The Book That Changed My Financial Life ๐Ÿค‘

Ali Abdaal
9 Dec 202116:54

Summary

TLDRIn this episode of Book Club, the host explores 12 key lessons on money from Morgan Housel's 'The Psychology of Money.' The video is divided into four parts, discussing attitudes towards money, earning it, spending it, and protecting it. Key takeaways include the influence of luck and timing on wealth, the importance of recognizing 'enough,' the power of compounding, and the value of saving. The host also emphasizes the psychological aspects of financial decisions, such as the emotional benefits of paying off a mortgage and the diminishing returns on happiness from increased income. This insightful summary encourages viewers to consider both the rational and emotional sides of managing their finances.

Takeaways

  • ๐Ÿง Different attitudes towards money can affect financial decisions, and it's important not to judge others based on their financial choices.
  • ๐Ÿ€ Recognize the role of luck in financial success, as it often combines with skill and unfair advantages, as exemplified by Bill Gates' early access to a computer.
  • ๐ŸŽฏ Learn to be content with what you have; constantly chasing more can lead to risky behavior and dissatisfaction.
  • ๐ŸŒฑ Early and consistent investing can lead to significant wealth through the power of compounding, as demonstrated by Warren Buffett's wealth accumulation.
  • ๐Ÿ’ฐ Prioritize saving as much as possible, as your savings rate is more controllable and impactful on wealth building than income or investment returns.
  • ๐Ÿšซ Focus on avoiding financial mistakes rather than seeking to make large gains, as the consequences of loss can be more detrimental than the benefits of windfalls.
  • ๐Ÿ› Use money to buy freedom and flexibility, as these are more valuable than material possessions in contributing to happiness and life satisfaction.
  • ๐Ÿ›ก Understand the difference between getting wealthy and staying wealthy; the former requires risk-taking while the latter requires risk-avoidance and humility.
  • ๐Ÿ  Avoid flashy spending to gain respect, as true wealth is often the money that remains unspent and respect cannot be bought with material possessions.
  • โš ๏ธ Always leave room for error in financial planning to account for both potential changes in financial returns and emotional responses to those changes.
  • ๐Ÿ”ฎ Avoid making extreme financial commitments based on current desires, as future goals and values are likely to change in unpredictable ways.
  • ๐Ÿ’– Make decisions that are reasonable and consider emotional well-being, not just rational and financially maximizing choices.

Q & A

  • What is the main topic of discussion in the video?

    -The main topic of the video is the 12 lessons about money that the host learned from Morgan Housel's book 'The Psychology of Money'.

  • Why should we not judge people based on their financial behavior?

    -We should not judge people based on their financial behavior because everyone has different attitudes towards money, which are influenced by their own circumstances and life experiences.

  • How does the experience of different generations with the stock market affect their investment decisions?

    -Different generations have different experiences with the stock market, which shapes their views on investing. For example, those born in the 1970s, who saw the S&P 500 increase significantly, are more likely to invest in stocks compared to those born in the 1950s, who experienced a stagnant market.

  • What is the role of luck in making money according to the book?

    -According to the book, any outcome, including making money, is a combination of luck, skill, and unfair advantages. It emphasizes that we should not solely focus on the actions of successful individuals but also consider the broader patterns and the role of luck.

  • Why is it important to recognize when 'enough is enough' in terms of financial goals?

    -Recognizing when 'enough is enough' is important because it helps prevent continuous pursuit of growth for its own sake and the potential negative consequences that come with it, such as engaging in risky behavior to chase more wealth.

  • What is the significance of compounding in building wealth?

    -Compounding is significant in building wealth because it allows earnings to be made on previous earnings, leading to exponential growth over time. This is illustrated by Warren Buffet's wealth, most of which was accumulated after his 50th birthday due to the power of compounding.

  • What is the relationship between savings rate and building wealth according to Morgan Housel?

    -According to Morgan Housel, building wealth has more to do with your savings rate rather than your income or investment returns. He suggests that savings equals income minus ego, highlighting the importance of controlling personal expenses.

  • Why is it advised to focus on not screwing up rather than making big gains in investments?

    -Focusing on not screwing up is advised because making consistent, non-dramatic gains over time is more beneficial than trying to make big gains, which can lead to significant losses if the investments fail.

  • How does the true value of money relate to freedom and flexibility?

    -The true value of money lies in its ability to provide freedom and flexibility. It allows individuals to control their time and options, which contributes more to happiness and a meaningful life than material possessions.

  • What is the difference between getting wealthy and staying wealthy according to the video?

