20 Lessons From The Psychology of Money That Changed How I Think About Money
Summary
TLDRThis video script explores key lessons from 'The Psychology of Money,' emphasizing the impact of perception on financial decisions. It discusses the role of luck versus skill in investments, the importance of recognizing when 'enough is enough,' and the power of compound interest. The speaker encourages viewers to focus on financial freedom, frugality, and the long-term benefits of investing, while also cautioning against the pitfalls of ego, the influence of negativity in news, and the need for a balanced approach to risk and reward in building wealth.
Takeaways
- 🧠 Perception vs. Reality: Our experiences make up an infinitesimal part of the world's events but heavily influence our understanding of how the world works.
- 🎩 Luck vs. Skill: Financial outcomes can be influenced by factors beyond our control, emphasizing the importance of distinguishing between luck and skill in decision-making.
- 💰 Contentment: Recognizing when we have enough is crucial for financial and personal well-being, as constant pursuit of more can lead to unnecessary stress and dissatisfaction.
- 🔄 The Power of Compound Interest: Early and consistent investing can significantly impact wealth accumulation, as illustrated by Warren Buffett's investment journey.
- 📉 Planning for the Unexpected: Financial planning should include strategies for when things go wrong, such as setting aside emergency funds to cover living expenses during downturns.
- 🕊 Freedom Over Flash: True wealth is about having freedom and options, not about flaunting material possessions to impress others.
- 🤔 Material Impressions: People are often more impressed by the idea of owning something than by the person who owns it, highlighting the futility of material-driven ego.
- 💼 Frugality Leads to Wealth: Building wealth is more about saving and investing wisely than about high earnings, emphasizing the importance of frugality.
- 📊 Market Odds: Historical data shows that the stock market has favored long-term investors, underscoring the value of patience and consistency over short-term fluctuations.
- 🚫 Avoiding Hidden Costs: Volatility and uncertainty are the 'fees' associated with potential market gains, and understanding this can help in managing expectations and reactions to market movements.
- 👤 Personalized Advice: Financial advice should be tailored to individual circumstances, as what works for one person may not be suitable for another.
- 🌐 Media Influence: Sensational negative news sells, but it's important to take financial news and forecasts with a grain of salt to avoid making decisions based on hype.
- 📚 Beware of Appealing Fictions: Confirmation bias can lead us to seek out information that supports our preconceived notions, which can be detrimental to balanced decision-making.
- 💤 Peace of Mind: Investments should be chosen based on whether they allow for a good night's sleep, indicating a balance between risk and personal comfort.
- 📈 Simplicity in Investing: Investing does not need to be overly complex; starting with simple strategies like a Roth IRA and low-cost index funds can be effective for long-term growth.
- 🛡 Embrace Risk: Taking calculated risks is essential for potential financial gains, and avoiding all risks could mean missing out on opportunities for wealth creation.
Q & A
What is the main point the author is trying to make about our perception of the world?
-The author emphasizes that our personal experiences, which constitute an extremely small fraction of the world's events, significantly shape our understanding of how the world works, often leading to skewed perceptions.
How does the author relate the concept of luck versus risk in financial decisions?
-The author illustrates that financial outcomes can be influenced by both luck and risk, where even well-researched decisions might fail due to uncontrollable factors, and conversely, poor decisions might sometimes yield positive results by chance.
What is the significance of recognizing 'enough' in terms of personal contentment?
-Recognizing 'enough' is crucial for personal contentment as it helps individuals understand when they have sufficient resources to live comfortably, avoiding the trap of endless pursuit of more wealth and material possessions.
Why is compound interest a concept that the author struggles with?
-The author struggles with the concept of compound interest because it represents the long-term effects of consistent investment, which is often overlooked in favor of immediate results, and its impact can be profound over time.
What is the importance of having a plan for when things don't go as expected in financial planning?
-Having a plan for unexpected events is important in financial planning to ensure financial stability and security. It involves setting up emergency funds to cover living expenses for an extended period in case of financial crises or downturns.
How does the author define financial genius?
-The author defines financial genius as doing average things when everyone else is acting irrationally, akin to the saying about pilots experiencing long periods of calm interrupted by moments of intense stress.
What is the author's stance on the importance of freedom in one's financial life?
-The author strongly advocates for prioritizing freedom in one's financial life, suggesting that even if it means earning less, the ability to have control over one's time and work environment is invaluable.
Why does the author suggest that material possessions are less impressive than we might think?
