The Core of Money Management from Morgan Housel, the Author of The Psychology of Money
It isn't about how much you have when it comes to money. Instead, it boils down to how you behave. There may be a million pieces of advice out in the world about what to do with your money, but it's your money management skills that determine whether you become wealthy or not.
In his book, "The Psychology of Money", Morgan Housel, award-winning author, and Partner at The Collaborative Fund, shares personal finance lessons through 19 short stories. Each of these stories highlights a unique psychological aspect of how people deal with money, the greed of money, and the key to happiness.
Here are five personal finance takeaways from the book:
1. Don't Underestimate the Power of Compounding
Warren Buffett is one of the most well-known and respected investors globally. He has consistently been among the world's wealthiest people in the last two decades. Here's the fact that you may not know that the book highlights: $81.5 billion of Warren Buffett's $84.5 billion net worth came after his 65th birthday. That comes from his careful long-term investment bets. Saying you're a long-term investor is like standing at the base of Mount Everest and saying you're going to the top. The hard part is getting to the top. You need to stick it through the downturns of markets to get wealthier at the end of it.
2. Making Money is Very Different From Keeping Money
People often fail to realise that making money and keeping money require two completely different skill sets and outlooks. Making money is all about taking suitable risks, working hard, approaching money situations with optimism, and constantly putting yourself out there. However, keeping the money you have made requires you to think and behave the right opposite. It involves being frugal with your expenses, guarding what you have made, and acknowledging that what you have made can be taken away just as or more quickly than you made it.
3. Cash Isn't the Enemy
Having too many cash reserves is seen as a negative when it comes to money management. Most people invest their surplus reserves and hold a tiny percentage in cash. While this may seem like the right move, market movements are unpredictable. Suddenly, there may be a 20%-30% decline in share prices that could give a massive blow to your portfolio. In such situations, you may be prone to panic selling. The flip side of that is that you may not have enough money to capitalise on the downturn. Sometimes, having a large cash reserve cannot make poor financial decisions and can be an excellent move for your portfolio. If you have read Warren Buffett's latest letter to his shareholders, you will know that he also upholds this view.
Additional read: The Key Lesson from Warren Buffet's Letter to Shareholders
4. Time is What Money Can Buy You
The most valuable thing that money can buy you is the freedom to control your own time. "The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays," Housel says in his book. Having the flexibility to do what you want with your time is much more valuable than getting an extra 2%-5% return on your investments that will cost you your sleep.
5. There is a Price to Pay For Investing
Nothing in the world is free. Even generating wealth comes at a cost. That isn't the literal cost of savings or investment charges. Instead, it is the psychological cost of investing. You have to be willing to endure the volatility of the markets if you want to be invested in the long term. There's no predicting how markets will move. Your financial condition may also change. That will have an impact on your investment strategy. You have to tide through the extreme fluctuations in the market and stick to your long-term investment goal for success.
The theory of money is very different from the reality of money. As Housel says, we are not spreadsheets at the end of the day. We can't function based on the principles of money. It all boils down to your money management skills and how you behave during a market downturn. Personal finance is about your decisions with your money rather than the amount of money you have.
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