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MBA2318 Must Read: The Psychology of Money by Morgan Housel
00:14:19
Money is an emotion. While we like to think of wealth-building as a purely rational or strategic exercise, those who ignore the psychological component are at a disadvantage.
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- [00:01]
Omar Zenhom
And we're back folks. It looks like Jim from sales just got in from his client lunch and he's got receipts. His next meeting is in two minutes. The team is asking can he get through his expenses in that time? He's going for it. Is that his phone? He's snapping a pic. He's texting Ramp. Jim is fast, but this is unheard of. That's it. He's done it. It's unbelievable. On ramp expenses are faster than ever. Just submit them with a text. Switch your business to ramp.com hey, welcome to the $100 MBA show. Practical business lessons you can count on to build your business. I'm your host, your coach, your teacher, Omar Zenholm. I'm also the co founder of Webinar Ninja, an independent software company I started with my co founder back in 2014. And today's episode is a must read episode. On our must read Episodes, I share with you a book that has influenced me as an entrepreneur. I share with you its takeaways, its insights, and why you should read it too. Today's Must Read is probably one of the best books on finance psychology I've read ever. It's called the Psychology of Money and it's written by Morgan Housel. This book makes the argument that our ability to be good with money has a lot to do with what's in our head and in our hearts and not what's in our spreadsheets, formulas or equations. As a business owner, you need to be good at money. You need to be good at earning it, keeping it, and having it work to your advantage. And this book shows you how to do that. This is one of the most practical books on managing your finances, whether it's for your business or for your personal finances, because it's very approachable. It has 20 short chapters and the book reads like a page turner. One chapter leads to the next and it's written in a language that anybody can understand. You don't need to be a finance geek to get this book in today. Today's lesson, I'm going to share with you some of my favorite takeaways, some of the things that really changed my mindset when it comes to money, and how this book can really impact your ability to grow not just now in your business, but in the foreseeable future, five years from now, 10 years from now, 20 years from now. It's a total game changer. Let's get into it. Let's get down to business. Today's Must Read the Psychology of Money by Morgan Housel is one of the best books I've read on money. And I've read a lot of finance books, business books, growth books. But what this book does, it refuses to ignore the human element of money. The way we perceive money, the way we think about money. It has a lot to do with the way we were raised, the environment we grew up in. If we grew up during a recession or a depression or a strong market, it has a lot to do with our parents and how they dealt with finances and how much they talked about it. There's so many factors that play into our own psychology of money. That's why sometimes you'll see somebody do something with their money and say, man, that's crazy. I would never do that. And they'd probably say the same about you. And that's why the opening chapter is titled no One's Crazy. Proving to you that we might think it's crazy that some people spend their money on lottery tickets, but it makes perfect sense for some people. We're quick to pass judgment on how people spend their money, how do they use their money to enhance their life. People bashing others on social media for buying houses during an inflated market instead of renting. But the thing that we're missing is that money is highly emotional. And I like the fact he starts with this chapter because he makes you aware of the fact that, hey, you have biases. There are things that you believe about money that are not really based in fact. They're just based on what you grew up with or what you believe based on the experiences you've had so far. Most of us don't have enough experience with money to actually have an educated opinion. And this allows you to kind of just open up and realize, I got a lot to learn. Let me listen up to this book. And in the book, he shares an incredible number of case studies of people that have built wealth even with regular low paying jobs, as well as people like Warren Buffett and Charlie Munger, who built extreme wealth. The thing that they all have in common, people that have built wealth, is that they stayed in the game. They stayed consistent. They say you have to be in the game to win the game. And the same goes when it comes to building wealth. And that begs the question, what gets you out of the game? Well, it's very simple. It's just not doing the right things consistently. It's taking risks when you don't have to. The book mentions the story of Bertie Madoff, where he basically ruined his whole life by taking huge risks that were really unnecessary he was actually a pretty decent business person for decades and he was trusted in his