The 5 Most Important Lessons I Learned Reading The Psychology of Money
So, I heard a lot of people talking about this book, The Psychology of Money by Morgan Housel, and I just finished it.
There are 20 lessons in this book, not about boring finance advice but rather about human behavior and the way people view, think and use their money.
In this article, I’ll highlight the main lessons I personally took from the book that changed my perspective on money.
That said, unlike the book, I’m going to talk about these lessons in order of importance so that you can develop a better money mindset and understand what to change when it comes to your own behaviour.
7. Freedom
The lesson number 7 is the most important because it gives us the ultimate goal, the final destination when it comes to money.
Most people, especially on the internet, will tell you that you need money to buy stuff, to acquire things that have been designed to look attractive.
But if there is one thing that has been known for millennia, it is that you cannot buy your way to happiness.
Stoics knew this millennia ago and told us that wealth is “indifferent” in the quest for happiness and fulfillment.
There’s this famous story about King Midas, who was once granted a wish and asked the gods for everything he touched to be turned into gold.
After enjoying it for a little while, he realized that it was more of a curse than a blessing.
The food he was about to eat turned into gold bars, and the wine he was about to taste became inert metal.
He hated himself for wishing for so much wealth and material richness when his young and beloved daughter ran into his arms, only to turn into a lifeless, shiny statue.
The goal of money is not to buy stuff. The goal of money, according to Housel, is to gain freedom—the ultimate goal of money is to have control over your time.
In other words, time independence: being able to work when you want to, to go out when you want to, and rest when you feel like it.
This is why money matters—because money is the best modern tool to gain time independence, not because it gives you access to Porsches, watches, and luxury…
But rather because it can allow you to access more control over your life. That’s if you decide to use it to buy back your time.
That profoundly changed my vision of money. This idea that the main thing isn’t possessions but how you use money to access more time and enjoy life more is life changing.
It is not something I discovered in this book but rather an ideology I started cultivating a little while ago. And the more I encounter it, the more it shapes my view of money.
Problem is, if you take a look around, most people are working 9-5 jobs and using their money to buy the newest shiny product.
When you’re young, hourly paid jobs with low wage are pretty much the only jobs you can get, considering the fact that you don’t have much experience.
Reading the book, the biggest lesson in my mind is that it’s a training—you have to go through the 9-5, the lack of control, and the lack of time to learn the lesson for yourself.
And this mentality—that you have to tolerate the current circumstances and be patient to access freedom later in life—is what leads us to chapter 4.
4. Confounding Compounding
Compounding interest is everything, and it directs money in a way the human mind can’t really grasp because of its time component.
Now, I don’t want this article to get technical, and to be honest, I wouldn’t be the right person to teach you about finance, but here’s a simple definition of it:
Compound interest is “what happens when the interest you earn on savings begins to earn interest on itself.” (Securian Financial)
If you invest money and use compounding interest, you can reach relatively high amounts of money with regular and stable investments—if you let it sit for long enough, that’s the key.
That’s how people got rich in the past, that’s how millionaires are made today and that’s also your most secure way to reach wealth and financial stability.
Compounding interest is no secret. People have been using it for decades, if not longer, and the main component here has nothing to do with finance, it’s a skill—it’s patience.
Most people don’t want to let their money sit in the bank for 20 years without touching it, and that’s the reason it’s so powerful—because you have to be patient in a world where most people are not.
Ultimately, this is a concept I apply not only to money but to my life in general. Compounding interest factors into every big decision I make.
When I started writing, I thought it would take me just a couple of months to get a full-time job writing and that my writing would notably improve after a few weeks.
I mean, there are courses out there promising to make you a full-time writer in 20 days, so in my mind it wasn’t that high of a barrier to entry.
This was naive on my end. But after writing for a while, I realized that the skill also rests on compounding interest—and that if I start writing now, I will probably become good at it in 5 years and not 5 weeks.
The sooner you reframe your mind to think in terms of long term compounding interest instead of direct benefits, the better life becomes.
You don’t have to make risky financial decisions. You can bet on time to grow your money. You don’t have to suffer the anxiety of the day to day life struggle, you can believe in a better financial future.
