What's Wealth? A lot of money to spend ..or...⍰⍰
Atomic ideas from Morgan Housel
Most of us tend to define wealth as that money stashed in your bank account, which you can spend any time on anything.
Maybe not. There has to be a better perspective!
And who else but the money psychology expert, i.e. Morgan Housel to guide us on this.
Wealth is the money that you don’t spend: Morgan Housel
In a thought-provoking discussion between Morgan Housel and Shane Parrish, the two discuss some of the key financial principles and investment strategies, emphasizing the importance of independence and the distinction between being rich and wealthy.
The hardest part of investing is defining the game that you’re playing
Here are the most important atomic ideas from the 1.5 hrs long conversation.
The Crucial Financial Skill: Avoiding FOMO
Not having FOMO (Fear of Missing Out) is identified as the single most important financial skill. Being immune to FOMO allows for better long-term decision-making and wealth accumulation. The ability to ignore short-term trends and the success of others helps in maintaining a steady investment course and achieving significant financial growth over a lifetime.
"If there’s one trait that’s going to allow you to accumulate wealth, it’s the lack of FOMO."
The Difference Between Rich and Wealthy
Being rich means having enough money to cover expenses like mortgage and credit card bills.
In contrast, being wealthy signifies a degree of independence and autonomy, where money is not just for spending but also for securing freedom. v
Wealth is the money that is saved and invested, not spent, allowing for future financial security and independence.
"Wealth is the money that you don’t spend."
The Impact of Luck and Timing
Luck plays a significant role in financial success, often overlooked. Factors like where and when one is born are uncontrollable yet have a massive impact on life outcomes.
Recognizing the influence of luck helps in understanding the broader context of financial success and reduces the tendency to attribute all achievements to personal effort alone.
Why Index Funds Excel
Index funds succeed due to two main reasons: a small number of stocks typically account for the majority of market returns, and they require minimal effort to manage.
This makes them an ideal choice for consistent long-term investment. Owning a broad index ensures participation in the major market drivers, regardless of the changing economic landscape.
The Power of Compounding
Compounding is a fundamental principle of wealth accumulation, driven by the power of time. The longer the investment period, the greater the exponential growth.
Emphasizing endurance over immediate high returns can lead to extraordinary financial outcomes. This principle applies broadly, not just in finance but also in various aspects of life and nature.
Managing Expectations
Setting realistic expectations is crucial for financial and personal well-being. It’s important to allow goalposts to move gradually rather than drastically.
Ensuring that personal aspirations grow at a sustainable pace compared to net worth helps in maintaining a balanced and stress-free financial life. This approach prevents the pitfalls of overambition and the resultant financial risks.
"I want my expectations to grow slower than my wealth over time."
Psychological Aspects of Money
Understanding the psychological components of money management is essential. Emotions like envy and regret can significantly influence financial decisions.
Learning to remain unaffected by others' financial successes and focusing on personal goals leads to better financial outcomes. It's not just about intellect but managing emotions and psychological triggers effectively.
The hardest part of investing is defining the game that you're playing
The Importance of Endurance
Endurance, coupled with the ability to manage downside risks, is a key factor in long-term financial success. Historical examples, like Warren Buffett accumulating most of his wealth after the age of 60, highlight the importance of patience and sustained effort. The ability to persist through market fluctuations without significant losses enables the power of compounding to work effectively.
Index Funds and Effortless Investing
Investing in index funds is highlighted as a strategy that requires minimal effort but yields significant returns over time. The low fees and broad market exposure make index funds an attractive option for long-term investors. The passive nature of this investment strategy aligns well with the principle that less effort often leads to better financial results in the investment world.
The Dangers of Social Debt
Wealth often brings an invisible social debt, a pressure to live up to societal expectations and to support extended family and friends. This can lead to financial stress and poor money management decisions. Understanding and managing this social pressure is crucial for maintaining financial health and independence.
The Role of Psychological Independence
True financial success involves achieving psychological independence, not just financial freedom. This means making decisions based on personal happiness and goals rather than societal pressures or comparisons with others. It’s about using money as a tool to enhance personal life and well-being rather than as a measure of success.
"I can just put all my money in treasuries and live for the rest of my life just off the interest."
Teaching Children About Money
Raising financially responsible children involves teaching them the value of money beyond material wealth. It’s about instilling principles of saving, investing, and understanding the psychological aspects of money.
Leading by example and fostering an environment where money is viewed as a tool for independence rather than a status symbol is key.
"Leave your kids enough money so they can do anything, but not so much money that they can do nothing."
Notable Insights:
"Not having FOMO is the single most important financial skill."
"Wealth is the money that you don’t spend."
"If there’s one trait that’s going to allow you to accumulate wealth, it’s the lack of FOMO."
"Leave your kids enough money so they can do anything, but not so much money that they can do nothing."