    -Getting wealthy often involves taking risks and being optimistic, while staying wealthy requires the opposite, such as humility and fear of losing what has been made. It emphasizes the importance of preserving wealth through cautious financial decisions.

  • Why is it suggested not to be flashy with wealth?

    -Being flashy with wealth is not suggested because respect and admiration cannot be bought with material possessions. People often admire the possessions themselves rather than the person owning them, and true wealth lies in the money that has not been spent.

  • What does the book suggest about the importance of leaving room for error in financial planning?

    -The book suggests leaving room for error to ensure both physical and emotional survival. It's important to plan for scenarios where financial returns may not be as expected and to consider the emotional impact of financial decisions.

  • Why should we avoid making extreme financial commitments for our future selves?

    -We should avoid making extreme financial commitments because our goals, values, and desires are likely to change over time. The 'end of history illusion' suggests that we are bad at predicting how much we will change in the future, so it's wise to maintain flexibility in financial planning.

  • What is the final lesson about being reasonable rather than rational in financial decisions?

    -The final lesson emphasizes that good financial decisions are not always rational but should be reasonable, taking into account emotional needs and personal comfort. It's important to make decisions that contribute to our well-being and peace of mind, even if they are not the most economically rational choices.

Outlines

00:00

๐Ÿ“š Introduction to 'The Psychology of Money'

The speaker introduces a book club series discussing 'The Psychology of Money' by Morgan Housel. The episode is structured into four parts: attitudes towards money, getting money, spending money, and protecting money. The first part addresses the varied attitudes towards money shaped by individual experiences and emphasizes the importance of not judging others based on their financial decisions. It uses the example of stock market perceptions among different generations to illustrate how attitudes can significantly impact financial behavior.

05:00

๐Ÿค” The Role of Luck and Contentment in Wealth

The speaker shares three key lessons from the book. Lesson two highlights the role of luck in financial success, using Bill Gates' early access to a computer as an example. Lesson three advises learning to recognize when 'enough is enough', cautioning against the endless pursuit of wealth and the risks associated with it, such as Bernie Madoff's pyramid scheme. The speaker relates this to their own life, discussing a decision not to move to Dubai for tax benefits, valuing stability and personal satisfaction over additional wealth.

10:00

๐Ÿ’ฐ Understanding the Power of Compound Interest

The speaker discusses the magic of compounding as a means to build wealth, using Warren Buffett's financial growth as an example. It explains that the majority of Buffett's wealth was accumulated after his 50th birthday due to the effects of compound interest. The speaker also emphasizes the importance of saving and the concept that savings equals income minus ego, advocating for a high savings rate as a path to financial freedom and autonomy.

15:01

๐Ÿšซ Avoiding Financial Missteps and Pursuing Freedom

Lesson six focuses on the importance of avoiding financial mistakes rather than seeking to make big gains, illustrating the point with the contrasting investment strategies of Sue and Jim. The speaker then transitions to spending money, with lesson seven emphasizing using money to buy freedom and control over time. Lesson eight contrasts the approaches needed for getting wealthy versus staying wealthy, noting that maintaining wealth requires humility and risk aversion. The speaker also touches on their own investment strategy in crypto, balancing potential gains with the need for stability.

๐Ÿก The Illusion of Wealth and Protecting Your Money

Lesson nine warns against flaunting wealth, suggesting that respect and admiration cannot be bought with material possessions. The tenth lesson advises leaving room for error, considering both the physical and emotional aspects of financial planning. The eleventh lesson cautions against making extreme financial commitments based on current desires, as these are likely to change, a concept known as the 'end of history illusion'. The final lesson encourages making reasonable decisions over purely rational ones, taking into account emotional well-being and personal comfort.

๐ŸŒŸ Conclusion and Additional Resources

The speaker concludes by summarizing the 12 lessons from 'The Psychology of Money' and mentions additional lessons to be covered in an extended version available on Nebula, an independent streaming platform. They also promote Curiosity Stream, a documentary streaming service, as a sponsor and offer it as a bundled service with Nebula. The speaker encourages viewers to subscribe for more content and provides a link to another video on generating passive income.

Mindmap

Keywords

๐Ÿ’กPsychology of Money

The 'Psychology of Money' is the central theme of the video, referring to the mental and emotional processes that individuals experience in relation to money. It's the title of the book by Morgan Housel that the video discusses, exploring how people's attitudes towards money shape their financial behaviors. The video uses the book's insights to discuss various money lessons, such as the impact of luck on wealth accumulation and the importance of recognizing when one has enough money.

