5 Wealth Lessons From The Psychology of Money

What would your answer be if someone asked you if you were happy with the way you currently manage your money? And, can you confidently say that you can comfortably retire someday?

We are all here because we want to create wealth or be in a situation where money is not a big deal if and when we need it. To get to this point, there has to be a discipline that we follow to ensure that we can be comfortable with our money- be it saving, investing or even spending it.

As such, there are a number of ways to create wealth but they all require that we are disciplined by becoming creatures of habit when it comes to shoring up savings towards a wealthy future.

But what is wealth?

According to Morgan Housel, the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness, wealth is what we don’t see. How is that, you ask?

Housel notes that wealth is not visible because it is financial assets not yet converted into what people can see or conceptualise. He argues that one way to become poor is trying to show people how much money you have by spending it. He cautions that spending is the fastest way to having even much less money.

In the book, Housel makes the following distinctions:

Perception of wealth

When people judge wealth by what they see, it is because it is what is available to them. It is evident, tangible and not hidden like people’s bank accounts. Perception of wealth is in things like cars, homes and life on the gram. In reality, the perception could be an endeavour to ‘fake it till you make it’.

Real wealth

The book emphasises that wealth is what people don’t see. It could be everything money that has not been spent on expensive purchases. Real wealth is hard to contextualize.

Wealth and riches

To be wealthy, one has to be disciplined enough to not spend everything they have. This, however, should not be misconstrued to mean that one should be a miser or avoid spending on necessities. By not (extravagantly) spending what you have, you can easily accumulate it. 

If you fail to differentiate between wealth and rich, you could be setting yourself up for a life of successively poor money decisions. 

While wealth is hidden - or rather an income not spent - rich is a current income that is spent and hard not to spot. Even when that fancy car or new home was funded by a loan, someone would need to be earning a current income of a certain level to qualify for such a big amount. The ‘rich’ will always go out of their way to ensure they are known.

By not immediately spending an income earned, wealthy people get more flexibility, options and growth such that one day the income not spent can purchase more than it could in the present.

To get you on a better path towards building wealth, here are five lessons from Housel’s work that will guide you towards your goal. As always, these are not cast on stone and you can adapt them towards your goals and aspirations.

1. Pay yourself first: 

Always ensure that a part of what you earn is yours to keep. This is because no one can create wealth without saving. You can start by taking a tenth of your earnings and save it for the future.

Tip:  Find a good investment vehicle where you can put your money so that it can give you some returns.

2. Expenses and you

Towards your wealth creation goal, strive to control your expenses. Avoid spending your money on unimportant things but make good use of whatever you have left over after paying yourself.

Tip: The success here will come if you can comfortably live within your means.

3. Invest your money

Having a passive income means that your money is working for you. To achieve this, invest some of your money when you have built up some savings which will make it possible for your money to make more for you.

Tip: Work towards getting returns on your investments (ROI).

4. Secure your principle

Always ensure that you have protected your money from loss by not taking unnecessary risks. Always invest where your principal is safe and where you can easily reclaim it if necessary.

Tip:  Consult a professional to help you with ways and ideas of profitably handling your money.

5. Increase your revenue streams

Wealth is not grown overnight and to successfully achieve your wealth creation goal, increase your revenue streams. Take opportunities that come your way and keep learning by educating yourself of the latest trends in wealth creation.

Tip: Keep learning and evolving with the times by continuously improving yourself.

WRAPPING UP

Building wealth is, in a sense, more of a journey than a destination. By truly understanding the difference between wealth and rich, you are able to set off on that journey with your objectives being much clearer. 

While not spending (unnecessarily) what you have is a literal building block for wealth, it is just but gives you a chance to multiply your current income. 

Which then means you have to learn as much as you can about investing, the ups and downs and trends as well as get professional financial advice as needed to guarantee that you are on the right track.