Applied it to life and you don’t have to stay up all night, dying of stress, studying for an exam anymore. Instead, you can start a week or two in advance and study for 30 minutes a day as it will compound.
You don’t have to learn coding within the next 3 months. Instead, you can extend your time horizon and give yourself 2 years to learn it properly, without destroying your sleep in the process.
Now, I’m not saying that everything you’ll invest in will blossom, but I think it’s the best way to build something truly sustainable that can last a lifetime.
Housel uses this concept to talk about money, but I think that the patience needed to put this strategy in place is the single greatest tool you can develop. Because patience is what will give you the edge.
Most people are sleep deprived, working too many hours and making emotional decisions when it comes to their money, wasting almost everything in the short term.
Meanwhile, if you choose to take the compounding route, you can work towards a better future—a little bit every day—without ever paying a high cost on the short term.
And with that skill, with patience, well that leads us to lesson number 10.
10. Save Money
Housel argues that you need to learn to save money just for the sake of saving it. You don’t need to have a grand goal at the end of the spectrum to keep you going.
Just save money because your future self will probably need it for something, but don’t expect any specific reward at the end. Now that’s an alienated mindset in a consumerism based society.
[One critique I have about the book is that, for a book titled The Psychology of Money, there are almost no reference to direct psychological concepts in it. It’s more about the mindset of money.]
To really understand lesson number 10, we need to talk about gratification. You’ve probably heard of immediate gratification, which is expecting an immediate reward for a behavior.
A kid draws well, you give the kid a sticker. Pretty simple to understand.
The opposite of that is called delayed gratification, which involves doing something without expecting an immediate reward afterward.
I started learning to piano a few months ago with no prior experience whatsoever and it is a struggle.
I told myself not to expect any specific outcome or margin of improvement because I want to play the piano just for the sake of doing it and not because I want to become good at it.
Becoming good at it will be a consequence, a byproduct of cultivating that mindset for a long enough time frame.
Because if I was to expect myself to be able to play a piece in a couple of days (it’s likely that I would have stopped learning, quickly)
This is delayed gratification, there a reward but it’s distant I know it will happen someday but in the meantime, I have to find motivation elsewhere (which can only be found in discipline).
These two concepts are crucial when it comes to money. By the way, immediate gratification is the main reasons why most people are broke.
They need to reward themselves and use money to do so, especially when they feel low. That’s why they often have nothing left to invest. (But we’re going to get back to that topic in the last part)
Saving money just for the sake of saving is really hard because it’s an extreme form of delayed gratification—you don’t even know what the reward will be.
Therefore, the mindset you need to cultivate is one of true optimism and trust: If I save this amount of money today, my future self will use it for the better and be grateful for my current actions.
In my opinion, that’s the wisest way to save money. But it means you have to have faith in the process and, in the meantime live the short term with the minimum.
As the reality to understand here is that “later money” almost always has more potential than “right now money.”
I’m in my 20s, and I don’t make much money to be honest. But I’ve realized that I don’t need that much if I set my ego aside and only buy the things I truly need, the viable minimum.
In my mind most of the shiny, fancy stuff people buy is just an attempt to gain social approval things like cars, Rolexes, designer clothes…
What’s the difference between a $100 G-Shock and a $50,000 Rolex? Both tell you the time.
The only real difference is that people don’t pay attention to a Casio, but they notice a Rolex.
But remember lesson 4 - the truth is, true wealth is a byproduct of time and compounding interest even if that means not looking like a rich person for a long time.
Those who burn their money in the present trying to buy social approval will never get closer to real wealth.
And the best thing you can do in your 20s, in my opinion - is to adopt the right perspective about money, not to get crazy amounts of it and go crazy with the purchases.
19. All Together Now
In the book, chapter 19 is a sort of summary, and it’s really about investment strategies, but I found one sub-lesson that struck me.
You probably are not playing the same game as the people around you.
This means that even if you’re virtually doing the same thing or in the same situation, you’re not aiming for the same outcomes.
At work, you may be surrounded by colleagues who don’t want to grow in the same way you do, yet you see them every day and are pretty much doing the same thing.