๐Ÿ’กAttitudes towards Money

Attitudes towards money are individual perspectives on the value and use of money, which can vary greatly and influence financial decisions. The video mentions that different generations may have different attitudes due to their experiences, like the impact of stock market performance on investment behaviors. It emphasizes the importance of not judging others based on their financial choices, as these are often a reflection of their unique attitudes towards money.

๐Ÿ’กCompounding

Compounding is a financial concept where interest or gains are earned on both the initial investment and the accumulated earnings over time. The video illustrates the power of compounding through the example of Warren Buffett, showing how a significant portion of his wealth was accumulated after his 50th birthday due to the effects of early investment and long-term compounding.

๐Ÿ’กSavings Rate

The savings rate is the proportion of one's income that is saved rather than spent. The video emphasizes that building wealth is more about maintaining a high savings rate than it is about income levels or investment returns. It suggests that savings are not just a function of income minus expenses, but rather income minus ego, highlighting the role of personal choices and restraint in wealth accumulation.

๐Ÿ’กRisk Management

Risk management in the context of the video refers to the strategies and actions taken to minimize potential financial losses. It is discussed in relation to investing, where the video advises focusing on avoiding mistakes rather than seeking to make large gains. The idea is to protect one's financial stability by not taking unnecessary risks that could lead to significant losses.

๐Ÿ’กFreedom

In the video, 'freedom' is associated with the non-material benefits that money can provide, such as flexibility and control over one's time. It suggests that using money to buy time and options is more valuable than purchasing material possessions. The script contrasts the pursuit of freedom with the pursuit of luxury goods, advocating for a more meaningful use of financial resources.

๐Ÿ’กWealth Preservation

Wealth preservation is the act of maintaining and protecting one's wealth over time. The video differentiates between getting wealthy, which involves taking risks, and staying wealthy, which requires caution and humility. It advises viewers to diversify investments and avoid putting all their assets into volatile markets to ensure the long-term preservation of their wealth.

๐Ÿ’กFlashiness

Flashiness refers to the display of wealth through expensive possessions like cars and houses. The video argues against being flashy, stating that true respect and admiration from others cannot be bought with material things. It suggests that people often mistake the admiration of possessions for admiration of the person, which is a misconception that leads to unnecessary spending.

๐Ÿ’กEmotional Survival

Emotional survival in the context of the video is the ability to maintain one's emotional well-being in the face of financial stress or uncertainty. It discusses the importance of having financial plans that account for not just physical needs but also emotional responses to financial situations, such as the psychological impact of watching savings diminish.

๐Ÿ’กEnd of History Illusion

The 'End of History Illusion' is a psychological concept where people believe that they will not change in the future, despite evidence of past changes. The video uses this concept to caution against making extreme financial commitments based on current beliefs and desires, as these are likely to change over time, potentially leading to financial difficulties.

๐Ÿ’กReasonable Decisions

Reasonable decisions are those that may not be strictly rational or financially optimal but are appropriate given an individual's emotional needs and personal circumstances. The video contrasts 'reasonable' with 'rational' decisions, suggesting that while rational decisions may seem best on paper, reasonable decisions consider the emotional well-being and peace of mind of the individual, such as the emotional benefits of paying off a mortgage.

Highlights

Different attitudes towards money affect how people earn and spend it, and quick judgments should not be made based on others' financial decisions.

The importance of recognizing the role of luck in financial success, as demonstrated by Bill Gates' early access to a computer.

The advice to learn to say 'this is enough' and avoid constantly moving the goal post in pursuit of more.

The power of compounding in growing wealth, illustrated by Warren Buffett's net worth growth after his 50th birthday.

The argument that building wealth is more about savings rate than income or investment returns.

The suggestion to focus on avoiding mistakes rather than seeking to make big gains in investments.

Using money to buy freedom and flexibility is more valuable than material possessions.

The distinction between the strategies required for getting wealthy and staying wealthy, emphasizing risk-taking versus preservation.

The paradox of flashy spending, where expensive items often fail to bring true respect and admiration.

The importance of leaving room for error in financial planning, to account for both physical and emotional survival.

Avoiding extreme financial commitments for the future self, as our desires and values are likely to change.

Being reasonable rather than just rational in financial decisions, considering emotional needs and peace of mind.

The psychological benefits of paying off a mortgage, despite the apparent financial irrationality.

The diminishing returns on happiness from increasing income, suggesting that beyond a certain point, more money does not buy more happiness.

The recommendation to save as much as possible, even without a specific reason, to increase financial freedom.