-The author suggests that material possessions are less impressive because people are primarily concerned with their own lives and are more likely to admire the item itself rather than the person owning it, highlighting the futility of seeking validation through material goods.
What is the author's view on the relationship between being wealthy and being flashy?
-The author argues that being wealthy is not about spending extravagantly or displaying wealth through flashy possessions. True success and wealth are measured in terms of financial freedom and prudent money management.
Why is saving for no specific reason important according to the author?
-Saving for no specific reason is important because it builds financial freedom and options for the future. It's about creating a buffer that can be used to seize opportunities or deal with unforeseen circumstances, rather than just for immediate consumption.
How does the author describe the role of risk in achieving financial success?
-The author describes risk as an essential component of financial success. Taking calculated risks, especially in investments like the stock market, is necessary to achieve potential rewards, despite the inherent uncertainty and potential for loss.
What advice does the author give on handling the volatility of the stock market?
-The author advises viewing market volatility as the 'fee' for potential long-term gains. Instead of being deterred by short-term losses, one should focus on the long-term benefits and not let temporary market dips affect their investment strategy.
What is the author's perspective on the generalizability of financial advice?
-The author emphasizes that financial advice should be tailored to individual circumstances and life stages. What works for one person may not be suitable for another, and it's important to adapt advice to one's own financial goals and situation.
How does the author connect the love of stories to financial decision-making?
-The author warns that our love of stories can lead to 'appealing fictions' where we seek out information that confirms our pre-existing beliefs or narratives, which can be detrimental to making objective and rational financial decisions.
What is the author's view on the relationship between ego and wealth creation?
-The author suggests that wealth creation is about bridging the gap between one's ego and income. It involves suppressing immediate desires and practicing delayed gratification to accumulate wealth for future opportunities.
Why does the author recommend simplicity in investment strategies?
-The author recommends simplicity in investment strategies to avoid the paralysis that comes from overwhelming choices. By focusing on straightforward methods like investing in low-cost index funds, one can achieve long-term financial growth without the stress of complex decision-making.
What is the author's opinion on the necessity of taking risks in the stock market?
-The author believes that taking risks is necessary for potential rewards in the stock market. While it's important to avoid risks that could ruin one's life, calculated risks with good odds of upside are worth considering.
Outlines
💡 Perception and Reality in Financial Decisions
This paragraph addresses the psychological aspects of money and decision-making. It discusses how our perceptions of events are often skewed due to the limited experiences we have, which can lead to misconceptions about financial behaviors. The speaker uses the example of a magic trick to illustrate how outcomes are not always a result of skill or rational decision-making but can also be influenced by luck. The importance of recognizing the difference between luck and skill in financial investments is highlighted, as well as the need to understand that people's financial actions may be rational given their circumstances. The paragraph also touches on the concept of 'enough,' urging viewers to be content with what they have and to avoid unnecessary risks for material gains.
💼 The Illusion of Wealth and the Importance of Frugality
The second paragraph delves into societal perceptions of wealth and success, challenging the notion that material possessions are indicative of an individual's worth. It emphasizes the idea that true wealth is about financial freedom rather than materialistic display. The speaker encourages viewers to practice frugality and to save not for specific items but to build a financial buffer that can provide freedom and options. The paragraph also discusses the importance of understanding the odds of success in the stock market and the long-term benefits of investing, rather than trying to time the market or react to short-term fluctuations. Additionally, it warns against the pitfalls of ego and the need for delayed gratification to build wealth.
📈 Embracing Risk and Simplicity in Investing
The final paragraph focuses on the importance of embracing risk in the pursuit of wealth and the simplicity of effective investing strategies. It argues that taking calculated risks is essential for financial growth and that avoiding all risk guarantees missing out on potential rewards. The speaker suggests that investing does not need to be overly complex and recommends starting with simple strategies like contributing to a Roth IRA and investing in low-cost index funds. The paragraph also touches on the psychological aspects of investing, such as the impact of ego on financial decisions and the need to ensure that investment choices do not cause undue stress or disrupt sleep. Lastly, it encourages viewers to subscribe to the channel as a low-risk, high-upside action.
Mindmap
Keywords
💡Psychology of Money
💡Perception
💡Luck vs. Risk
💡Contentment
💡Compound Interest
💡Financial Plans
💡Financial Freedom
💡Materialism
💡Frugal
💡Volatility
💡Ego
💡Risk Management
Highlights
Our perception of the world is greatly influenced by personal experiences, which make up an extremely small fraction of what's happening globally.
