The Psychology of Money – 16 Lessons for the FIRE Community

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Last month we kicked off our brand new Personal Finance and FIRE Book Club with The Psychology of Money by Morgan Housel. I have to admit that I was disappointed when I was done reading. Really disappointed actually…

Money Flamingo Book Review of The Psychology of Money with key takeaways and quotes for the FIRE Community

At first, I was happy when I read Morgan’s promise in the introduction: “It’s not a long book. You’re welcome.” You know those personal finance books where the author repeats the same three ideas for 350 pages? Well, this is not one of those books. There are gems on every single page. So many powerful quotes. Mind-blowing stories. Lots of common sense and reminders but also concepts I had never thought about. After reading the print version I immediately treated myself to the Audible version and devoured it during my morning walks. But the audiobook is also pretty short (obviously). I would have loved for this book to be longer. If there is one person who has my full permission to waffle on about the same topic for 350 pages (or 9 hours for an audiobook) it’s Morgan Housel!

As you probably know by now I thoroughly enjoyed this book. It’s definitely one of the best personal finance books I’ve read in years. This book covers so many interesting concepts that I would have loved to read more about. There don’t seem to be too many books on the psychology of money and I think it’s an area of personal finance that deserves a lot more thought and attention. I really like Morgan’s clever and down-to-earth writing style. I genuinely hope that he’ll write another book on the subject soon.

Who Should Read The Psychology of Money?

Everyone. Well, eventually. Depending on where you are on your personal finance journey there are other books you should read first – like The Barefoot Investor. If you are new to Financial Independence this is probably also not the best book to start with. You can find a list of my favourite Financial Independence books for beginners on the resources page. Once you have your personal finance basics covered and are well on your way to FIRE The Psychology of Money is the PERFECT book to read. It’s an excellent read for anyone in the boring middle part of the path to Financial Freedom.

How to Read The Psychology of Money

If you don’t mind reading on your tablet, you can read The Psychology of Money for free on Scribd. You can use my referral link to receive a 60-day free trial (instead of 30 days).

If you like print editions, try your local library! I was lucky that my library had just purchased the book. Otherwise, you can order it here. I actually just ordered the print edition for my bookshelf. This is definitely a book I will come back to regularly, so I want my own copy.

The audiobook is also great, although I would have preferred it if Morgan Housel recorded the book himself (I love audiobooks read by the author). You can find the Audible version here (it is free for new members and Audible are currently offering a 2-month free trial).

16 Lessons from The Psychology of Money

As I mentioned above there are gems on every single page in this book. Below I’ve listed the 16 lessons that I found most profound – both for the FIRE Community as a whole and for myself as an investor and semi-retiree. This is not a standard book review, it’s a bit of a mix: a recap of my favourite sections and quotes as well as the conclusions I drew for my own life and relationship with money. Enjoy!

1. Finding one’s “enough” is super important.

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

If we don’t find our “enough”, then expectations will keep rising with results. Envy and social comparison don’t lead to happiness (quite the opposite) and will lead to regrets in the long run.

Whatever it is, the inability to deny a potential dollar will eventually catch up on you.

This reminder came particularly timely for me as it’s one of the topics I discussed in my recent rant article on the increasing commercialisation of the FIRE space.

“Enough” is a concept that I have thought about A LOT over the last five or so years, especially when we reached our goal (Flamingo FI) and stopped earning full-time salaries to have more time for ourselves and our kids. I feel that we have done a good job defining “enough” for ourselves, but I can see how easy it is to get tempted by more money, so I will ensure I keep this front of mind throughout our semi-retirement journey.

Reputation is invaluable.

Freedom and independence are invaluable.

Family and friends are invaluable.

Being loved by those who you want to love you is invaluable.

Happiness is invaluable.

And your best shot at keeping these things is knowing when itโ€™s time to stop taking risks that might harm them. Knowing when you have enough.

Have you figured out what “enough” means to you yet?