The reminder that not everyone should invest in high-risk assets like crypto, as it's important to stay within one's comfort zone.

Transcripts

play00:00

hey friends welcome back to the channel

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today we're talking about 12 lessons

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about money that i learned from this

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fantastic book by morgan housel called

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the psychology of money and that's what

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we're talking about in this episode of

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book club the ongoing series where we

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distill and discuss highlights from some

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of my favorite books and we're going to

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do this in four parts we're going to

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talk about lessons about our attitudes

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towards money lessons about getting

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money lessons about spending money and

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then lessons about protecting our money

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once we've gotten it part one three

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lessons about our attitudes towards

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money so the first lesson i got from the

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book was that everyone has different

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attitudes towards money and because the

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way that those attitudes affects the way

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that they earn and spend their money we

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shouldn't be too quick to judge people

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based on what they do with their own

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money so let's think about people's

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behavior when it comes to investing in

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stocks for example if you were born in

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the 1970s the s p 500 which is the index

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fund that tracks the top 500 biggest

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companies in the us that increased by 10

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times its starting amount between age 13

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and age 30 for you but if you were born

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just 20 years earlier the market

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basically went nowhere so these two

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groups of people are going to go through

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life with radically different ideas of

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how the stock market works and obviously

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these views are going to affect how they

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behave like people born in the 1970s are

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much more likely to invest in stocks

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than people born in the 1950s for whom

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they think the stock market doesn't

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really do anything and so for example

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for someone like me it can seem a bit

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weird like why don't more people just

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just invest in the s p 500 it just keeps

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on going up why don't more people invest

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in crypto but what i realized after

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reading the book is that to be honest i

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need to not be a dick about it because

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people have different attitudes to money

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depending on their own circumstances

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lesson number two is don't underestimate

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the importance of luck when it comes to

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making money because basically any

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outcome that we're going for whether

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it's making money or anything else in

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life is some combination of luck and

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skill and unfair advantages if we take

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bill gates for example now he's

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obviously super talented but he was also

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pretty lucky to get to go to one of the

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very few high schools in the u.s that

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actually owned a computer and that's

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what helped him start messing around

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with coding and start working on the

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company that ultimately became microsoft

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and so morgan's point in the book is

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that we shouldn't focus too much on the

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individuals we shouldn't look too

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closely at what did elon musk do to get

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rich what did bill gates do to get rich

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we should instead look at the broader

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patterns that try and account for this

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fact that different people got lucky at

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different times lesson number three from

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the book is that we should learn to say

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this is enough now it's natural for us

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to humans to keep on moving our goal

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posts like once we achieve our goals

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whether it's financial goals or career

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goals or hot bot goals or pretty girl

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goals we always look forward to the next

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goal and generally the cycle doesn't end

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because we keep on comparing ourselves

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to the people who are above us in this

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invisible ladder now this doesn't really

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resonate with me because i've been

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chasing this entrepreneurship thing

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since like the age of 13 trying to make

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money on the internet and started off

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making basically zero money and then

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slowly so slowly over time my income has

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basically compounded to the point where

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i am way beyond the point that any

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reasonable person would say that this is

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enough but what i've been finding is

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that the comparator group keeps on

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changing it's like when my youtube

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channel was just starting out and it was

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making a small amount of money here and

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there it was like oh that's cool you

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know it'd be cool to make maybe a

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hundred pounds here and there then it

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started making 100 pounds here and i was

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like oh that's cool but look at those

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channels that maybe have millions of

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subscribers like i wonder how much money

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they're making and what i like um that

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morgan reminds us of is that we actually

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do need to recognize when enough is

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enough and not be continuously trying to

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pursue growth just for its own sake and

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in the book he gives a bunch of examples

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of really rich people doing very dodgy

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and shady things to chase even more

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money like bernie madoff for example who

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was already ridiculously rich but then

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built this pyramid scheme to try and

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become even more ridiculously rich and

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ended up in prison as a result of it and

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what morgan says is that it's really

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about asking the question of when is

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enough enough do i really need this

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extra thing and there's a nice quote

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where he says there is no reason to risk

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what you have and need for what you

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don't have and don't need and this

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lesson actually applied in my life

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fairly recently so my housemate sheen if

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you might remember from previous videos

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moved to dubai and i was strongly

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thinking why don't i move to dubai and i

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spoke to my accountant he was talking

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about the low tax rates and all that

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kind of stuff and i was thinking oh i

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could wind down the company in the uk

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move to dubai like not live in the uk

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for three years to become tax resident

