Morgan Housel’s book “The Psychology of Money” is an impactful bestseller that emerged during the global pandemic.
It’s an insightful look into the natural tendencies people have with money and explains how these tendencies have developed over time. The book is especially relevant to today’s economic environment in the wake of the global pandemic.
1. The Overconfidence Factor
One emerging idea from the book is that many investors are overconfident in their knowledge of financial markets, and they often overestimate the amount of control they have. This issue is discussed both at an individual level and institutional level with the federal reserve. Throughout the book, Housel explores the probabilities of financial success among different groups of people.
2. Compound Interest
A second theme throughout the book is the idea that investing over the long term gives us the highest probability of reaching our financial goals. The power of compounding creates the surest way to multiply our savings and achieve financial freedom. Albert Einstein has been quoted as saying, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Essentially, compounding is the idea of investing and then continually reinvesting your earnings for years on end. Your initial earnings are put to work, and earn even more, and so forth. This allows small beginnings to snowball into a money machine by retirement. In theory, using the rule of 72, your investments can double every 9 years, assuming an 8% average annual rate of return.
To illustrate the power of compounding, let’s say that an individual has $30,000 invested for retirement by age 30. Assuming they earn an 8% annual return and invest $6,000 per year, by age 56, this investor will have saved $701,617.
By extending this calculation to age 65, allowing 9 more years of compounding, this investor will have saved $1,477,461. Nearly a million and a half dollars. That’s roughly double the amount they accumulated over 26 years by giving their assets another decade to compound. That is the power of compounding over long periods. This example also highlights the importance of patience and staying invested for the long term.
3. Stick to Your Goals
A third point in The Psychology of Money is Housel’s advice to stick to your goals. You have a set financial plan and financial goals that are unique to your situation. It can be easy to get caught up comparing yourself to others and let it influence your decisions—also known as “keeping up with the Joneses.”
In addition, Housel discusses how we can be drawn to try to impress others by placing more value on our external appearances. Housel encourages the reader to stay the course with their goals despite the distractions they may face. If you find yourself easily distracted from your financial goals, then it may be time to take a closer look at why your goals are important to you. If you can “find your why” that’s truly important to you, then you will have a deeper dedication to your financial goals.
4. Wealth Is What You Don’t See
Towards the end of the book, Housel advises readers that the true value of wealth isn’t the ability to purchase luxury items—it’s control over your time. Many Americans are incentivized to save because it gives them the ability to retire from their career and spend more time with their loved ones.
One interesting point Housel uncovers is that money saved today gives you the ability to buy freedom in the future. Housel states that “Wealth is what you don’t see.” The value of savings is the options, flexibility, and growth it provides that you otherwise would not have. Real wealth is income not spent—it’s assets tucked away on balance sheets.
5. What Is Enough?
A key point in the second half of the book involves a discussion around defining enough. Everybody has a different definition of enough, but it is critical to define what is enough for your life. Without a clear definition of enough, you can arrive at retirement and realize that you don’t have as much as the next person.
Remember, there will always be somebody who has more than you. This can either spur you to continue to strive for more, or you can be at peace with it because you know what enough is for you. In the end, Housel says that sitting down and defining enough ahead of time will allow you to feel content once you’ve reached your goals.
Turn to TrueNorth Wealth
Here at TrueNorth Wealth, we specialize in helping households clearly define their financial goals and partner with them to plan their path forward into retirement. We focus on understanding our client’s goals and helping them achieve those essential goals through comprehensive fee-only financial planning.
To schedule a consultation with one of our local financial advisors in Boise, ID, or throughout Utah, call us today!