The Six Lessons You Need to Know From Morgan Housel’s Psychology of Money

Steve Lear |

By Dan Lear, CFP®, BFA™, with support from Mitch Bernier

One of my favorite finance books of recent years is Morgan Housel’s Psychology of Money. This book gives real life examples of how to gain wealth and, more importantly, to keep wealth. I recently led a book club with several of our financial planners on the lessons presented in the book, and how we can use them to help our clients. Here are some of our favorite lessons:

1. Knowing What is Enough

Bernie Madoff is the world’s most infamous fraudster. But what most people don’t know, is that before he conned people out of $65 billion, Madoff’s business was making $25-50 million a year in profit. Madoff didn’t commit his crime because he had nothing. In fact, he had quite a lot by most peoples’ standards. He committed his crime because he had no concept of “enough.”

Helping clients identify what enough looks like for them is an important part of financial planning. Having a clear picture of enough can help make financial decisions easier. It can help clients answer questions such as “Am I ready to retire” or “How much can I give to charity.” The real trick is helping clients keep enough from moving over time, so that they can reach their goals with a true sense of satisfaction, rather than constantly pining for more.  

2. Getting Wealthy vs. Staying Wealthy

Housel summarizes money success in a single word, “survival.” There are many ways to get wealthy, but only one way to stay wealthy – a combination of frugality and paranoia. In order to earn the rewards of compounding interest, you need to stay in business, stay invested, and keep playing the game.

People often think my job as a Financial Planner is about helping people build wealth. What they don’t realize is that it’s just as important to help clients keep their wealth. This could mean making sure an investment portfolio is properly risk-aligned, looking for tax planning opportunities, or using my behavioral finance training to keep clients disciplined during turbulent markets. We aren’t here to chase big returns. We know that patience and earning average returns over long periods of time is what builds generational wealth.

3. Freedom

You’ve heard it said hundreds of times, “Money doesn’t buy happiness.” But money can buy freedom. The freedom to choose how you spend your life – what you do, where you do it, with whom, and for how long. The greatest value money can offer is the ability to control your time.

Our clients often come to us with the financial goal of being able to retire. We try to help reframe this concept as “financial independence.” The goal isn’t necessarily to stop working. The goal is to have the freedom to choose when, where, and how much you work.

4. Save Money

You may think that you need a high income or a sophisticated investment strategy in order to build wealth. But according to Housel, building wealth has little to do with your income or investment return, and lots to do with your savings rate. Wealth is the accumulation of whatever is leftover after you spend what you take in. If you spend significantly less than you take in, you can build significant wealth, even without a high income. And, you don’t need a reason to save. Saving for no reason at all is what can give you the flexibility throughout life to stay out of debt and reach your financial goals.

Saving money is part of the cash flow conversation we have with our clients. We especially want to help clients avoid lifestyle creep – the tendency to spend more as you make more. Saving in a disciplined way, such as into a company sponsored retirement plan or through a systematic investment plan, are both strategies that can help.

5. Room for Error

“Planning is important, but the most important part of every plan is planning on your plan not going according to plan.” Housel addresses the idea of chance a few times in the book, but the lesson about leaving room for error really resonated with me. He believes that by allowing room for error, you are acknowledging that uncertainty, randomness, and chance – in other words, “unknowns” – are an ever-present part of life. This lesson also relates back to not needing a specific reason to save. Establishing good savings habits will prepare you for the many curveballs life throws at you.

As Financial Planners, we see first-hand just how often unknowns disrupt life. That’s why helping client’s plan for life’s uncertainty is a cornerstone of our work. Depending on the client, this can include establishing an emergency reserve, obtaining an insurance policy, or positioning investments to ensure cash is readily available if needed. Whatever the specific strategy, the goal is the same – to leave room for error.

6. Nothing’s Free

Everything has a price, but not all prices appear on labels. The price of investing success is not immediately obvious – the price of investing success is investing losses, being disciplined enough to stay invested in times when stock prices go down. Because it’s not a price tag you can see, it often feels more like a fine for doing something wrong than a fee for doing something good.

Helping clients see market downturns as a fee rather than a fine is one way we keep clients disciplined during turbulent times. People will generally accept paying fees, while fines are supposed to be avoided. When framed this way, it’s only natural to expect to pay a reasonable fee for long-term success.

I believe the magic of Housel’s wisdom is that his lessons are so simple, yet have you ever thought about money in quite this way? Even among our group of financial professionals, people who think and talk about money all day long, we each gained some new insight from Psychology of Money. If these lessons resonated with you, we highly recommend you read the book. If you do, please bring it up next time you talk to your Financial Planner. We know it will lead to an insightful discussion.


Information presented is believed to be factual and up-to-date, but should not be regarded as a complete analysis of any subjects discussed. All opinions reflect the judgment of the author as of the date of the post and are subject to change. A professional advisor should be consulted before making any investment decisions.