2. “People do some crazy things with money. But no one is crazy.”

Morgan argues that we all have different views about how money works based on our unique circumstances, upbringing, goals, beliefs and personal experiences. What seems crazy to one person might make perfect sense to another.

I think this point is a great reminder that we should not judge others and what they do or don’t do with their money. The more I know about finance and investing and the better I get at aligning my money decisions with my goals and ambitions, the more I get annoyed with people who are “don’t care” about money and at the same time whine about being broke. I’m sure that most people in the FIRE community would have similar feelings. Morgan makes a great point by saying that we should make an effort to understand where people like this are coming from – like underprivileged people who buy lotto tickets for instance:

Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted. We are paying for a dream, and you may not understand that because you are already living a dream.

He also stresses that personally experiencing something (fear, uncertainty, and hardship) is totally different from simply studying the same thing. People make financial decisions because they make sense to them at the time.

We all think we know how the world works. But we’ve all only experienced a tiny sliver of it.

3. “Nothing is as good or as bad as it seems.”

Did you know that Bill Gates went to one of the only high schools in the world that had a computer? I didn’t.

Morgan does a great job stressing the role of luck and risk when it comes to financial success (or failure):

Luck and risk are siblings. They are both the reality that every outcome in life is guided by forces other than individual effort.

You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.

Nothing is ever as good as it seems because of the amount of luck that was probably involved. At the same time, nothing is ever as bad as it seems because of the level of risk (bad luck) involved.

When it comes to successful people we idealise we should not forget the role luck probably played in their success, so it might not be realistic to achieve what they achieved simply by following the steps they took. So it is a good idea to focus less on individual stories but more on broad patterns to find out what is likely to lead to success.

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.

When things are going really well we should remember we are not invincible and that luck probably played a role in our success. And where there is luck, there is risk, so things can turn for the worse at any time.

Go out of your way to find humility when things are going right and forgiveness/compassion when they go wrong.

4. Never underestimate the power of compound interest.

Morgan does a fantastic job illustrating the power of compound interest. He tells the story of Warren Buffet’s investing success in a completely different light:

Buffet’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child.

He explains that if Buffet had started investing at age 30 instead of at 10 years old. Instead of the $84.5 billion he owns today, he would be worth a meagre $11.9 MILLION. Crazy, right? This illustration really blew my mind.

All of us in the FI community know how important it is to start early, be consistent, stay in it for the long run etc., but this example made me realise just how important it is. Mr. Flamingo and I didn’t start investing seriously until we were in our 30s. I’ll make sure to teach our kids about investing and compound interest early on so they start building their snowballs as early as possible.

Money needs time to compound.

5. Room for error is key.

Margin of safety – you can call also call it room for error or redundancy – is the only effective way to safely navigate a world that is governed by odds, not certainties.

It’s also important to leave enough room for error/a margin of safety in one’s investment plans to survive the ups and downs in the market and to stay in the game long enough for the magic of compounding to unfold.

The more you need specific elements of a plan to be true, the more fragile your financial life becomes.

This is definitely something we took into consideration when we designed our plan. We hope to achieve 7% inflation-adjusted returns, but we will be ok financially if we only achieve 3% (although that will push our traditional retirement date out significantly). We also have plenty of cash for unforeseen situations. Our overall cash position – comprising funds outside and inside our retirement nest egg – sits at about 20% – just like Morgan’s.

So the person with enough room for error in part of their strategy (cash) to let them endure hardship in another (stocks) has an edge over the person who gets wiped out, game over, insert more tokens, when they’re wrong.

I couldn’t agree more with this statement. If you’ve followed our story over the years you probably know that Mr. Flamingo lost his life savings in his early 20s when he made a bad investment decision and put all his eggs in one basket. This was a “game over, enter more tokens” situation for him and it took him a long time to get over it and get started investing again.

For us as early semi-retirees safety and room for error is extra important.

6. Getting wealthy and staying wealthy are different things.

There are a million ways to get wealthy, and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.

