Top highlights from The Psychology of Money
Some people are born into families that encourage education; others are against it. Some are born into flourishing economies encouraging of entrepreneurship; others are born into war and destitution. I want you to be successful, and I want you to earn it. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
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Moneys greatest intrinsic valueand this cant be overstatedis its ability to give you control over your time.
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Spending money to show people how much money you have is the fastest way to have less money.
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Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness. The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.
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Things that have never happened before happen all the time.
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Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
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Napoleons definition of a military genius was, The man who can do the average thing when all those around him are going crazy.
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Controlling your time is the highest dividend money pays.
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Independence, to me, doesnt mean youll stop working. It means you only do the work you like with people you like at the times you want for as long as you want.
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Be nicer and less flashy. No one is impressed with your possessions as much as you are. You might think you want a fancy car or a nice watch. But what you probably want is respect and admiration. And youre more likely to gain those things through kindness and humility than horsepower and chrome.
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doing something you love on a schedule you cant control can feel the same as doing something you hate.
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progress happens too slowly to notice, but setbacks happen too quickly to ignore.
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I love Voltaires observation that History never repeats itself; man always does.
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Saving is the gap between your ego and your income.
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Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you cant believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are driven by the same thing: You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
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Growth is driven by compounding, which always takes time. Destruction is driven by single points of failure, which can happen in seconds, and loss of confidence, which can happen in an instant.
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Nothing is as good or as bad as it seems.
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Less ego, more wealth. Saving money is the gap between your ego and your income, and wealth is what you dont see. So wealth is created by suppressing what you could buy today in order to have more stuff or more options in the future. No matter how much you earn, you will never build wealth unless you can put a lid on how much fun you can have with your money right now, today.
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Savings can be created by spending less. You can spend less if you desire less. And you will desire less if you care less about what others think of you.
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To grasp why people bury themselves in debt, you dont need to study interest rate: you need to sturdy the history of greed , insecurity and optimism.
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Using your money to buy time and options has a lifestyle benefit few luxury goods can compete with.
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Bill Gates once said, Success is a lousy teacher. It seduces smart people into thinking they cant lose.
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You are one person in a game with seven billion other people and infinite moving parts. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.
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A mindset that can be paranoid and optimistic at the same time is hard to maintain, because seeing things as black or white takes less effort than accepting nuance. But you need short-term paranoia to keep you alive long enough to exploit long-term optimism. Jesse Livermore figured this out the hard way.
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Someone driving a $100,000 car might be wealthy. But the only data point you have about their wealth is that they have $100,000 less than they did before they bought the car (or $100,000 more in debt). That's all you know about them.We tend to judge wealth by what we see, because that's the (self-edit: only) information we have in front of us.
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Compounding works best when you can give a plan years or decades to grow. This is true for not only savings but careers and relationships. Endurance is key. And when you consider our tendency to change who we are over time, balance at every point in your life becomes a strategy to avoid future regret and encourage endurance.
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Risk is whats left over when you think youve thought of everything.
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At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, Yes, but I have something he will never have enough. Enough. I was stunned by the simple eloquence of that wordstunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldnt have been more accurate. For a critical element of our society, including many of the wealthiest and most powerful among us, there seems to be no limit today on what enough entails.
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More than 2,000 books are dedicated to how Warren Buffett built his fortune. Many of them are wonderful. But few pay enough attention to the simplest fact: Buffetts fortune isnt due to just being a good investor, but being a good investor since he was literally a child. As I write this Warren Buffetts net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that hes been a phenomenal investor for three quarters of a century. Had he started investing in his 30s and retired in his 60s, few people would have ever heard of him. Consider a little thought experiment. Buffett began serious investing when he was 10 years old. By the time he was 30 he had a net worth of $1 million, or $9.3 million adjusted for inflation.16 What if he was a more normal person, spending his teens and 20s exploring the world and finding his passion, and by age 30 his net worth was, say, $25,000? And lets say he still went on to earn the extraordinary annual investment returns hes been able to generate (22% annually), but quit investing and retired at age 60 to play golf and spend time with his grandkids. What would a rough estimate of his net worth be today? Not $84.5 billion. $11.9 million. 99.9% less than his actual net worth. Effectively all of Warren Buffetts financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. Thats how compounding works. Think of this another way. Buffett is the richest investor of all time. But hes not actually the greatestat least not when measured by average annual returns.
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Plan to survive reality. Future filled with unknown is everyones reality.
