the tale
we're referring to the furthest end of a
distribution curve it's easy to assume
that all events have an equal impact
upon the market and the economy however
the reality is that all impacts aren't
distributed equally most often a small
number of events account for the
majority of the outcome take a look at
the stock market when we see the amazing
growth of the market over the past 50 or
100 years we might think that all the
companies contributed equally to its
growth however when we look deeper most
of the companies in the index were
effectively failures most recently
companies like apple and Amazon were
what's true of the S P 500 or the total
stock market to its positive returns
everyone else losers the key takeaway
here is not to say that we should
actually try to identify these Tales
because that is impossible to do
especially for average investors like
uni rather the point of tales highlights
the importance of following the average
a good definition of an investing genius
is the man or woman who can do the
average things when all those around
them are going crazy Tales Drive
everything number seven wealth lesson
and this is my personal favorite and
that is to recognize that of all the
things that you can buy with money time
and therefore freedom is the greatest
purchase the highest form of wealth is
the ability to wake up every morning and
say I can do whatever I want today for
me this is very personal because I spent
a good 20 years of my professional life
in some form of institution whether in
the military a school or company at the
time it was hard to wrap my head around
the value of ultimate freedom because
I've never truly experienced it but
studies and my personal experience has
made me a Believer happiness is a
complicated subject because everyone's
different but if there's a common
denominator in happiness a universal
fuel of Joy it's that people want to
control their lives if you have the
means to buy back time buy back Freedom
even if it's a small sliver of complete
Freedom it'll provide you the best
return for your money number eight while
fussing very straightforward no one is
impressed by your car when you see
someone driving a nice car you rarely
think wow the guy driving the car is
cool instead you think wow if I had that
car people would think I'm cool
subconscious or not this is how people
think so if you like nice cars try one
because you want to not to impress
someone else number nine wealth lesson
real wealth is most often hidden we
naturally judge people's wealth by oec
because that's all the information we
have to go off on they aren't going to
show us their bank account or investment
Holdings so we can only make inferences
based on outward appearances how fancy
is their car how big is their home how
lavish was their last overseas vacation
however this is the worst way to truly
gauge someone's wealth modern capitalism
makes helping people fake it until they
make it a cherished industry the honest
truth is that any one of us with a
decent credit score can look rich if we
wanted to we can finance a new
Lamborghini we can take out a two
million dollar mortgage for a mansion
and we can put that fancy trip to Greece
on a credit card but true wealth is
actually what we don't see because
wealth is actually built when we don't
spend the money not buying that nice car
or the large Mansion or taking that
overpriced first-class flight so next
time you see someone with a lot of nice
rich things don't be impressed the world
is filled with people who may look poor
but actually wealthy and people who look
rich but are actually living on borrowed
credit number 10 wealth lesson if you
want to Achieve Financial Independence
you must learn to save money this is
more important than your investment
returns your income or your ridiculous
good looks wealth is just accumulated
leftovers after you spend what you take
in and since you can build wealth
without a high income but you have no
chance of Building Wealth without a high
savings rate it's clear which one
matters more when it comes to money we
get so enamored with the sexiest tools
investment vehicles and get rich schemes
but Building Wealth is very simple spend
less than you earn and save money so
care less about what others think of you
lower your ego save more and build real
wealth number 11 wealth lesson when it
comes to managing your money don't try
to be a perfectly rational spreadsheet
just be reasonable enough reasonable is
more realistic and you have a better
chance of sticking with it for the long
run which is what matters when managing
your money when we think of money and
numbers we automatically think we need
to become a spreadsheet meticulously
calculating the pros and cons of every
purchase dilemma and arriving at the
most ideal decision however we're humans
not computers to set the expectation
that we should behave like one is just
setting ourselves up for failure so
accept reasonable accept our social
beings so we don't need to aim for
spreadsheet level Perfection with every
financial decision if you can do
reasonable enough consistently over a
long period of time you will win with
money number 12 wealth lesson recognize
that the world is surprising we often
use history to predict the future but
the biggest lesson that history should
teach us is that the future is not
predictable we have no idea what will
happen next it is smart to have a deep
appreciation for economic and investing
history history helps us to calibrate
our expectations study where people tend
to go wrong and offers a Rough Guide for
what tends to work but it is not in any
way a map of the future history is good
for General takeaways General
understanding of greed and fear how
people behave under stress and how
people respond to incentives but be wary
when someone tries to use specific
historical Trends Industries or Market
movements to explain what is happening
today the economic and political
landscape of yesterday is completely
different from today and it will be even
more so tomorrow take the general
lessons but be wary whenever someone
gets too specific number 13 wealth
lesson always make room for error a
margin of safety or a buffer room no
plan will ever go according to the
original plan in World War II's Battle
of Stalingrad the largest battle in the
world history there was a point in the
battle where the desperately needed
German tanks failed to function properly
where they wore now from all the
fighting were they too damaged from the
last engagement no it was actually the
mice few of the mice that had nested
inside the tanks had eaten away all the
insulation covering the electrical
system making them inoperable the
Germans went into battle with one of the
most sophisticated equipment in the
world at the time yet they were defeated
by something no one could have ever
expected mice the honest truth is that
despite how ridiculous such stories
sound things like this happen all the