Morgan explains that financial success is all about survival. Staying wealthy requires a different skillset than becoming wealthy:

Getting money requires taking risks, being optimistic, and putting yourself out there.
But keeping money requires the opposite of taking risk. It requires humility, and fear that what youโ€™ve made can be taken away from you just as fast.

Now that we are semi-retired I can see how important this distinction is.

7. Index investing makes so much sense.

In the chapter “Tails, you win”, Morgan illustrates that in finance a small number of events (tail events) account for the majority of outcomes. Most public companies fail and the majority of stock market returns come from just a few outliers.

To me, this means that index investing really is the best way to invest. I can’t and don’t want to try to pick the next Amazon or Apple, so I’m just happing buying and holding the index and getting average returns over the next few decades.

Morgan also argues that this principle applies to personal finance and investing. If we manage to stay sane during tail events like recessions, we will have much better results in the long run. This matters much more than what we do during “normal” times:

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

This ties in nicely with lesson 5. If we leave enough room for error and buffers to keep a cool head during difficult times, we are more likely to “do the average thing” when everyone loses their mind around us.

8. No one cares about your car (or other fancy toys).

This one is probably obvious to most FIRE enthusiasts. If you think people will respect or admire you because of the cool stuff you own, you are almost always wrong. In most cases the opposite is true:

Humility, kindness, and empathy will bring you more respect than horsepower ever will.

If you drive a fancy car they won’t find you cool but will think about how cool they would look if they drove the same car.

No one cares!

9. Real wealth is invisible.

Money has many ironies. Here’s an important one: Wealth is what you don’t see.

When someone owns a fancy house are a cool car what we see is not their wealth but simply the money they’ve spent, which is the opposite of wealth.

Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

This is so true and such an important concept. And not spending the money we have accumulated is the only way to get (and stay!) wealthy.

We can’t tell if this woman is wealthy or not because real wealth is invisible.

10. Save, save, save!

A high savings rate is more powerful than high investment returns. Anyone who has read Mr. Money Mustache’s many articles on this subject knows his. But it’s easy to forget when life gets busy (we have been guilty of this over the last couple of years since our kids were born).

Morgan also points out how important it is to save, even if we don’t have a specific goal:

Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.

The flexibility and control over our life and time that savings give us are invaluable:

What is the return on cash in the bank that gives you the option of changing careers, or retiring early, or freedom from worry? I’d say it’s incalculable.

11. Keep your ego in check!

Morgan argues that once our basic needs are met, spending is mostly directed by our egos, so it’s important to keep them in check.

[…] one of the most powerful ways to increase your savings isn’t to raise your income. It’s to raise your humility.

12. “Manage your money in a way that helps you sleep at night”

Morgan says it is ok to just be reasonable instead of 100% rational as it is more realistic and lets you stick to your plans long-term. This is great advice and no doubt very important for our mental health and wellness.

You’re not a spreadsheet. You’re a person. A screwed up, emotional person.

Does your investment strategy pass the “sleep test”?

13. Past performance REALLY is no indicator of future performance.

Most investment performance comes from outlier events that we can’t foresee. That’s why past performance tells us little about the future. Life and investing are full of surprises and there will be lots of future events we won’t see coming.

The most common plot of economic history is the role of surprise.

My personal conclusion is that all we can do is control the stuff we can actually control and not stress about the future. Easier said than done, of course, but definitely a good thing to strive for.

14. People change, circumstances change, goals and priorities change.

We all change, all the time. And with us, our goals, priorities and preferences change. When Mr. Flamingo and I started our journey to Flamingo FI 5.5 years ago we were completely different people. We were carefree DINKs who wanted to travel, live in different countries and be as independent as possible. We were not even sure if we wanted kids. 5.5 years later we are very happy parents and our family is the number one priority for us. Offering our kids the best start in life is now much more important than frugality and our savings rate. Stability and flexibility are much more important than just a few years ago. Most people go through this transition when they start a family. Even people who think it would never happen to them. I was one of these people. I always laugh when I hear people speak about what it will be like when they have kids. Becoming a parent is one of those things you can’t properly imagine until you actually become one.