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outside of the uk become tax resident in

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dubai where i don't pay any corporation

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tax or vat or income tax and all this

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stuff and then i'd be making twice as

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much money because i have to pay half as

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much tax and i had all these thoughts

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going in my head and it was around that

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time that i read the psychology of money

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and started figuring out what my values

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in life and stuff and i realized that

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that is just like stupid thinking i

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don't need that extra money i quite like

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being in the uk i like the fact that my

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friends and family are here and i'd be

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sacrificing a large amount of stability

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here in the uk for the sake of just

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chasing a little bit more money but

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effectively tax avoidance in dubai and

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so ultimately i decided against it um

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thank you morgan for for the tip on that

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front part two lessons about getting

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money all right so this is obviously not

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a video on how to make money from

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scratch you can check out my video on

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nine passive income ideas if you want

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more information about that but morgan

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does have some very solid chapters about

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how we actually get rich so lesson four

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is to appreciate the magic of

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compounding so let's say i put a

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thousand dollars into the s p 500 index

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fund and i get a decent return of about

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10 per year that'll give me 1100 by the

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start of year 2 which means i'm then

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earning 10 on the 1100 so that at the

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start of year 3 i'll have 1 210 and as

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this compounds over time you're

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basically earning interest or gains only

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on your interest or gains and when you

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start playing with the big numbers here

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the results are absolutely insane now

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the example that morgan uses in the book

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is warren buffett who is famously very

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rich and at the time that the book was

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written warren buffett's net worth was

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around 84.5 billion dollars but of that

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84.5 billion dollars 84.2 billion of it

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actually came after his 50th birthday

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and of that amount 81 billion of it came

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after his 60th birthday and one of the

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reasons that warren buffett was able to

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get so much wealth is that he started

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young and he kept going like he started

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investing at the age of 10 such that by

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the age of 30 he had a million dollars

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in investments and then he just

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absolutely kept on going well into his i

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think he's like 90 something now and

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there's some good maths in the book that

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shows that 99.9 of warren buffett's

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wealth came as a result of compounding

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because he started early and he just did

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it for absolutely ages and there's a

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really nice quote from the book that

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describes warren buffett's success with

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this morgan writes that none of the 2000

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books picking apart buffett's success

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are titled this guy has been investing

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consistently for three quarters of a

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century but we know that that's the key

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to the majority of a success it's just

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hard to wrap your head around that maths

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because it's not intuitive lesson number

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five is to try and save as much as you

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can even when you don't have a specific

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reason to save morgan writes that

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building wealth has little to do with

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your income or investment returns and

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lots to do with your savings rate so we

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naturally think that saving is basically

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income minus expenses but morgan says

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that the other way of thinking about it

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is that savings equals income minus ego

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and this is quite interesting i think

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it's an interesting way of looking at

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our expenses like if i look at my own

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spending how much of that spending is

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actually necessary and how much of it is

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based on ego i don't know maybe you can

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decide and he also talks about how

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really our savings rate is the only

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variable in this equation that we can

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really control like i can't really

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control how much money i'm making i

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can't to extend but not really i can't i

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can't at all control the returns of the

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stock market or the returns of bitcoin

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or the returns of the real estate market

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but i can absolutely control how much

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money what percentage of my income i'm

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saving myself and there's a related

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point that i came across from uh biology

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who was interviewed in tim ferriss's

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podcast recently where he says that if

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you can have a very high savings rate

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and you can keep your own personal

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expenses very low like you need little

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money to survive and thrive then it

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actually gives you a lot more freedom in

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life because there are a lot of people

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that are tied to jobs that they don't

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necessarily enjoy because they now have

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lifestyles that require them to have

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that high income from the job that they

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don't necessarily enjoy and kind of the

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point is what's what's the point of

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being miserable in your job for 80 000

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hours of your life kind of for most of

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the time that you spend alive what's the

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point of being miserable in that for the

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sake of having a fancy house and having

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a fancy car it's probably not worth the

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trade-off and so really if we can just

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lower our personal expense rate increase

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our personal savings rate in you know

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whatever fashion we can uh that gives us

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more anti-fragility more freedom more

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autonomy to kind of do more of the

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things that we actually want lesson

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number six from the book is to focus on

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not screwing up rather than on making

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big gains so let's imagine two investors

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sue and jim sue invests one dollar into

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the stock market every single month no

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matter what whereas what jim does is

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that he invests money into the stock

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market as it's going up and then he

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sells his stocks as it's going down and

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he's trying to play the market in that

