Understanding the Psychology of Money
“The Psychology of Money” by Morgan Housel has some of the most eye-opening perspectives on personal finance, wealth, risk, and success. Making sense of money isn’t just about understanding numbers and economics. It’s about grasping human behavior, both our own and others, and recognizing that behavior is hard to predict and often harder to rationalize. Many of the strategies we implement here at JB2 are reflected well in this book.
Key Takeaways
1. Personal History and Experiences Shape Our Financial Behavior
Housel emphasizes that each individual’s financial behavior is strongly influenced by personal history and unique experiences. For example, if you grew up in a high inflationary time, you will look at money and investing in a much different light. Growing up in a real estate family has dramatically influenced our investment decisions. It’s essential to understand your money preferences. For us, it’s safer, stable properties that yield a reasonable return but allow us to sleep at night. How you behave with money often is more important than what you know.
5. Compounding is a Powerful Force
Housel illuminates the powerful role that compounding plays in wealth generation. Patience and a long-term perspective are keys to leveraging this silent engine of financial growth. It’s not about getting rich quickly but about small, consistent gains over a long period of time. He uses Warren Buffet as an example; he doesn’t have the best average yearly return ever but has had consistent returns since he was literally a child. A majority of his wealth has come from after his 80th birthday. The historical odds of making money in the US markets are 50/50 over one-day periods, 68% in one-year periods, 88% in 10-year periods, and till this point in time, 100% in 20-year periods. The key to allowing compounding to do its work is just staying put with an investment in the long term.
4. Rational Decisions Aren’t Always Rational
Housel explains that rational financial decisions often aren’t objectively rational but are influenced by an individual’s unique circumstances, emotional needs, and life experiences. This insight highlights the importance of understanding the psychology behind our decisions about money. What investment will keep us at ease and allow us to sleep at night and maintain a particular strategy for the long-term.
5. Saving
Savings for saving’s sake is essential. It’s good to have goals to save for. However, there will be the inevitable major financial surprises that, without serious savings, you may not be able to withstand. For example, we have ample reserves on our properties and try to add to them as time goes on. We know, especially in some of the older buildings, there will be unaccounted surprises that we need to endure so that we are never forced to sell at an inopportune time. Savings gives you the flexibility and strength to take advantage of more opportunities when they present themselves.
6. Worship Room for Error
No investment ever goes exactly to plan. We build in wiggle room where we can, like not modeling big pushes in rent, inflating expenses a little bit to handle possible expense swings, and always having plenty of reserves, aiming low to meet or exceed our projections. It can be more of an art than a science on our properties. This is when experience with actually running buildings count—ultimately building enough room for error that we can absorb any error that comes up.
7. No Longer Moving the Goal Post
Knowing your enough is so crucial. Getting to the point where you are comfortable and don’t feel you need more. You no longer feel like you need to keep up with the Joneses. You are not giving a dam about how people may perceive it. Knowing your enough may feel like you are missing an opportunity or avoiding growth. It’s the opposite because that insatiable want for more will eventually turn into regret and unhappiness. However, growth is good in needs to come with great responsibility after a certain point. For example, we stopped new purchases when we felt the focus needed to be on our existing portfolio.
8. Time is Wealth
Ultimately the true sign of wealth is spending as much time as you want with those you want to spend it with. It is being able to wake up in the morning and indeed do everything you want to do without obligation. That could be some work, but we are choosing to do it and not forced to do it to pay bills. That’s why we have specific cashflow goals to get to and promote for anyone that invests with us.
Ultimately the main goal is to own enough assets to live your “enough life.” Spend whatever time you want with whoever you want. Leave enough room for error and have significant savings to endure the mistakes. You are allowing time and compounding to do magic for you over time. Lastly, making sound investments enables you to get enough of a return but lets you sleep at night. Peace of mind at the end of the day and ultimate freedom is the name of the game.