I remember 3 years ago, during COVID, when I was working in a grocery store. I was standing all day, looking at people fighting for pasta, toilet paper and wearing spacey outfits to avoid the virus.
At the time, I was a student, but since school was closed, I had what was essentially a full-time job there.
What truly shocked me was how, even though I was living in the same reality as the people around me on a daily basis, my mindset was completely different.
I saw the supermarket as a temporary way to pay for expenses, and the sooner I could get out of there, the better, because the redundancy of the job was destroying my brain.
I realized that some of the staff had been working at that same supermarket for over 20 years. They had started when they were around my age and had never left.
This vision haunted me. I kept repeating to myself, “You’re not here for the same reasons” - which way may own version of “you’re not playing the same game as those people”
It’s easy to get lost in your journey and look to the people around you to understand where you are and what you should do.
But if you’re not playing the same game, the hard truth is that you only can put faith in yourself and keep going even if you’re temporary stuck in your surroundings.
Some people spend their whole lives playing a game that doesn’t really interest them, and I personally think that’s the equivalent of a mental death.
So, if you’re in a spot you don’t enjoy right now, if you feel stuck, if you’re not proud of your actions, you need to stick to the plan, what has the most chances of getting you out.
Keep moving forward, and remind yourself that you’re not playing the same game as the people around you even if you’re in the same exact situation at the moment.
You have different goals for yourself. You have ambition. You have things you want to accomplish.
Even if that means that right now you’re stuck working full-time in a grocery store you hate, hoping for a different set of cards.
20. Confessions
In the last chapter of the book, Morgan Housel explains his personal view on money and how he handles it in his life.
I found that part to be the most relatable and enjoyable to read because it felt more human than the rest of the book, which was good but sometimes leaned a bit too much into finance-geek territory for me.
So, I thought I’d write my own version of his chapter confessions and share how I consider and use money as just a random 23-year-old guy just because, why not.
First of all, I think money is a tool that’s meant to cover necessities—that’s why it was invented three thousand years ago.
In my opinion, money is useful for paying rent, buying food, covering phone bills, and occasionally purchasing something you really enjoy, even if you could live without it.
I think that nowadays, a lot of people have lost sight of the primary purpose of money and have become completely absorbed by the idea that money can buy the love, admiration, and approval of others.
Personally, I believe that in your 20s, you shouldn’t seek to become super rich and maybe I say that because I’m not rich myself, I don’t know.
Instead, I think that the plan should be to focus on building a healthy relationship with money that will last a lifetime.
And to me, the most important lessons I’ve learned in my life when it comes to money are:
To learn how to live below your means
To save money early on for the right reasons
Not to use money for self-regulation
We’ve already discussed the first two, so I’ll focus on the last one that I touched on prior.
Sophia was a friend of mine who often felt anxious and sometimes even depressed about events in her life.
During the day, she was social and high-energy, but it was clear that she was deeply unhappy at times.
On the days she felt low, she would use shopping to cheer herself up. Being in malls, going from store to store, and choosing whatever she wanted gave her a sense of control and an escape from negative emotions.
But that control only came from using money to exert it. Despite not having tons of money, she always had the latest jackets, shoes, and designer bags.
When I talked to her, I realized how little those things actually mattered to her. The only reason she bought them was for the brief hour of joy and excitement she’d get from the shopping episode.
That’s using money for self-regulation. And like any unhealthy habit, once it becomes part of your life and you’ve trained your brain to rely on money for emotional regulation, it’s really hard to unlearn.
This is especially true for young adults, who tend to feel stronger emotions and are more prone to seeking approval and admiration from others, which is likely to lead to an unhealthy relationship to money.
Of course, shopping isn’t the only way this pattern manifests. You need to take a look at your own life to see if you use money in a dysfunctional way.
Anyway, those are the most important lessons I took away from the book and my take on it.
The book is honestly, it’s a great starting point if you’re in a similar situation and want to learn more about money behavior but aren’t into finance (like me).
That said if you’re really into psychology, I don’t think that this book does it for you I think it’s a rather shallow psychological approach and that it’s more of a self-help finance book.
Let me know what you thought of this article, and as always, I hope this helps. Trust the process.