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sense this is what sue's portfolio looks

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like over time and unfortunately this is

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what jim's portfolio looks like over

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time and the reason why sue ends up

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better off than jim is not because she

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made big gains it's because she

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consistently did not screw up by selling

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her stocks in like a downturn and the

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other interesting point here is that

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when it comes to thinking about how

play07:32

we're spending and investing our money

play07:35

getting it wrong is a lot worse for us

play07:38

than getting it right because if we lose

play07:39

money we can then no longer go back into

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the game and we actually have

play07:42

consequences on our life whereas if we

play07:44

make twice as much money or twice as

play07:45

much as that or twice as much as that

play07:47

like there are significant diminishing

play07:49

returns to the value of extra money that

play07:51

we get and so morgan's point basically

play07:52

is you know to like think about the long

play07:55

term and try not to lose money rather

play07:57

than thinking oh my god i need to chase

play07:59

that next ponzi scheme or that next oh

play08:00

you know dogecoin is going to the moon

play08:02

therefore i'm going to put stuff in

play08:03

there it's far more important to just

play08:04

focus on not screwing up and not losing

play08:07

money and doing that consistently over

play08:08

time so that you can actually benefit

play08:09

from compounding all right let's turn to

play08:11

part three which is lessons about

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spending money and then lesson number

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seven is use money to buy freedom and he

play08:15

talks about how really the true value of

play08:17

money is in the flexibility and the

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optionality that it gives us rather than

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the fact that it helps us buy a fancy

play08:21

house or a fancy car he writes that

play08:23

money's greatest intrinsic value and

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this cannot be overstated is its ability

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to give you control over your time using

play08:29

your money to buy time and options has a

play08:31

lifestyle benefit that few luxury goods

play08:33

can compete with and the reason for this

play08:34

is that at the end of the day we all

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just want to be happy and live a happy

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and meaningful life and tons of studies

play08:38

have shown that your income has

play08:40

significant diminishing returns on your

play08:42

personal life satisfaction or happiness

play08:44

from life and that beyond a point

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depending on who you ask it's around

play08:48

about 75 000 in the u.s beyond a certain

play08:50

point more money stops buying you

play08:53

further increases in happiness and so

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ultimately given that time is our most

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valuable non-renewable resource we can

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always make more money but we can never

