20 Lessons From The Psychology of Money That Changed How I Think About Money

Summary

This 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

00:00

💡 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.

05:02

💼 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.

10:02

📈 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.

Keywords

💡Psychology of Money

The 'Psychology of Money' refers to the mental and emotional processes that influence how individuals perceive, use, and manage money. In the video, it is the central theme that shapes the speaker's perspective on financial decisions and behaviors, highlighting the psychological factors that affect how people think about money.

💡Perception

Perception in this context is how individuals interpret and understand the world around them, particularly in relation to financial matters. The video script discusses how our personal experiences, though minimal in the grand scheme of things, heavily influence our perception of how the world works, including our financial decisions.

💡Luck vs. Risk

The concept of 'Luck vs. Risk' addresses the balance between chance outcomes and calculated decisions in financial investments. The video emphasizes that outcomes can be due to either bad luck or the inherent risk of the decision, and it's important not to conflate the two when evaluating financial choices.

💡Contentment

Contentment is the state of being happy and satisfied with what one has. The video encourages viewers to recognize when they have 'enough' in terms of material possessions and financial status, suggesting that pursuing more can sometimes lead to unnecessary stress and unhappiness.

💡Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. The video uses Warren Buffett's investment journey to illustrate the power of compound interest and the importance of starting to invest early.

💡Financial Plans

Financial plans are strategies or roadmaps for managing one's money over time. The video script mentions that plans should be flexible and include provisions for when things do not go as expected, such as having emergency funds to cover living expenses during financial downturns.

💡Financial Freedom

Financial freedom refers to having control over one's financial life and the ability to make choices without being constrained by financial limitations. The video advocates for prioritizing financial freedom, suggesting that it is more important than material possessions or high income.

💡Materialism

Materialism is the importance placed on physical possessions and wealth as a measure of success. The video argues against materialism, stating that people are often more impressed by their own possessions than others are, and that true wealth lies in freedom, not flashy displays of wealth.

💡Frugal

Being frugal means being economical with one's resources and spending less than one earns. The video emphasizes the importance of saving not just for specific goals but for the sake of building wealth and financial security.

💡Volatility

Volatility in finance refers to the degree of variation of a trading price or rate over time. The video script uses the concept of volatility as the 'fee' one pays for potential returns in the stock market, suggesting that short-term fluctuations are the price for long-term gains.

💡Ego

Ego, in the context of the video, refers to one's self-importance or the desire to impress others with material possessions. The video suggests that saving money is the gap between one's ego and income, and that building wealth requires suppressing the ego to prioritize future financial options over immediate gratification.

💡Risk Management

Risk management is the process of identifying, assessing, and prioritizing potential risks to minimize or avoid negative impacts. The video encourages viewers to embrace calculated risks for potential rewards, while also cautioning against taking on risks that could jeopardize their financial stability.

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