54 pages • 1 hour read
Morgan HouselThe Psychology of Money
Nonfiction | Book | Adult | Published in 2020A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Themes
Personal Perspectives Inform Financial Management
In The Psychology of Money, Housel acknowledges the personal nature of financial management and urges the reader to recognize their own unique influences, biases, and goals. He claims, “People from different generations, raised by different parents who earned different incomes and held different values, in different parts of the world, born into different economies […] learn very different lessons” (14). For instance, he emphasizes the generational differences that can have a lasting impact on someone’s perception of money, banking, and the economy. He cites a study by economists Ulrike Malmendier and Stefan Nagel that identified clear generational differences in investors’ behavior. Housel explains, “The economists found that people’s lifetime investment decisions are heavily anchored to the experiences those investors had in their own generation— especially experiences early in their adult life” (16, emphasis added). People of the same generation may also view money differently depending on their nationality. For example, Housel contrasts people who endured the impoverished post-war years in Germany with the average American from that time, who enjoyed a healthy economy. He explains, “No one should expect members of these groups to go through the rest of their lives thinking the same thing about inflation. Or the stock market. Or employment. Or money in general” (19).
According to Housel, our income levels and social class also influence our personal perspectives about how to manage our money. For example, Housel examines the perspective of a low-income person who routinely spends their little extra money on lottery tickets, noting that they are almost certainly wasting their savings. Emphasizing the differences in perspective, he writes that while this decision may seem illogical to outsiders, it is important to picture the issue from the buyer’s point of view: “Buying a lottery ticket is the only time in our lives we can hold a tangible dream of getting the good stuff that you already have and take for granted” (22).
Other differences, such as people’s personal short- and long-term goals, can also impact our decisions. For example, Housel argues that generic financial advice does everyone a disservice since people have very different goals, incomes, obligations, and feelings about risk. Housel claims that it is difficult to fully realize how varied people’s approach to money can be, noting, “an anchor of psychology is not realizing that rational people can see the world through a different lens than your own” (155). Housel therefore urges the reader to recognize the personal nature of finance and not assume that others have all the answers, or are making poor decisions. He reminds the reader of the importance of “not being persuaded by the actions and behaviors of people playing different games than you are” (156), emphasizing that it is important “to identify what game you’re playing” (156, emphasis added) and make your financial plans accordingly. Housel’s analysis of such personal perspectives encourages the reader to acknowledge the subjective nature of money and to consider their own personal experiences that have shaped their relationship with money.
The Importance of Long-Term Planning
A recurring theme in Housel’s work is the importance of long-term financial planning. He argues that people find more value in accruing wealth than spending on luxuries in the short term, since saving decreases their stress and maximizes their independence later in life.
Housel repeatedly contrasts consumers who have short-term or superficial spending habits with those who have a plan for the future. For Housel, the greatest value people can extract from their wealth is more flexibility and independence, which require savings and a long-term perspective. He explains, “The only way to be wealthy is to not spend the money you do have. It’s not just the only way to accumulate wealth; it’s the very definition of wealth” (90, emphasis added). This long-term approach is not easy, he concedes, and he likens it to the discipline required to lose weight through exercise and healthy eating. This discipline, he argues, proves that “money relies more on psychology than finance” (97), since our own spending habits and expectations play a large part in our success or failures.
One of the main reasons Housel recommends long-term planning is to reap the full benefits of compounding. The author uses Warren Buffet’s unusually long career as an investor to demonstrate how investments held over a lengthy period can compound into a vast sum of money. According to Housel, if Buffet had not started investing until his thirties and had retired at a typical age, he would only have about $11 million dollars as opposed to his real total of about $84.5 billion. The author explains, “Effectively all of Warren Buffet’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time” (49, emphasis added).
Housel emphasizes the necessity of long-term planning in his analysis of risk assessment as well. Housel urges the reader to avoid risky investments or spending habits that could ruin them completely by leaving them in bankruptcy or with crippling debt. These misfortunes would be bad on their own, but, even worse, they may prevent people from ever building back up their wealth and savings again. Housel underlines that financial survival is essential because it gives you “longevity,” which is what enables compounding to “work wonders” (58). Without savings or investments compounding over the long term, people miss out on easily-generated wealth that could make a significant change to their quality of life later on. Housel’s arguments and analogies urge the reader to develop a more long-term vision for their finances that avoids unnecessary risks and emphasizes compounding opportunities.
Rich Versus Wealthy
A major theme in Housel’s work is the distinction he makes between being “rich” and being “wealthy.” Housel distinguishes between these two categories in order to encourage the reader to value independence and security over possessions, and to encourage them to develop certain habits that will create long-term wealth rather than short-term riches. He writes, “We should be careful to define the difference between wealthy and rich. It is more than semantics. Not knowing the difference is a source of countless poor money decisions” (90).
To Housel, being rich means that someone has a high-enough income to allow them to spend money on luxury items that signal their wealth to others. For example, someone with a high income may spend a lot of their paycheck on car payments, vacations, jewelry, or luxury clothes. Housel often mentions how status symbols can create a misleading impression of someone’s financial state, persuading the reader to not take them seriously as markers of true wealth. For example, Housel reminisces about his time working as a valet in Los Angeles, where he realized that some clients were not nearly as wealthy as their possessions suggested. He recalls, “If you see a Ferrari driving around, you might intuitively assume the owner of the car is rich […] the truth is that wealth is what you don’t see. Wealth is the nice cars not purchased” (89, emphasis added).
Furthermore, because possessions usually depreciate over time and do not guarantee you any independence or security for the future, Housel disapproves of overspending on them when those funds could be invested for the future. He shares an anecdote from Rihanna’s former financial advisor, whom she sued when she nearly became bankrupt due to overspending. Housel explains, “The advisor responded, ‘Was it really necessary to tell her that if you spend money on things, you will end up with the things and not the money?’” (90). Housel notes that when people say they would like to be a millionaire, they generally mean that they would enjoy spending a million dollars, which he observes is “literally the opposite of being a millionaire” (90, emphasis added). He explains, “Spending money to show people how much money you have is the fastest way to have less money” (88). Housel’s examples paint “rich” people as impulsive and uninformed, revealing how these spendthrift traits can lead to financial ruin.
In contrast, Housel describes true wealth as money that people have saved or invested, or valuable assets they own and could sell in the future. As such, “its value lies in offering you options, flexibility, and growth to one day purchase more stuff than you could right now” (90). Housel laments that it is easier to notice and admire “rich” people rather than “wealthy” people, since the restraint and frugality necessary to building real wealth are actions that we cannot see. He observes, “[I]t is easy to find rich role models. It’s harder to find wealthy ones because by definition their success is more hidden” (91, emphasis added). His anecdote about Ronald Read, the janitor who had $8 million saved by the time he passed away, serves as a prime example of how living frugally can generate real wealth, which remains hidden from view.
Housel reveals that he is trying to do something similar to Read, since “independence has always been my personal financial goal” (191, emphasis added). By living below his means and maintaining a high savings rate, Housel is not living like a “rich” person, but is instead generating wealth for his long-term plans. He and his wife make this possible by prioritizing their savings and fostering their sense of “enough.” Housel writes, “Our savings rate is fairly high but we rarely feel like we’re repressively frugal because our aspirations for more stuff haven’t moved much” (192). Housel’s admiration for careful long-term planning, maintaining a modest lifestyle, and prioritizing independence over status symbols suggest that becoming “wealthy” is a much better goal than becoming “rich.”