play08:59

make more time using our own money to

play09:02

buy extra time to buy our freedom is a

play09:05

very good use of that money rather than

play09:07

spending it on pointless luxury crap

play09:08

that we don't actually need lesson

play09:09

number eight is that getting wealthy is

play09:10

very different to staying wealthy now

play09:12

here morgan writes that getting money

play09:13

requires taking risks being optimistic

play09:15

and putting yourself out there but

play09:16

keeping money requires the opposite of

play09:18

taking risks it requires humility and

play09:20

fear that what you've made can be taken

play09:22

away from you just as fast and i was

play09:24

kind of thinking about this as i was

play09:25

thinking about like basically these days

play09:27

how much of my investment portfolio to

play09:29

take out of stocks in real estate and

play09:31

just put into crypto so crypto is

play09:32

obviously highly volatile and could go

play09:34

up significantly i have reasonably high

play09:36

conviction that it will um but i still

play09:38

have a decent chunk of savings in

play09:41

investments in stocks and shares and in

play09:42

real estate and reminding myself that

play09:44

right now my aim is not to continue to

play09:46

make more money my aim is actually to

play09:48

keep the money that i have and grow it

play09:49

slowly that means i want to be nicely

play09:52

diversified across these different asset

play09:53

classes and so i do have a fairly

play09:56

significant chunk of my portfolio i

play09:57

think like 30 or 40 30 probably 30 in

play10:00

crypto more on that in a future video

play10:01

coming but i am not withdrawing all my

play10:04

stock market returns and all of my kind

play10:05

of real estate investments to put money

play10:07

into crypto that would be a bad decision

play10:09

and even though it might go up it's like

play10:10

if it goes down then that will

play10:12

significantly negatively affect my life

play10:14

in a far greater way than if it just

play10:15

goes up 10x or goes to the moon for

play10:17

example lesson number nine from the book

play10:18

is don't be a flashy so morgan

play10:20

writes to his son you might think you

play10:22

want an expensive car or a fancy watch

play10:24

and a huge house but i'm telling you you

play10:25

don't what you want is respect and

play10:27

admiration from other people and you

play10:29

think that having expensive stuff will

play10:31

bring it it almost never does especially

play10:33

from the people that you actually want

play10:34

to respect and admire you now there's

play10:36

two main reasons for this and the first

play10:37

one is the man in the car paradox the

play10:39

idea is that people buy fancy cars and

play10:41

mansions and stuff because they think

play10:42

that this will get them respect and

play10:44

admiration from other people at the end

play10:45

of the day like if i'm driving the news

play10:46

tesla around people will think that i'm

play10:48

cool and rich and that kind of stuff but

play10:49

what people don't realize is that people

play10:51

don't actually admire the person with

play10:52

the fancy cora house instead they're

play10:54

just admiring the fancy kara house

play10:56

itself and imagining themselves having

play10:58

that tesla or having that mansion so

play10:59

buying expensive things to gain respect

play11:01

from people never actually works because

play11:03

respect and admiration can't be bought

play11:04

and the second point he makes about this

play11:06

is that there's no point being flashy

play11:07

about the money you're spending because

play11:08

true wealth is actually the money that

play11:10

you have not spent and then we turn to

play11:11

part four which is how to protect your

play11:12

money once you've got it any amount of

play11:14

money any amount of money at all needs

play11:15

some level of protection and so lesson

play11:17

10 here is to leave room for error now

play11:19

broadly there are two bits to this idea

play11:21

of making room for error the first part

play11:22

is making sure that you can technically

play11:24

survive if your future returns are not

play11:25

very good so let's say i've got some

play11:27

money and i'm banking on it going up by

play11:28

seven percent i really should have a

play11:30

plan like if it does not go up by seven

play11:32

percent if it goes up by four percent or

play11:33

three percent or two percent or even if

play11:34

it goes negative i should be able to

play11:36

survive that likelihood but the second

play11:38

point is that it's not just about the

play11:39

physical survival it's all it's also

play11:40

about the emotional survival and would

play11:42

we want to live that kind of lifestyle

play11:44

so for example let's say you work your

play11:46

job and you save up two years worth of

play11:48

expenses so you can quit your job and

play11:49

become a full-time youtuber for two

play11:50

years and give that a go in theory

play11:52

you're telling yourself that you have

play11:53

two years worth of runway so that if

play11:55

worst case scenario you don't succeed as

play11:57

a youtuber then two years down the line

play11:59

your savings will run out and you can

play12:00

just get another job but what you're not

play12:02

taking into account there is the

play12:03

emotional pain of seeing your savings

play12:05

whittle down over time and it might just

play12:07

be that as you burn through 50 of your

play12:08

savings at that point you start to feel

play12:10

emotionally psychologically scarred and

play12:12

you just quit and go back to your day

play12:13

job because you couldn't handle the fact

play12:15

that you lost 50 of your savings and

play12:16

you're not succeeding on youtube just

play12:17

yet so the point that morgan is making

play12:19

in the book is that we need to make room

play12:21

for these kind of emotional decisions

play12:23

and the way that we behave as humans

play12:25

when it comes to money which is why it's

play12:26

called the psychology of money is that

play12:28

we act not necessarily in like fully

play12:30

rational economic logical terms but we

play12:32

also have to take our emotions into

play12:34

account lesson number 11 is to try and

play12:35

avoid extreme financial commitments for

play12:37

your future self and this is speaking to

play12:38

the kind of person that says you know

play12:39

what i know that i'm never going to buy

play12:41

a house therefore i can afford to splash

play12:43

money when i'm when i'm young or someone

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who says you know what i know i'm never

play12:45

going to have kids and therefore my

play12:47

expenses can be super high because i

play12:48

know i don't have to save for the kids

play12:49

college fund or whatever now this is

play12:51

kind of a bad thing because even if you

play12:52

are very sure that that's how you want

play12:54

to live your life chances are you are

play12:55

not correct and that you actually will

play12:57

change your mind at some point further

play12:58

down the line psychologists call this

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the end of history illusion it's the