Market reactions to downturns or lottery ticket purchases may seem irrational, but they are often responses that anyone might have in the same situation.
Distinguishing between luck and risk is crucial in financial decision-making, as outcomes can vary despite making the right choices.
The importance of recognizing when we have enough and the potential pitfalls of constantly seeking more material possessions.
The concept of compound interest and its significant impact on wealth accumulation over time, illustrated by Warren Buffett's early start in investing.
Planning for the unexpected is essential in financial planning, with the recommendation to have emergency funds equivalent to six months to a year's living expenses.
The value of doing average things well during times of chaos, and the importance of maintaining financial stability.
The idea that freedom should be prioritized in financial planning, as it allows for flexibility and contentment in life.
The misconception that material possessions impress others as much as they do ourselves, and the liberation that comes from realizing this.
The advice to be wealthy in terms of freedom rather than flashy displays of wealth, focusing on long-term financial health.
The role of frugality in building wealth and the importance of saving for the sake of saving, not just for specific purchases.
The importance of staying invested in the market for the long term to take advantage of compound interest and historical trends.
The difficulty of predicting the future, especially in terms of career choices, and the need for flexibility in long-term planning.
The hidden costs of investing, such as volatility and uncertainty, which are the price to pay for potential returns.
The importance of tailoring financial advice to individual circumstances and not blindly following general recommendations.
The influence of media on our perception of financial news and the need to critically assess the information presented.
The human tendency to seek stories that confirm our existing beliefs, known as appealing fictions, and the need to avoid this bias in financial decision-making.
The creation of wealth through delayed gratification and the importance of saving money for future freedom and options.
The simplicity of investing through low-cost index funds and the benefits of a long-term, consistent investment strategy.
The necessity of embracing some level of risk in investing to potentially achieve greater rewards.
Transcripts
these are 20 lessons from the book the
psychology of money that changed how i
think about money and hopefully it can
change yours too no one is crazy well i
mean some people are what we experience
makes up about point zero zero zero zero
zero zero zero one percent of what's
actually going on in the world and yet
it makes up like eighty percent of how
we think the world works for instance
when you see this you might think that
wow that was magic you didn't see that
it took like two and a half minutes to
actually make it happen i had to do a
bunch of takes but finally it actually
worked you just saw something cool and
even my bracelet changed
change
oh there we go so when we see people
freak out and sell everything when the
market goes down or buy lottery tickets
we might think that that is a crazy
irrational decision no one's crazy if
you were in their shoes you might do the
same thing
luck versus risk let's say that i go out
there i do some research and i buy a
stock and five years from now maybe that
stock either didn't grow at all or maybe
even lost money it's possible that when
i bought that stock i i made a bad
decision it's also possible that i made
the right decision and i just got some
bad luck there was stuff that is not in
my control that happened like this stock
could have had an 80 chance of making
money and it just so happened that i
landed on that 20 chance that it wasn't
gonna work out doesn't mean i made a bad
decision
not necessarily but it could also work
the other way where you just get some
dumb luck where you pick something that
was actually a bad decision and it ended
up working out for you this is something
that's really important when it comes to
listening to financial
advice and taking action in your own
financial life like for an example bill
gates happened to be in one of the only
schools that had a computer in his state
if that hadn't have happened maybe he
wouldn't be worth tens of billions of
dollars you never know how kind of risk
and luck are going to be involved in
your decisions and how it can completely
change everything
most of us have enough we have enough to
live on to have food to drink coffee to
have something to watch a youtube video
on but we always seem to push for more
power more money bigger house more
clothes nicer cars and yes i fall into
that trap as well where once i hit half
a million subscribers i'm hopefully
gonna get a tesla so don't forget to
subscribe but seriously we need to
realize when we have enough and right
now i do have enough that would be a
bonus that is completely unnecessary and
sometimes realizing that and that if we
can keep our needs few then we can have
enough a lot sooner than somebody else
and be content in our lives there are
some things that are just never worth
risking in order to get more things like
our reputation our freedom our family
and friends our happiness and the best
way to make sure that we can keep all
these things is not risking any of them
to have more than we need when we
already have enough
compound interest i'm gonna be honest
this is something that i struggle with
when we see somebody who's at the top of
their field whether that's in youtube in
business in investing in a relationship
we want kind of that end result but we
want it now and we don't see all of the
work and the years that went into that
for instance if you look at warren
