Cracking the Wealth Code: 5 Valuable Lessons From The Psychology of Money …

5 money lessons I learned from “The Psychology Of Money”

8 min readAug 9, 2023

“The highest form of wealth is the ability to wake up every morning and say, I can do whatever I want today ”- Morgan Housel

Before we jump onto the valuable lessons that will change your relationship with money, let’s start with a brief introduction to the book.

The thought behind this book is that doing well with money has little to do with how smart you are and a lot to do with how you behave and behavior is hard to teach, even to really smart people.

It teaches us that financial success is not a hard science, it’s a soft skill, where how you behave is more important than what you know. It uses brief narratives to persuade you that soft skills are more significant than the technical side of money.

Enough of the introduction, now let’s talk about something that you’re here for. Here are 5 Valuable Lessons From “The Psychology of Money”

1. Luck And Risk Are Twins:

The impact of luck and risk on your financial success is very hard to measure. They are both the reality that every outcome in life is guided by forces other than individual effort. In the real world, 100% of your efforts do not lead to 100% of outcomes.
The accidental impact of actions outside of your control can be more consequential than the ones you consciously take. When you give luck and risk their proper respect you’ll come to realize that financial success both your own and others, it’s never as good or bad as it seems.
But when judging other’s financial success we attribute a great deal of it to luck, and when it comes to our success attributing it to luck can be hard to digest. We tend to celebrate great results not great decisions.
Great decisions don’t always lead to great outcomes, bad decisions don’t always lead to bad outcomes. In poker, this is known as resulting; we rate a decision based on its outcomes alone.
We celebrate investors who make reckless decisions disguised as boldness and get lucky, and we judge an investor’s skill when he or she makes a solid decision but ends up on the unpleasant side of risk.
As Morgan Housel said “The line between inspiringly bold and foolishly reckless” can be a millimeter thick and only visible with hindsight. Therefore, focus less on specific individuals and case studies and more on broad patterns.
Both success and failure are lousy teachers; one seduces you into thinking you are invincible and persuades you to attribute a large part of your success to risk, and even if the investment decision was a bad one, the success of it will make you believe it was a good one.
On the other hand, failure can make you believe that your investment decision was poor just because it didn’t turn out to be great and we fail to notice the unforgiving realities of risk.
The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out so you can keep playing until the odds fall in your favor.

2. Never Enough:

Greed is a powerful human emotion that guides a lot of our financial decisions, clouds our judgments, and leads us to make bad financial decisions as well.
We never know when’s is enough. We hear stories of people ruining their happy families just so that they can earn more and justify it by saying that they were doing it for their families.
People end up behind bars for financial fraud because they don’t know how to keep the goalpost from moving. There is no reason to risk what you have and need for what you don’t have and don’t need.

There are two reasons why we are not able to get out of this foolish race:

(A) Social Comparison

Social comparison is a battle that can never be won, there will always be someone bigger, better, wealthier, talented, or happier than you. Even when you reach the top you will still somehow find someone who is better than you in some aspect of life.
Social media and consumerism culture collectively encourage us to buy bigger and better things.
They promise that it will make our lives easier and more comfortable, as well as raise our social status so that people will respect us more, we will be liked by our peers, accepted in a group, or simply make us look cool on social media, and we believe them. They make us feel that it’s never enough.

(B) Our Perception Of “Enough” Is Incorrect

The idea of having enough feels like leaving opportunity and settling for less than what we deserve. But “Enough” is realizing that the opposite — Your desire for more will drive you to the brink of regret.
There are things in life never worth risking, no matter the potential gain. The feeling of not having enough will push you to make decisions that will hurt or destroy the things you value most, such as your reputation, freedom, happiness, friends, and family.
The best shot at keeping these things is knowing when it’s time to stop taking reckless risks that might harm them and knowing when is enough.

3. Getting Wealthy And Staying Wealthy Are Not The Same Thing:

Investors we have been successful in the long term such as Warren Buffet and Charlie Munger, work with mental tricks, tools, and attitudes that are eminently applicable to everyday life.
Their first and foremost priority is to avoid the downside, i.e. what not to do. Before they even think about the upside.
As Warren Buffet observed: “Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.”
Charlie Munger has commented: “It is remarkable how much long-term advantage people like us have gotten by trying not to be consistently stupid, instead of trying to be very intelligent”
Getting money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking a risk. It requires humility and fear that what you’ve made could be taken away from you just as fast and in your past success luck played a major role and you can’t rely on luck indefinitely.
The examples are all around us people who have reached the top of the financial ladder only to fall off from it even more quickly. Sportsmen, celebrities, pop stars, and entrepreneurs became wealthy through their expertise but failed to maintain their wealth because they made stupid decisions with their money.

4. You Need A Few Superstar Investments To Be Financially Successful:

If a venture capitalist makes 50 investments they likely expect half of them to fail, 10 to do pretty well and one or two to be bonanzas that drive 100% of the fund’s returns. Investment fund correlation ventures once crunched the numbers. Out of 21,000 venture financings from 2004 to 2014:
65% of lost money and only 2.5% percent of the investments made 10x-20x returns. One percent made more than 20x returns and half a percent made 50x or more.
So you must accept the fact that not all of your investments will perform well; in fact, the majority of them will fail miserably and lose money; However, the good news is that you only need a few superstar investments to outperform the rest of your failures.
Nobody not even great investors like Warren Buffet, Peter Lynch, Charlie Munger, or anyone else for that matter are immune from making bad investment decisions. No one can make good decisions all the time.

5. The Dividend Money Pays Is Freedom:

“The ability to do what you want, when you want, and with who you want, for as long as you want, is priceless. It is the highest dividend money pays.” — Morgan Housel

The major factor in our happiness is not money, it is about having a strong sense of controlling one’s life, making decisions on our own, and living life on our own terms that make us happy.
Money is important but only to a certain point after that more money doesn’t guarantee more happiness, so if you sacrifice your freedom to earn more money you’ll make your life and yourself even more miserable than before.
So if you want to be happy buy freedom through money, not a bigger house or a luxury car. But we use our greater wealth to buy bigger and better stuff and in turn, give up more control of our time.

“Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.” — Morgan Housel

Despite inflation, our generation is earning more than our ancestors couldn’t possibly imagine in their wildest of dreams but our control over our time has diminished significantly and since controlling your time is such a key happiness influencer, we shouldn’t be surprised that people don’t feel much happier even though we are, on average, richer than ever.
Solution: Whenever you have the impulse to buy something, pause and ask yourself a few simple questions:

Q1: Do I really need this product?

Q2: Can I live my life without it?

Q3: Am I buying this product just because everyone is buying it?

Q4: Would Invest in this product save time or money in the long run?

Filtering your decision through these questions will help you spend your money wisely and on stuff that you actually need and trust me, you don’t need a lot of stuff to be happy, productive, and entertained.

“People who live far below their means enjoy a freedom that people busy upgrading their lifestyles can’t fathom.” — Naval Ravikant

I appreciate you taking the time to read this article and paying attention to it.

Follow me on Memo’d a great short-form format for sharing knowledge, and the perfect place to store and showcase my work. Anyone can join and enjoy the content totally free, check it out.

Feel free to share your thoughts in the comments section below.