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It’s a rainy day here on the Isle of Wight in the UK, a perfect day to stay home with a cup of tea and a good book. But I’m still thinking a lot about the most recent book I finished since it has stuck with me and sparked a lot of conversations between me and Ali. Today seems the perfect day to review it and share some personal reflections.

When I picked up The Psychology of Money, by Morgan Housel I mentioned to Ali that I was interested in this book for two reasons. First, I’ve followed Morgan Housel over the years since he first joined the Motley Fool and I’ve really enjoyed reading his articles on behavioral finance and the market. Second, I’ve come to the conclusion that people can’t master their own money until they’ve mastered their emotional money baggage and this book definitely touches on that idea.

This is the 25th personal finance related book I have read and reviewed so far, and it’s definitely one of my top 5 favorites. Since I’m dyslexic I chose the audible version of this book. It was fun to listen to it being read by one of the Motley Fool’s longtime podcast hosts, Chris Hill, who I’m very familiar with. As I settled in with the book and the chapters started to unfold I felt right at home with the great collaboration between Housel’s storytelling style and Hill’s narrating style. I also really liked the way the book is organized into 20 short chapters, each one a little parable about human nature, risk, and the power of money in our lives.  

This book came along at a great time for me with all of the uncertainty swirling around due to the continued fallout of COVID. Everyone we’ve been talking to in our financial coaching sessions has had some kind of major change or upheaval this year and the need for some control in each of our own lives is palpable for many, including me and Ali. 

We started out this year traveling full time in Mexico and then watched our portfolio lose almost 28% of its value in mere weeks during the COVID Crash. Our travel plans dropped out from under us as the reality of COVID closed one country after another to Americans and infection rates climbed in the USA. Eventually we felt our only option was to abandon our travel lifestyle and regroup, just like Harry Potter in the Deathly Hallows. I kept picturing that scene in the last Harry Potter book when Harry and his friends retreat back to Hogwarts to face insurmountable odds against He Who Must Not Be Named. And yet by naming him, Voldemort, they are able to pool their resources, overcome their fears, and prevail.

Don’t worry! This post is still focused on a personal finance book!

It will sound cliche but I loved every chapter of The Psychology of Money. I found something we could relate to and things we’ve actually experienced in every chapter. Which meant Ali and I were constantly discussing the book as I kept reading. I listened to the book twice, and Ali was anxious to read it after me. But I won’t go through all of it here, instead I’m going to focus the rest of this post on the four chapters that really spoke to me…

Chapter 2 – Luck & Risk

Over and over again in this book Housel points out that humans crave the need to control things. We look to control our surroundings, other people, and especially our money. To simplify things Housel describes that there are things we can somewhat control (Risk) and there are other things we really have no control over at all (Luck). It makes sense for me to focus on what we do have control over, like our portfolio allocation. Then we need to accept the fact that the rest of our portfolio growth is based on luck since we have no control over the market. Most importantly I think we need to be humble when luck turns in our favor, and we need to be kind to ourselves when luck turns against us.

Chapter 10 – Save Money

Housel argues that we don’t need a reason to save. We should just do it. Save! We should save because we don’t know what’s coming, good or bad. We should plan for what we can predict and we should plan for what we can’t predict as well. Saving and investing is goal number one for us, but we also need to remember that having cash available when we need it is also important. Emergency fund!

In our own personal finance plan every dollar has a job. The biggest job our cash has is to just be there, ready for us to access quickly in an emergency. We currently have two years of living expenses set aside in cash and bonds. We’ll also be setting aside some extra funds for out-of-pocket medical expenses and health insurance deductibles in our next withdrawal for 2021 since we’re getting on the ACA next year. Knowing our cash has a job makes us confident that it’s constantly working for us, even if it’s cash. That’s one way we can manage risk to our portfolio even though we don’t have a crystal ball. Managing risk and protecting our portfolio is what helps us sleep a little better at night.

Chapter 11 – Reasonable > Rational

In this chapter Housel explores the idea of how we make choices in the world, especially when it comes to money. Personal finance decisions are not black and white, and not the same from one person to the next. Our decisions are influenced by our upbringing and the experiences we’ve had in the world. In our case it’s not always the best idea to make choices based only on the numbers. We’ve realized that weighing the choice we can live with and stick to emotionally, against the choice that will make us more money, is what works best for us.

A few months ago we bought a house with cash after getting pulled over from our Nomad life. I’m sure that purchasing a home won’t grow our portfolio as much as leaving all of that money in the market. But having a home base close to family will make us happy. We paid cash because we didn’t want to have a mortgage hanging over our heads again. We could have borrowed the money for our home and gotten a crazy low interest rate, which would have allowed us to keep the bulk of that money in the market earning even more. But for us, not having a mortgage and being 100% debt free in retirement was more important.

Chapter 12 – Surprise!

As the book progresses, Housel looks even deeper into the topic of risk management. He lays bare the reality that no matter how much you plan ahead and understand your personal risk tolerance, there can always be a black swan that comes along and surprises you. He used the example of how engineers planned the height of tsunami walls around the Fukushima Daiichi Nuclear Power Plant in Japan. They used historical data from tsunamis to design 5.7 meter seawalls. And yet, on March 11th 2011, a 9.1 magnitude earthquake sent a 14 meter tsunami right over the walls devastating the power plant. The point being that we should expect to be surprised even if we think we have prepared for anything and everything.

In many ways the COVID pandemic has felt like one tsunami after another for so many people. Much of life is not in our control so we have to figure out how to forgive ourselves and others when bad things happen beyond our control. Then we can move on and be ready for the next opportunity that comes our way.

Financial Forgiveness

While I was reading this book one thing that kept occurring to me was the idea of financial forgiveness. Sometimes we make financial mistakes ourselves, and other times we put our money into the hands of people we trust personally or institutions that appear to have expertise beyond our own. It’s quite common for people to trust individuals from investment companies or even family and friends with money. If you do and things go awry, being able to forgive yourself for those mistakes as well as others for their part is complicated. As we’ve seen during our financial coaching conversations these types of situations can take a major toll on your confidence around money and can also get in the way of making better choices in the future. For example, if you choose to trust your brother to manage your money and he loses it, you might find yourself procrastinating about making future money choices and finding a better advisor. You might also find that that serious damage has been done to your relationship with your brother. Financial forgiveness is an important and complicated part of moving on.

When Ali and I finally pooled our money, we had to work hard on overcoming some money baggage we both carried with us. In my case, I felt I didn’t have enough of a financial education and would always have trouble accessing information because I’m dyslexic. Ali’s money baggage is focused around very irresponsible parents who couldn’t keep jobs or make enough money to keep their kids safe and healthy. Ali and I were also hard on ourselves about how we handled the two rental properties we had that were never cash flow positive. I also once loaned a friend money years ago, knowing in my heart it was unlikely they could ever pay it back and I didn’t want our friendship to become complicated.  

Eventually Ali and I realized that it’s better to have tried and made mistakes with our money than to never have tried. Making mistakes is part of the financial education process. The less you let your mistakes hold you back, the more freedom you will have to make good choices that will propel you forward in the future. When we retired we forgave ourselves for our mistakes with the rentals and I also forgave that personal loan I had given to a friend. Since then, we’ve not dwelled or looked back for any purpose other than to say, “Those were good lessons!”

Again and again, The Psychology of Money reminded me that we are not 100% in control of the variables that will come at us in life. And when you do make mistakes it doesn’t help to keep beating yourself or others up about it. Do the work you need to do to move on so those old mistakes don’t become obstacles in your path.