buffett he started investing when he was
10 years old i don't know what you were
doing at 10 but i i wasn't investing and
by the time he was 30 he hit a million
dollars by the time he was 59 he hit 3.8
billion dollars and now he's worth
almost 100 billion dollars but if he had
started investing at 20 instead of at 10
that could have made an enormous
difference in how much he's worth today
a lot of times we look at the results
instead of looking at the compound
effects that went into it plan on the
plan not going according to plan as mike
tyson once said everybody has a plan
until they get punched in the face so
when we're making plans for our
financial lives we should have plans for
if those plans go terribly awry we
should have emergency funds we should be
aiming for probably having six months to
a year's worth of living expenses in
case things go wrong what happens if
there's a recession and you can't
withdraw your money from the stock
market what happens if there's a housing
crisis well we don't want to obsess
about all the negative things that could
happen in the world structure our
finances to be unbreakable be a pilot
of your findings there's an old saying
with pilots that being a pilot is hours
and hours of boredom punctuated by
moments of sheer terror a good
definition of financial genius is doing
the average thing when everybody around
you is going crazy freedom comes first
honestly i i couldn't agree with this
more that's what i talk about in
financial minimalism all the time it's
the idea that even doing something that
you love on a schedule that you hate or
with people that you hate can make it
feel like that's something that you hate
so even if you love your job right now
focusing on building freedom in your
life is what's really important because
what if in a year you get a terrible
boss or you hate your job or they try to
move you or they do something or you
hate your work environment or the
schedule they put you on we should be
focusing on building freedom like that's
why i quit the other jobs that i was at
where i could have made more money with
them but i didn't like the hours i
didn't like what i was doing so even
though for the first couple years i made
way less money i would rather have the
freedom and less money because all i
need is enough no one gives a
no one is as impressed by your material
stuff as you are like let's be honest
when you see somebody driving that cool
car you don't think that that person is
cool you think that the car is cool or
how cool you would look if you were
driving that car this is something that
i used to really struggle with where i
would always be focused on
my clothes my car what people thought
about me my job whatever it was and how
people perceive me when in reality no
one really cares they're just worried
about themselves so that's really
freeing because you don't need to spend
money on stuff you don't need to impress
people you don't even like i think
that's from fight club
[Applause]
be wealthy not flashy
when most people say that they want to
be a millionaire what they really mean
is they want to spend a million dollars
which is literally the opposite of being
a millionaire but most people judge how
successful they are on how much money
they spend how flashy their stuff is but
true success and true wealth is measured
in
freedom
be frugal shocker right building wealth
really has very little to do with how
much money that you make and almost
everything to do with your savings right
now a lot of people only save for
specific things they save for a house
they save up for a car for a vacation
whatever it is but he talks about how
important it is to save just for the
sake of saving you don't need something
that you're saving up for you're saving
up because that's what's gonna buy your
freedom that's what's gonna buy options
that's what's gonna buy memories is
saving money not to spend it and because
you know that stuff won't make you happy
never tell me the odds actually you know
the odds are quite interesting the odds
of making money in the stock market are
50 50 over one day 66
over one year 88 over 10 years and a
hundred percent over 20 years so this
just really shows the importance of
being in the market for a long time
taking advantage of that compound
interest and not freaking out when the
market goes down or trying to time it
but just trying to be in the market and
continually put more and more in over a
long period of time and that's how
you're like guaranteed to make money now
if you guys want to be guaranteed some
money you could sign up for weeble and
get up to 12 free stocks when you open
and fund a new account this is the main
app i use to invest and it's honestly
just free money so there's a link down
in the description we suck at telling
our own future
now most people stick with the job that
they chose when they were trying to go
to school at 18. but the odds of picking
a job that's gonna be fulfilling you're
gonna actually care about and enjoy
going to work and enjoy every day for
the next like 40 years are
astronomically low and that's because we
can't really tell what the future holds
i used to have five-year plans and ten
year plans and now i really don't plan
past about six months and if something's
really not fulfilling you
and you're just doing it because that's
what you've done in the past it's not
really a good reason to do it it might
be time to kind of make a shift and see
what you can change so that you're not
stuck doing this thing you don't like
doing for the rest of your life not all
prices are on the label like i said
earlier there's like a hundred percent
chance of making money if you invested
in the stock market over a 20-year
period of time and the historical
average is around 11 per year however
that money does not come free there is a
fee that you have to pay but that fee is
not money it is volatility and