play13:01

idea that when you ask people how much

play13:02

they've changed in the last 10 years

play13:04

we're pretty good at describing how

play13:05

we've changed but if you ask people to

play13:07

predict how much they're going to change

play13:08

in the next 10 years then we're really

play13:10

bad at doing that and we think that we

play13:11

are broadly the people we are now are

play13:14

roughly the same as the people that

play13:15

we're going to be 10 years from now and

play13:16

so given that we are really bad at

play13:17

predicting how our own goals and values

play13:19

and desires are going to change over

play13:20

time and given that we're kind of hoping

play13:22

that unless the crypto thing really goes

play13:24

to the moon and fiat currency completely

play13:25

dies we're still going to need money to

play13:27

make decisions 10 years from now we

play13:30

should keep that in mind we shouldn't

play13:31

make extreme financial commitments to

play13:33

ourselves right now we shouldn't blow

play13:35

all our money for this you know lift

play13:36

fast die young because by the time

play13:38

you're approaching the whole day young

play13:39

thing you might realize actually i kind

play13:41

of want to live for another 40 years and

play13:42

now you have no money and it's kind of a

play13:43

bit of a struggle and then lesson number

play13:44

12 is to be reasonable rather than

play13:46

rational and the point that morgan's

play13:47

making here is that sometimes good

play13:48

decisions are not always rational but

play13:50

they are reasonable and that we have to

play13:51

remember that we're ultimately emotional

play13:53

creatures with emotional needs not just

play13:55

like rational economic machines making

play13:57

the absolute perfectly logical decision

play13:59

i think this lesson is what i really

play14:00

took home because before reading the

play14:02

book i could not imagine why anyone

play14:04

would bother paying off the mortgage on

play14:06

their house it just seemed like a dumb

play14:07

thing to do like why would you do that

play14:08

you can borrow money from a mortgage

play14:09

relatively cheaply if you stick that

play14:11

money in stocks and shares it will grow

play14:12

faster than the rate of the thing of the

play14:14

mortgage if your inflation happens over

play14:15

time the more value of the mortgage does

play14:16

that goes down all of these like

play14:18

rational economic reasons for not paying

play14:19

off the mortgage on your house but i

play14:21

completely discounted the fact that

play14:23

there is a lot of emotional niceness to

play14:25

having paid the mortgage on your house

play14:27

you feel like you have this house that

play14:28

you can now live in without paying a

play14:29

mortgage you feel a sense of security it

play14:31

helps you sleep better at night and so

play14:32

if you can and you're in that privileged

play14:33

position and you want to put down a cash

play14:36

payment to pay off the deposit on a

play14:37

house yes technically it's kind of

play14:39

irrational it's not the most

play14:40

economically financially like legit

play14:42

decision to maximize your returns but if

play14:44

it's the thing that helps you sleep at

play14:45

night that is the thing that matters

play14:46

because ultimately if we're playing this

play14:48

game of you know getting and protecting

play14:50

and earning and continuing to retain our

play14:52

money rather than losing all of it we

play14:54

have to also optimize for the things and

play14:56

the decisions that will help us sleep at

play14:58

night and so maybe you might watch one

play14:59

of my crypto videos or you've got a

play15:00

crypto bro friend who says oh my god you

play15:02

should be putting 100 of your money into

play15:03

crypto but if that helps you sleep worse

play15:05

at night don't do it put however much of

play15:07

your money into crypto as a as you are

play15:10

personally comfortable with and that

play15:11

will be reasonable even if it's not

play15:13

fully rational so those are 12 lessons

play15:14

about the psychology of money there are

play15:16

actually a few more i think three more

play15:17

that i've got in my script but this

play15:19

video is getting very long and so those

play15:20

lessons are going to be in the extended

play15:22

version of this video which is available

play15:24

over at nebula now if you haven't heard

play15:25

nebula is an independent streaming

play15:26

platform that's built by me and a bunch

play15:28

of other creator friends and on nebula

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we can put things like very very very

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long videos about books like this

play15:32

without worrying about how they're going

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to perform in terms of the youtube

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algorithm it's also the place where i

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release exclusive content like clips

play15:38

from my old deep dive series live advice

play15:39

from cool people are from all around the

play15:41

world and also my workflow series where

play15:42

i talk through how i use apps like

play15:44

notion and rome in an anal amount of

play15:46

detail that i don't normally do on these

play15:47

youtube videos now if you want to get

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access to nebula then the best thing you

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can do which is actually a reasonable

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and rational way to spend your money is

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to sign up to curiosity stream who are

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streams fantastic library of content

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know about the psychology of money and

play16:36

you want to learn how to make money then

play16:37

check out this video over here which is

play16:39

nine passive income ideas and talks

play16:40

about how at the time i was making 27

play16:42

000 per week from these different

play16:44

sources of passive income and hopefully

play16:46

that'll give you some ideas for how you

play16:47

can make money by yourself anyway thank

play16:49

you so much for watching do hit the

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subscribe button if you aren't already

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and i'll see you hopefully in the next

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video bye

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Related Tags
Financial PsychologyInvestment AdviceWealth BuildingSaving StrategiesSpending HabitsMoney AttitudesCompound InterestRisk ManagementPersonal FinanceLife Lessons