Five mindset shifts to help you reach financial freedom
Did you know that $81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday?
I didn’t until I started reading Morgan Housel’s finance blog.
Morgan earned credibility through his former finance column at The Wall Street Journal. But what’s even better is that Morgan practices what he preaches. He’s transparent about every step he takes and passes along precious advice.
In his new book, he shares timeless lessons on wealth, greed, and happiness. Here are the ones that stuck with me. If applied, they can turn you into a better investor.
1.) Your Behavior Matters More than Your Financial Hard Skills
Until halfway through my economics studies, I avoided personal finance. Yes, I aced through my math-heavy exams. But knowing how to invest your own money?
I thought you’d have to be a genius.
Derivates, hedging, and exchange-traded funds sounded like Chinese. A beautiful language I’d never be able to learn.
As a life-long learner, I hear you sigh. Of course, with the right mindset and tools, you can learn anything in life.
When I picked up my first personal finance books, I started learning that making your money work for you is actually pretty simple. Morgan writes:
“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.”
Psychological biases, like impulsive purchases, often have a far greater effect on financial success than understanding another portfolio theorem.
2.) Only You Can Determine When You Have Enough
I loved the following anecdote from the book as it shows the difference between being greedy and living in abundance.
At a billionaire’s party, Kurt Vonnegut teases his conversational partner Joseph Heller. He says the host earned more money on a single day than the author had made with his popular book Catch-22. Heller replies: “Yes, but I have something he will never have. Enough.”
How much money do you need to feel you’ve got enough? When can you truly feel satisfied and free from greed?
Abundance is a choice. You’re the one who determines whether you have enough. In Morgan’s words:
“The hardest financial skill is getting the goalpost to stop moving.”
If you keep chasing more and more, you’ll waste your life. You’ll always feel you’re missing out on something.
When I became self-employed last summer, I defined my monthly minimum ($2K) and dream ($10K) income for a 35-hour workweek. In my fifth month of self-employment, I hit my income goal.
And yet, I moved my goalpost without realizing it. I kept trying to earn even more, put in more hours, said yes to more projects. With every additional working hour, I dropped another healthy habit.
Work and money have a diminishing marginal utility. From a certain point, more isn’t better but worse.
Once I pass the 35-hour threshold, every additional working hour decreases my joie de vivre. I move less, laugh less, and feel less. In the long-run, no additional income is worth this price.
Enoughness is a choice. Only you can get your goalpost to stop moving.
3.) Freedom is the Ultimate Form of Wealth
Why do you want to make a ton of money?
Do you want a specific car or luxurious clothing? Or are you past material status symbols and chasing new experiences, like traveling the world? Maybe you already found contentment in the presence and want to earn more to pay for your kid’s education or your mum’s retirement.
When you keep exploring your reasoning and peel down the outer layers, many people discover a fundamental core underneath.
The key motivation to become wealthy is the ultimate freedom.
Freedom means doing what you want whenever you want. Freedom means surrounding yourself with the people you want for as long as you want. As Morgan put it:
“Controlling your time is the highest dividend money pays. Use money to gain control over your time, because not having control of your time is a powerful and universal drag on happiness.”
You no longer have to say “yes” when you feel like saying “no.” You can pick the projects you truly want without thinking about monetary rewards.
That’s also what Naval Ravikant means when he says that you should optimize for independence rather than pay whenever you can in life.
4.) Shut Up and Wait
$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. One of the richest people alive used the power of compounding interest to grow his money.
This piece of advice is so powerful yet often neglected. To become a better investor, you don’t need to consume financial news a few hours a day. Instead, it’s about remaining passive and wait it out.
If we look at long time horizons, we see nothing but economic growth. And that’s why the benefits of compounding are available for everyone who manages to stick to the same strategy.
Because all you need to do to benefit from compounding interest is keeping your money invested and wait it out. Good returns sustained over an uninterrupted period of time will ultimately win.
Billionaire Charlie Munger, Warren Buffet’s long-term business partner, sums it up nicely:
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”
5.) Wealth is Income Not Spent
What would you do if you became a millionaire overnight? Most people answer this question by listing all the things they‘d buy. Soon they wouldn’t be millionaires any longer.
The math is simple. If you own a million but spend all of it on consumer goods, nothing will be left to pay the dividends.
Becoming wealthy isn’t solely about how much you make. It’s also about how much you save.
Earning $1200 or $8200 a month won’t increase your net worth if you’re spending all of it on food, clothes, beauty products, cars, furniture, hairdressers, insurances, phones, and travel.
By spending 100%, you will never accumulate wealth unless someone else is saving for you. If you own a million but spend all of it on consumer goods, you’ll soon be broke. Wealthy people remain wealthy because they don’t spend their money, they save it.
Wealth is invisible. It’s income you didn’t spend. As Morgan states:
“Wealth is an option not yet taken to buy something later.”
Bonus Tip: Don’t Trust Mutual Fund Portfolio Managers
Did you know that most wealth managers are salespeople? I didn’t.
That’s why I almost trusted a mutual fund manager when he told me about his investment opportunities. In my uninformed mind, 1% sounded pretty cheap. But it isn’t. Over time a 1% fee can reduce your returns by around 30%.
Morgan Housel likely agrees with Rami Sethi, who writes,
“If you are reading this and you’re paying over 1% in fees, I’m going to kill you. Get smart. You should be paying 0.1 to 0.3%.”
Fund managers and many other financial experts earn money per product they sell. And because they earn commissions, you’ll understand why they likely direct you to expensive mutual funds.
The financial times published an article revealing that half of all U.S. mutual fund portfolio managers do not invest a cent of their own money in their funds. So, better do the maths before investing in an overpriced product.
The Bottom Line
If you just remember one thing from the Psychology of Money, it should be the following: Inspirational lessons on investing and acting according to them aren’t the same thing.
Whenever you read through valuable investing advice, you have two options: Let it pass like a swift moment of inspiration, or ask yourself how to apply that insight in your decision making.
So, if you’re serious about becoming a better investor, pick your favorite lesson and change your behavior. Because ultimately, you are in charge of creating the life you want to live.