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Daniel Kahneman once told me about the stories people tell themselves to make sense of the past. He said: Hindsight, the ability to explain the past, gives us the illusion that the world is understandable. It gives us the illusion that the world makes sense, even when it doesnt make sense. Thats a big deal in producing mistakes in many fields.
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Optimism sounds like a sales pitch. Pessimism sounds like someone trying to help you.
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Richard Feynman, the great physicist, once said, Imagine how much harder physics would be if electrons had feelings. Well, investors have feelings
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Everything has a price, but not all prices appear on labels.
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Modern capitalism is a pro at two things: generating wealth and generating envy. Perhaps they go hand in hand; wanting to surpass your peers can be the fuel of hard work. But life isnt any fun without a sense of enough. Happiness, as its said, is just results minus expectations.
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Yes, but I have something he will never have... enough
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At every stage of our lives we make decisions that will profoundly influence the lives of the people were going to become, and then when we become those people, were not always thrilled with the decisions we made. So young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain. On and on and on.48
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But theres only one way to stay wealthy: some combination of frugality and paranoia.
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The customer is always right and customers dont know what they want are both accepted business wisdom. The line between inspiringly bold and foolishly reckless can be a millimeter thick and only visible with hindsight.
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one of the most powerful ways to increase your savings isnt to raise your income. Its to raise your humility.
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The End of History Illusion is what psychologists call the tendency for people to be keenly aware of how much theyve changed in the past, but to underestimate how much their personalities, desires, and goals are likely to change in the future.
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Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming.
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The only way to be wealthy is to not spend the money that you do have. Its not just the only way to accumulate wealth; its the very definition of wealth.
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And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, its clear which one matters more.
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doing well with money has a little to do with how smart you are and a lot to do with how you behave
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Comfortably living below what you can afford, without much desire for more, removes a tremendous amount of social pressure that many people in the modern first world subject themselves to. Nassim Taleb explained: True success is exiting some rat race to modulate ones activities for peace of mind. I like that.
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The hardest financial skill is getting the goalpost to stop moving.
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Therefore, focus less on specific individuals and case studies and more on broad patterns.
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To make money they didnt have and didnt need, they risked what they did have and did need. And thats foolish. It is just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.
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A good rule of thumb for a lot of things in life is that everything that can break will eventually break. So if many things rely on one thing working, and that thing breaks, you are counting the days to catastrophe. Thats a single point of failure.
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Karl Pillemer interviewed a thousand elderly Americans looking for the most important lessons they learned from decades of life experience. He wrote: No onenot a single person out of a thousandsaid that to be happy you should try to work as hard as you can to make money to buy the things you want. No onenot a single personsaid its important to be at least as wealthy as the people around you, and if you have more than they do its real success. No onenot a single personsaid you should choose your work based on your desired future earning power.
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A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy. Tails drive everything.
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Expecting things to be bad is the best way to be pleasantly surprised when theyre not. Which, ironically, is something to be optimistic about.
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1. More than I want big returns, I want to be financially unbreakable. And if Im unbreakable I actually think Ill get the biggest returns, because Ill be able to stick around long enough for compounding to work wonders.
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The ability to do what you want, when you want, for as long as you want, has an infinite ROI.
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Being swayed by people playing a different game can also throw off how you think youre supposed to spend your money. So much consumer spending, particularly in developed countries, is socially driven: subtly influenced by people you admire, and done because you subtly want people to admire you. But while we can see how much money other people spend on cars, homes, clothes, and vacations, we dont get to see their goals, worries, and aspirations. A young lawyer aiming to be a partner at a prestigious law firm might need to maintain an appearance that I, a writer who can work in sweatpants, have no need for. But when his purchases set my own expectations, Im wandering down a path of potential disappointment because Im spending the money without the career boost hes getting. We might not even have different styles. Were just playing a different game. It took me years to figure this out. A takeaway here is that few things matter more with money than understanding your own time horizon and not being persuaded by the actions and behaviors of people playing different games than you are.
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If expectations rise with results there is no logic in striving for more because youll feel the same after putting in extra effort. It gets dangerous when the taste of having moremore money, more power, more prestige increases ambition faster than satisfaction. In that case one step forward pushes the goalpost two steps ahead. You feel as if youre falling behind, and the only way to catch up is to take greater and greater amounts of risk.
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Happiness, as its said, is just results minus expectations.
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The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there wont wipe you out so you can keep playing until the odds fall in your favor. But more important is that as much as we recognize the role of luck in success, the role of risk means we should forgive ourselves and leave room for understanding when judging failures.
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you need short-term paranoia to keep you alive long enough to exploit long-term optimism.
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