The Psychology Of Money and How to Master Yours
When it comes to money, it’s not how much you have; it’s your attitude towards it. Unfortunately, we’re humans—our perspectives are highly influenced by our experiences and biases and not always reliable. If you want to improve your relationship with money and improve your financial situation, learning about the psychology of money is the perfect place to start.
What does the psychology of money mean to you? You might have heard of the best-selling book, but there’s more to this concept than a catchy title. At its core, money psychology is all about the behavioral patterns, habits, and emotions we have regarding wealth, which can affect everything from our spending habits to our willingness to make risky decisions.
Even if you like to tell yourself that life is about more than just money, burying your head in the sand isn’t going to change the fact that money will always be a part of your life. You may as well control your relationship with it before it starts controlling you—here’s how to do it.
“The Psychology of Money”
Whether or not you’re familiar with the Morgan Housel book, it’s worth taking a moment or two to go over a few key lessons dispersed throughout the chapters to understand why it’s been so popular.
You might expect a book about money to be all about generating as much wealth as possible, but Housel’s magnum opus takes a slightly different approach. The aim is to highlight just how counterintuitive and emotion-driven our attitudes toward money can be.
Understanding the psychology of money will help us a lot to be aware of what we thought and behaved. There are nineteen short stories in the book that do just this, but since we don’t have time to go over them all, so here are a few of our favorites.
Be reasonable, not rational
Here’s the first counterintuitive idea: when you’re trying to come up with a plan for managing your money, you shouldn’t necessarily take the most rational route.
There’s no point in coming up with the perfect plan on paper if it never goes beyond the paper. For instance, you might work out that it’s best to spend 95% of your disposable income on investing and only leave the other 5% for treating yourself. But if you need to go a little above that one month, you might give up completely and decide to save nothing.
If you leave yourself a little wiggle room when it comes to budgets and five-year plans, you could end up better off in the long run. It doesn’t make much sense, but that’s just how humans operate.
Rich man in a car paradox
Have you heard of the spotlight effect? It’s the idea that we all go through our life thinking that the spotlight is on us and that everyone else is judging us, but in reality, everyone else is thinking about themselves—just like you. This applies to how we approach wealth, too.
Many people fall into the trap of buying things to be liked by others. Yet when others see you have expensive things, it doesn’t necessarily make them like us. Even if others are suitably impressed by your wealth, their focus will still be on themselves and not on you—unless you give them a better reason to like you.
What will really help you stand out to others are qualities like empathy, intelligence, and humility.
Cost avoidance syndrome
You’ve probably heard the phrase that “there’s no such thing as a free lunch.” Whatever returns you get from investing, there’s always a hidden cost—whether that’s huge investment risk or trouble sleeping because you have no spare cash to cover emergencies.
This is normal; the problem comes when people refuse to accept this natural law. You wouldn’t try to steal a car to avoid paying for it, so why would you try to avoid losses on stock investments by trying to beat the market or use excessive leverage?
Applying the psychology of money
Like so many important things in life, theory is great—but practical application is better. Hopefully, the examples outlined above have already sparked some ideas in you, but in case they haven’t, let’s take a look at some takeaways.
Money isn’t everything
It might be an ironic message for a book about money, but there really is more to life than your bank balance.
Whether you sit on the “money can’t buy happiness” or the “money can buy you things that make your life better” camp, ultimately we can all agree that there are many more things that matter.
Part of mastering our psychology of money involves accepting that we should recognize the limits of money instead of valuing it above everything else, and use it in a way that lines up with our principles and ideals. For instance, maybe your priority is spending as much time as possible with your family, so you see wealth as a vehicle to that rather than a means in itself.
History isn’t everything either
Financial advisors and writers love to say that past performance doesn’t indicate future results, but it’s a cliche for a reason.
If you’re part of Generation Z, you probably think that ultra-low interest rates are standard, bonds are a lost cause, and huge stock market returns are standard. But if you’re a baby boomer, you have different experiences. No, that isn’t yet another dig at boomers—it’s just a demonstration of how asset performance can vary so drastically from one decade to the next.
Bonds used to be a safe investment to generate a little interest; nobody could have predicted the potential for negative (or close to) interest rates that fail to beat inflation. Likewise, back in the 1970s, it would have been unthinkable that stocks like Tesla and Google would turn out to be so profitable—never mind cryptocurrencies.
Who knows what will happen next?
Anyone who tells you that something is a surefire great investment just because it’s done well before doesn’t know what they’re talking about. We never know when the next “black swan” is coming.
Always choose diversification
By now, you know that you can’t avoid costs when you invest money and that you can’t always predict future returns based on the past.
So, is there any way you can set yourself up for success? Nothing is ever a guarantee, but you’re best off to hedge your bets and aim for diversification over any kind of high-risk or fancy strategy that aims to beat the market.
If you invest in various investment types (e.g. bonds and stocks) and asset classes (e.g., commodities and cryptocurrencies loan), you’ll have something to back you up if one market fails.
Investing with MyConstant
Once you’ve mastered your psychology of money and applied these concepts, you’re ready to start investing the sensible (but not necessarily ultra-rational) way.
If you’re looking for a relatively low-risk platform to invest in as part of your diversified strategy, MyConstant could be a great option. Crypto enthusiasts can experiment with our crypto lending program to earn up to 7%, while more conservative investors can deposit their USD to earn more interest than savings accounts or bonds offer.
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