uncertainty and this can be really
powerful to understand especially with
everything that's going on right now
when you see the market dip 20 and you
lose 20 of your money that can be really
scary unless you look at it as this is
the fee if i can stick through this this
is what's gonna make me money in the
long term as opposed to people who can't
handle it and they sell and get out of
the market like you have to realize that
that stress that uncertainty that worry
that is the price for the returns that
you're gonna make you are not
me that that's kind of obvious and
congratulations to you but we often look
at people giving financial advice and a
lot of it that even i've talked about
sometimes is very blanket this will
equal this like this will be a good
decision if you invest your money this
way it'll be a good decision that's not
necessarily true so we have to be very
careful who we listen to when you're
giving financial advice to an 18 year
old as opposed to a 30 year old who's
just starting a family as opposed to a
50 year old who's getting ready for
retirement
a decision that would be great for one
person would be a horrible decision for
somebody else to realize that i i'm not
you and the other people that you listen
to you have to take it with a grain of
salt and kind of adapt it to your
circumstances because every circumstance
is different so we all have to make
slightly different decisions the joker
was right some people just want to see
the world burn no like legit negativity
is what sells this is why i don't listen
to any news of any sort and i have no
idea what's going on in the world if
someone writes an article that the
market's gonna go up 50 next year
nobody will give a crap but if that same
person writes a very similar article
saying that the markets are going to go
down 50 next year everybody will start
losing their minds so when you're
watching the news or looking at
forecasts just realize that negativity
sells so take it all with a grain of
salt because you never know who's just
trying to make money off of negative
things happening and trying to hype them
up so that they can get more clicks it's
a bit of a scam
beware of your love of stories if you
dislike investing in the stock market or
you just like investing in real estate
or dislike starting a business you're
gonna find a story that kind of makes
sense with that narrative that you have
in your head you're gonna try to fill in
the gap this is called appealing
fictions if you think that the stock
market is gonna go down next year you
will find tons of things to support that
idea if you think it's going up you'll
probably find tons of things to support
that idea so it's actually really
important to not go into researching or
planning things or even having
discussions with people with a story or
an idea in mind already that you're
trying to draw things from other places
to match that story that you already
have going in your own head this happens
in politics all the time where somebody
will have one mindset and they will
surround themselves uh with people who
agree with that mindset and never take a
step back and ask if each side has
merits that there is some middle ground
with but honestly we just love our
stories less ego more wealth saving
money is the gap between your ego and
your income so wealth is created by
suppressing what you could buy today in
order to have more money and options in
the future so no matter how much you
earn you can't really start building
wealth unless you can practice delayed
gratification like it's just really
important to remember that wealth is
what you don't see you need to sleep at
night sometimes getting the highest
possible returns is not really what we
should be shooting for we should be
shooting for being able to sleep at
night and not stress about our finances
so when we're looking into investment
one of the questions that we should be
adding to the list will i be able to
sleep at night and if the answer is no
and it's gonna be a big stress on your
life then maybe you should look in a
different direction it's just it's just
not worth losing sleep over investing
doesn't have to be complex a lot of
people get overwhelmed with the options
that are out there when it comes to
investing you can do real estate a
business you have all these stocks like
thousands and tens of thousands of
stocks that you can choose from and
therefore they don't do anything because
it's too stressful and it doesn't really
need to be that complex he talks about
one of the simplest ways to start
investing and that is just to simply
open a roth ira and invest into low cost
index funds something like vtsax and
just continually putting money in it
every single month for the long term and
not worrying about the market because
again you're looking for that 20 years
down the road this might sound really
simple but it actually works stats show
that 85 percent of large cap active
managers didn't beat the s p 500 over
the decade ending in 2019 just putting
your money in the s p 500 and leaving it
embrace some risk some risk is good in
order to make money in the stock market
you have to put money into the stock
market and therefore take a risk yes it
could be safer to keep that money in a
savings account but if you don't take
that risk you are guaranteeing that you
won't get that reward so while it's
important to make sure that we avoid
risk that could actually like ruin our
lives taking a calculated risk on
something that has very good odds of an
upside is totally worth it and we can't
just not take action because there is
some risk involved now something that
has a very low risk and hopefully a very
large upside is actually subscribing to
this channel so if you haven't
subscribed already don't forget to do
that and i'll see you guys next week
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