Building Wealth With Sustainable Strategies
Key Takeaways from “The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness” by Morgan Housel
Financial security. Freedom. Peace of mind. These are all powerful motivators when it comes to building wealth. But where do you even begin? And what does it mean to build wealth? The internet is flooded with get-rich-quick schemes and conflicting advice. This month’s read for the SheReadsCo. book club was “The Psychology of Money: Timeless Lessons, on Wealth, Greed, and Happiness” by Morgan Housel. This post will highlight the key takeaways and equip you with actionable strategies to navigate your financial journey and achieve long-term success.
Know Your Goals (and your numbers)
As indicated in the title, Housel touches on the subject of greed and what it means to be wealthy in his book, “The Psychology of Money”. The author brings up an excellent point that when people say they want to be a millionaire, they usually mean they want to spend a million dollars. Building wealth is different than this.
So how do we define wealth? This is partially subjective. But typically, wealth is a ticket to freedom, flexibility, and control over your time. This is where self reflection comes in. Evaluating what you need to feel relaxed and in control of your time and money, combined with your lifestyle expectations is the first step to defining what wealth is for you.
“Everyone needs the basics. Once they’re covered there’s another level of comfortable basics, and past that there’s basics that are both comfortable, entertaining, and enlightening.”
Get real with yourself about what different stages of comfort look like for you and then you can start getting real with your financial management instead of always just chasing bigger numbers.
Save For The Unexpected
Housel speaks to the importance of saving money, even if you do not have a purpose for it at the moment. Its purpose becomes for life’s unexpected ups and downs. Similar to an emergency fund, this idea of savings goes a step further. Going back to the point of defining wealth around the control over your time, having savings means more ability to try new things like business ventures, or time off for having kids. It takes the stress away from having to make decisions out of necessity over desire, especially when life doesn’t run on our expected timeline (which is most of the time).
The Effects of Compounding
A key aspect of building wealth has to do with the rules of compounding. Compounding, in the world of finance, refers to the process where your money grows exponentially over time. Here's the breakdown:
You invest an initial amount, called the principal.
You earn interest or returns on that principal.
The key part: those returns are then added back to your principal and become part of the amount that earns interest in the next period.
So, you're not just earning interest on your original investment, but also on the interest you've accumulated previously. This creates a powerful snowball effect, growing your wealth at an accelerated pace the longer your money is invested.
Here's an example:
Imagine you invest $1,000 at a 5% annual interest rate.
In the first year, you'd earn $50 in interest, bringing your total to $1,050.
In the second year, you'd earn interest not just on the original $1,000, but also on the $50 you earned the first year. So, you'd make $52.50 (5% of $1,050), bringing your total to $1,102.50.
See how the interest amount keeps growing each year? That's the magic of compounding.
“But good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”
Because of the beauty of compounding, stressing about the hottest individual stocks, or quick cash options, are not necessarily going to build you sustainable wealth. Instead, focusing on the consistency of contributing to investments will pay off the most reliability in your lifespan.
Building wealth is a marathon, not a sprint. It requires discipline, patience, and a focus on your long-term goals, just like the principles outlined in "The Psychology of Money". By taking control of your finances, defining your own version of wealth, and implementing these actionable strategies, you'll be well on your way to achieving financial security and the freedom it brings. Remember, the journey itself is empowering. Celebrate the small wins, learn from setbacks, and enjoy the process of building a brighter financial future for yourself.
This post is just the beginning. The SheReadsCo. book club is a fantastic resource for continued learning and support. So grab a copy of "The Psychology of Money" if you haven't already, join the discussions, and keep building your financial knowledge!