time so the good rule of thumb is to
expect the unexpected and always make
room for error when it comes to my
finances my favorite margin of safety is
to hold cash at least three to six
months in an easily accessible checking
or savings account I personally favor 12
months Bill Gates said this when
Microsoft was a young company I wanted
to have enough money in the bank to pay
a Year's worth of payroll even if we
didn't get any payments coming in even
at the early stage of the company Bill
Gates knew he needed a margin of safety
to make his dream come true number 14
wealth lesson or actually this is more
of a life lesson recognize that you will
change or as I like to say You must
change this reminds me of what a
marriage counselor once said a couple in
their 40s went into a therapy session
and the wife was complaining to the
counselor how her husband was no longer
the same man she married 20 years ago
the fire was gone it was a lot more
reserved now not as spontaneous as when
they first started dating do you know
what the marriage counselor said well
good I really hope he's not the same guy
you married 20 years ago do you still
want to be married to a 20 year old
college student when it comes to
planning our financial future we
oftentimes approach it with the
Precision that we'll know exactly what
our future selves will want but the
truth is that we will change we have to
change I may be completely okay wearing
the same shirt right now but who knows
when I'm 15. I might have a fashion
Eureka moment and might want a bigger
closed budget therefore we should avoid
the extreme ends of financial planning
assuming you'll be happy with the very
low income or choosing to work endless
hours in pursuit of high one increases
the odds that you'll one day find
yourself at a point of regret number 50
Teen Wolf lesson recognize that when it
comes to investment returns even the
ones that follow the market nothing is
free I advocate heavily for Index Fund
investing a simple low-cost and most
effective for average investors like you
and I so it's easy to assume that there
is no cost to this way of investing
however there is it may not be in
dollars and cents but in motion markets
don't move in the way we want it spikes
up and spikes down at a moment's notice
you watch the stock market long enough
you'll go through all stages of emotion
Joy fear excitement doubt and regret you
name it you'll experience them all this
is because even if you have Steel in
your blood veins very few investors have
the ability to say I'm actually fine if
I lose 20 of my money this is even more
true for new investors who have never
experienced a 20 or even a 10 decline
ever before but except that this is the
price we have to pay if we want to reap
the benefit of investing in the market
and build wealth in the long run if we
can accept that market volatility is the
fee we have to pay to invest in the
market we can stick around long enough
for investing games to really work for
us number 16 wealth lesson I identify
what specific money game you're playing
it's easy to assume that when we're
talking about money and Building Wealth
we're all pursuing the same goal playing
the same game ultimately to get rich
however when we unpeel the layers what
we'll often find is that there is a
great deal of variability to what Rich
looks like for each person for one
person it may be having a comfortable
middle class retirement when they turn
60. for another person it might mean
being able to live in a 16 room mansion
and fly in a private jet every weekend
therefore the money strategy or the
money game that each individual is
playing is and has to be completely
different the 60 year old retiree will
be fine saving 20 percent of their
income in a low-cost Index Fund however
the aspiring private jet passenger must
take greater risks either starting their
own business or investing in very risky
assets so be worth taking Financial cues
from people playing a different game
than you are understand what money game
you want to play and adhere to advice
from individuals that are in the same
game as you number 17 wealth lesson
Embrace optimism people naturally
gravitate towards pessimism it's more
captivating and frankly more plausible
tell some one that everything will be
great and they're likely to either shrug
you off or offer a skeptical eye however
tell someone that they're in danger and
you have their undivided attention what
do you think we have so many Doom and
Gloom news and content out there no news
coverage is about how good times are
ahead rather they're all about how we're
at the brink of a new Great Depression
or another worldwide Financial
catastrophe but optimism is what will
enable us to take Smart Financial risks
and build wealth if we believed
everything in the news and truly believe
that the world was going to end tomorrow
there's no way we would put a penny into
the stock market but the fact is that
the stock market has gone up 17 000
fools in the last century it's easier to
create a narrative around pessimism
because the story pieces tend to be
fresher and more recent optimistic
narratives require looking at a long
stretch of history and development which
people tend to forget and take more
effort to piece together embracing
pessimism is easy but don't choose an
easy path Embrace optimism number 18
wealth lesson be okay with knowing we
don't know I have not met an investor
who genuinely thinks Market forecasts as
a whole are accurate or useful but
there's still tremendous demand for
forecast in both media and from
financial advisors why does this happen
it's because we all want the complicated
world that we live in to make sense and
forecasts are stories that help to fill
that blind spot psychologist Philip
tedlock once wrote we need to believe we
live in a predictable controllable world
so we turn to authoritative sounding
people who promise to satisfy that need
but we must be careful we must come to
terms with accepting that we really
don't know no one really knows the
future this also means accepting much of
what happens in the world is out of our
control this could be a hard pill to
swallow but the sooner we accept it
sooner we can make financial decisions
that can leverage this fact why hold a
lot of cash because we don't know what
calamity is right around the corner why
live way below our means because we
don't know what could happen to our
income tomorrow why invest in a broad
market index fund because we have no
control over a single individual company
or even a group of companies follow the
market don't try to beat it sooner we
accept the fact that there is more we
don't know than we know sooner we can
make financially smart decisions thank
you guys for watching and this Spirit of
making smart decisions if you'd like to
learn 12 of my favorite non-money books
that changed my life please check out my
video here until next time all the best
foreign.
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