Previously, we highlighted nine steps to improve your financial situation from award-winning author Morgan Housel. In Housel’s book, The Psychology of Money, he takes readers on a journey through 19 short stories that teach fundamental principles about wealth, greed, and happiness.
The book has been a significant success, selling more than a million copies since its release in 2020.
These stories help to highlight many of the emotional issues that investors face on their journey to financial freedom and securing a healthy retirement. As a follow-up to the original nine steps, here are five bonus steps that author Morgan Housel says can help readers make better decisions with their money:
“Worship room for error.”
Throughout Housel’s book, he takes readers through an exploration of the fine line between risk and reward. While many investors want the reward, few are willing to embrace the risk it takes to get it.
As a parallel discussion to investment decisions, Housel instructs his readers to construct a financial plan that builds a healthy margin for error. He says that the more things that can go wrong while still reaching your financial goals, the better. Conversely, the more things you need to go right to achieve your financial goals, the more fragile your plan is.
Building margin for error into your plan can be as simple as setting aside a fully funded 3-6 month emergency fund or as complex as drafting an estate plan that outlines your end-of-life wishes and worst-case scenarios.
Above all else, Housel says that we should worship room for error because that will make our plan more secure in the long run. If you imagine your financial situation as a castle or fortress, your margin for error is your moat, protecting the castle from unexpected financial disasters.
“Avoid the extreme ends of financial decisions.”
Housel writes: “Everyone’s goals and desires will change over time, and the more extreme your past decisions were, the more you may regret them as you evolve.”
Plain and simple: it is hard to predict what we’ll want in the future, but one thing is guaranteed: things are going to change. It is wise advice to avoid locking ourselves into any extreme ends of the financial planning process, leaving our options wide open for our goals and preferences to evolve.
In practice, this could look like avoiding creating a budget or spending plan that matches or exceeds our income, locking us into our job no matter what. Instead, by creating a spending plan that allows for a healthy gap between what we earn and what we spend, we can allow our goals to change and have the freedom to take a different job, even if it means a temporary pay cut.
Setting up a plan that avoids locking you into extreme ends of the financial planning spectrum is a recipe for better financial outcomes and a lower probability of regret.
“You should like risk because it pays off over time.”
When it comes to investing, risk gets a bad rap. People often view risk as something to avoid, limiting their ability to generate investment returns, making it more challenging to achieve their financial goals.
The truth is, over long periods, taking risks in the stock market can end up looking a lot less risky than one might think. For example, consider that the S&P 500 has had a positive return over every single rolling 20 year time period from inception to now. Said another way, the market relentlessly marches up and to the right over long periods, rewarding investors who trust the process and stay invested.
“Define the game you’re playing.”
One of Housel’s most important points about wealth and greed centers around the idea that we’re not all playing the same financial game. So, for example, the right price to pay for Apple stock will be different for someone that’s saving for their retirement in 20 years versus someone planning to flip the stock before lunchtime.
We’re not all playing the same game—we have different goals, timelines, risk profiles, and motives. So as you look at others’ financial decisions, realize they may be doing precisely what they should be doing to achieve their financial goals while understanding that may be the exact opposite of what you should be doing to achieve yours.
“Respect the mess.”
Last but not least, Housel instructs his readers to respect the mess. The world of finance is big, complex, and downright messy. There’s not always one correct answer to each question because the answer will largely depend on your unique goals and desires with money.
That’s why smart and informed people can make widely different financial decisions from one another, and neither need to be wrong. As Housel aptly puts it: “There is no single right answer; just the answer that works for you.”
TrueNorth Wealth is Here to Help
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