Finance and investing are guided by people’s behaviors. Morgan Housel, author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness
Talking about money is one of the most important skills to being a fiscally responsible and literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one.
Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, in our society it is considered rude to discuss money and wealth.
The reason so few people build wealth is because they fail to adopt smart financial habits that lead to wealth, according to Morgan Housel, author of The Psychology of Money. The smart financial habit formula for how to build wealth is to take action with enough consistency to achieve the goal. The formula is:
[(Small, Smart Choices) * (Consistency) * (Time)] = Wealth
The distinguishing characteristic of people who achieve wealth is that they manage their money well and they have good money habits. The people who build wealth don’t necessarily earn the most. They aren’t the smartest. They don’t have any special training. They just have good money habits.
Daily habits are important because:
- A daily habit of frugality saves small amounts every day that compound and grow over long periods of time to become substantial wealth.
- “Doing well with money has a little to do with how smart you are and a lot to do with how you behave.”
- “You can build wealth without a high income, but have no chance of building wealth without a high savings rate.”
- “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” This soft skill and behavior are called the Psychology of Money.
“Physics isn’t controversial. It’s guided by laws. Finance is different. It’s guided by people’s behaviors.“
References:
- https://www.cnbc.com/2019/04/30/the-us-is-in-a-financial-literacy-crisis-advisors-can-fix-the-problem.html
- https://www.sloww.co/psychology-of-money-book/
- https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
- https://financialmentor.com/wealth-building/how-to-build-wealth/7699