Morgan stresses how important it is to accept the fact that our minds will keep changing over time. In order to avoid regrets in the future, he recommends avoiding “the extreme ends of financial planning”. This is probably a very good idea. Save but don’t go overboard. Work but don’t spend all your time in the office. Be frugal but don’t overdo it. I guess a balanced, well-rounded life makes it easier to make changes and adapt to the person we will be in the future.

15. Play your own game and stick to it.

Beware taking financial cues from people playing a different game than you are.

While Morgan focuses heavily on investing and spending when he talks about this topic, it really applies to all areas of life. It is so important to figure out what game we are playing and then to stop worrying about what everyone else is doing. This is probably one of my favourite takeaways from the book.

[…] while we can see how much money other people spend on cars, homes, clothes, and vacations, we don’t get to see their goals, worries, and aspirations.

What game are you playing?

16. Get out of the echo chamber once in a while.

The more you want something to be true, the more likely you are to believe a story that overestimates the odds of it being true.

I find that the FIRE community as a whole often resembles an echo chamber where now thousands of people repeat ideas that a pretty small number of people came up with. It seems like so many people are saying the same thing so it has to be true, but it is definitely a good idea to get out of the echo chamber once in a while and see what “outsiders” have to say.

Morgan says that we all have an incomplete view of the world and tend to form a complete narrative to fill in the gaps. I think that’s definitely true and is also the same on a community level. For me, this is a reminder to listen to lots of different people’s opinions, read widely and question things.

And that’s it – 16 lessons from The Psychology of Money. Thanks for reading!

Which lesson do you find most important?
If you have read the book already – are there any lessons you would like to add?

P.S.: As mentioned above you can read The Psychology of Money and many other awesome personal finance books for free on Scribd. Use my referral link for a 60-day free trial.

You can read The Psychology of Money and many other personal finance books on Scribd (for free with a 60-day trial).

20 thoughts on “The Psychology of Money – 16 Lessons for the FIRE Community”

  1. What a great article! These ideas really resonated with me, the book sounds like a fantastic read. Really appreciate the tips on how to read it for free too. Keep up the good work, I really love your blog and message!!!

    Reply
  2. What a great read! Even when I haven’t even picked up the book yet, I’ll definitely use your suggestion and download the audio book, if the book is as good as this summary I looking forward to the read!!

    Reply
  3. This book has been on my watch list for a while. My local library (in Spain) doesnt have it – and even if it did, I’m not sure my Spanish is sufficiently advanced.

    Given your awesome write up – would you still recommend reading it?

    Reply
    • Yes, I definitely recommend reading it. If it’s not available where you are you can always check it out on Scribd. I doubt it would have been translated into Spanish since it’s pretty US-focused.

      Reply
    • Definitely, the audiobook version is good as well. It would have been even better if Morgan Housel read the book himself, I love audiobooks read by the author. Still a good listen though!

      Reply
  4. Just added this book to my wishlist. Great writeup.

    There are so many good lessons it’s hard to pick one as being the most important. If I had to choose, I’d say #8 is one of the most important on this list, but one of the hardest for many to follow. Whether it’s buying new furniture (and then proceeding to upgrade old furniture to match the new fancy furniture), or a nice car, or something else, there seems to be something embedded in the human mind that makes us want to show off sometimes.

    But, as you said, no one cares. We just like to think they care.

    Great reminder to do what YOU want rather than trying to impress others around you. Could save you a lot of money in the long run.

    Reply
    • Thanks Dylan! ๐Ÿ™‚ I agree, “No one cares” is definitely something we should keep in mind all the time. I agree with you, it’s amazing how much financial stress people could avoid if they remembered this in the right situations.

      Reply

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