For our inaugural book club discussion, we read and examined Morgan Housel’s The Psychology of Money. The book explores the psychological biases and emotional pitfalls that can influence our financial decisions and offers insights and strategies for gaining a clearer and more confident understanding of our money. We explored what wealth meant to each of us and shared childhood money memories that have shaped our opinions and biases as adults. Throughout our vibrant and thoughtful conversation, we were able to hear everyone’s “aha” moments and favorite lessons learned throughout their journey with the book.
The Human Aspects of Money
Retirement planning and wealth management are complex topics with many intricacies, nuances and pitfalls. It is easy to become bogged down by the mountains of advice available, the dated formulas, and the counterintuitive investing theories. Sometimes amid all the data-driven strategies, we overlook the very human element of our finances. By exploring Morgan Housel’s book, The Psychology of Money, we were reminded of the psychological foundations of wealth, greed, and happiness. Our discussion focused on the mental and emotional components that help us to make decisions, particularly concerning money. The objective? To help avoid common mistakes and encourage wise financial decisions.
“Aha” Money Moments
While we often discuss the difference between saving and investing versus spending and what that means for our wallets, Housel articulates it in a simple, yet very effective, phrase: Wealth is what you don’t see. Throughout our lives we are trained to equate wealth with material objects, whether it be the shiny new car parked in your neighbor’s driveway, the luxury weekend getaways you see on Instagram, or the beautiful jewelry your sister just got for her birthday. However, a point that Housel stresses, and one that resonated with us, is that these material objects have nothing to do with wealth at all, but actually show us the opposite. They are a demonstration of spending, not accumulating, assets. They are a sign of money that has already been spent.
Our discussion provided a perspective that building wealth isn’t shiny or showy. It’s not something that provides instant gratification or something you can show off to a neighbor. Building wealth is what happens behind the scenes. Wealth is the money that you choose not to spend, what you choose to save. And this is hard because these signs of spending (or what we previously thought of as wealth) are all around us and it can be easy to get caught up in these signals of social status. This brings us to phrase #2: Beware of taking financial cues from people playing a different game than you are.
The most important two factors to consider when thinking about your assets are your time horizon and your goals. This has absolutely nothing to do with anyone besides yourself and what matters the most to you. For example, let’s pretend my neighbor was trying to convince me to invest $10,000 in a short-term, speculative investment with a chance for it to double in six months. She was planning on making the same investment as well. I trust my neighbor, and, at the outset, it seems like if she was willing to make this investment, I should too. But let’s take a step back. What I might not know is that my neighbor also has $500,000 invested in a safer, long-term investment strategy, whereas I only have $15,000 in savings because I’ve been focused on paying off medical school loans while supporting my family. That $10,000 represents different wealth to my neighbor compared to me. We are playing very different games, so I should not be persuaded to use the same financial cues.
What if it was only $500 instead of $10,000? Let’s turn to phrase #3: Small decisions can have a significant impact. Housel emphasizes that small, seemingly insignificant financial decisions can have an outsized impact in the long run. A small but consistent saving habit can grow exponentially over time through the power of compounding, leading to wealth accumulation. Similarly, small daily habits, such as eating out for lunch or buying a cup of coffee every day, can appear insignificant, but their costs add up quickly. By examining their daily habits and cutting back on even a few expenses, individuals can significantly impact their overall financial health.
The Financial and Behavioral Gist
Personal finance is less about mathematical formulas and more about human behavior. Financial success and long-term wealth accumulation are typically the result of positive, lifelong habits, such as saving, living within our means and being disciplined in investment decisions. By understanding how human behavior affects investment and retirement planning, people can learn to harness the power of their minds and avoid common mistakes associated with fear or greed. The goal of personal finance is not to beat the market or win financial competitions, but to achieve financial security and happiness, whatever that means for the individual. This achievement is not an easy feat, as Housel points out that the hardest financial skill is getting the goalpost to stop moving. Deciding what “enough” is for yourself and your family, and sticking to it, will enable you to reach a level of financial freedom that many always feel is slightly out of reach because of a never-ending endzone.
The Psychology of Money reminds us of the human factor involved in personal finance. At Treehouse Wealth Advisors, we see life as an ever-evolving journey—we get it. That’s why when the joy of marriage or a new job brings change to your family’s situation and finances, our team is here for you. Whether it’s a big celebration or the inevitable reality checks of life—rest assured that together we can stay committed to keeping everyone on a secure path. By addressing financial decision-making’s emotional and psychological components, individuals can make better choices and avoid common financial mistakes.