community of investors. But he got greedy. And usually greed preludes risk. And one of the things you don't want to do in your life and your business is to find yourself ruined, right? To be totally out of business, you got to stay in the game to win it. So you got to be careful about the choices you make that can possibly ruin you. This is why they say you need to diversify your income. This is why SaaS companies, for example, software as a service or subscription companies, are so valuable because they're not reliant on a few big customers. If a couple of your clients are holding up your business and one of them or both of them leave you, you're ruined. Your business is in the dumps unless you can find a way to replace them, which is really hard. Subscription services, on other hand, rely on hundreds and thousands of small customers. So if you lose a customer two or three or four or 500, in a lot of cases, you are going to be okay. You can bounce back. Not all your revenue is based on one or two people. So you got to think of your business that way as well. How can you make sure you are not ruined by one bad move that puts you out of the game? Because you got to stay in the game for a long period of time to become wealthy. And that's really the secret is longevity. We mentioned Warren Buffett. He is now worth over $111 billion. People thought he was always rich. He started at the age of 20 and it took him to age 50 to make his first billion. And it's all because he understands the power of compounding. And compounding only works when you're consistent, when you keep your money in the game. And that's why it's so important to stay afloat in your business to have surplus. That leads me to another chapter that's all about luck and risk when it comes to money. He discusses in the book that, hey, we are all going to get lucky sometimes, and sometimes we're going to get unlucky. The problem is that we always rely on the fact we're going going to get lucky and never think about the times when we're going to get unlucky. So you got to have a buffer. You got to make sure that you can weather some unlucky times in your business so you can again stay in the game. Some of us are on razor thin profit margins going month to month. This is not going to work. You need to make sure that your business model is allowing you to have a little bit of a buffer, keeping money in the bank, keeping some Runway for you, preparing for the inevitable time where you're going to get unlucky, when things are going to turn, things that are totally out of your control, whether it's the economy or a pandemic or a financial crash or a war. This is something that we all have seen in history. And yet in the future, we just don't think these things are going to happen. They will, and we got to make sure our businesses are ready for it. This one broke me because I was like, man, I'm more of the optimistic person. I'm the optimistic business owner who always feels like we're going to get better and better. But sometimes it's not always that. You're going to take two steps forward, one step back sometimes. And you got to be able to absorb the blow of that one step back. Chapter five is all about getting wealthy and staying wealthy. Making money and getting rich is actually not as difficult as it may seem. Staying wealthy is a different story. And I want to quickly share a concept that he shares in the book that you're going to really love. The difference between wealthy and. And being rich. When people say, I want to be a millionaire, they're really saying, I want to spend a million dollars, which means it makes them feel rich to be able to buy things, experience things, do things. The quickest way to feel rich is to start spending money. But being wealthy is having the ability to do things. It's the unspent money. It's the money in the bank that allows you to have a bit of cushion. It's the money in the bank that allows you to say, hey, if things go wrong, I have a safety net. It's the money in the bank that allows you to say, hey, if I want to quit my job and think about starting a for six months, I can do that. That makes you wealthy. Wealth is hidden. Being rich is really public. It's really out there. And he's arguing you should try to be wealthy, not rich. Because wealth is the stuff that people don't see. It's the business that you have that is allowing you to earn passive income. It's the investments you have that are earning money while you sleep. It's the real estate property that you have that is allowing you to expand your portfolio, get some rent, yield, and have an asset. These things give you flexibility. It gives you peace of mind. That's what wealth is. Being rich or looking rich is really what holds people back. It's the Lamborghinis, it's the Ferraris, it's the gold watches, it's even that six bedroom house on the beach. He shares a story about a man in a Ferrari. And when you see a Ferrari, all you really see is somebody who spent a lot of money on a car. Either they borrowed from the bank or they are $250,000 less wealthy now because they bought this car. You don't know what else is going on in their life. They could be spending half their income on this car, maybe even more. And he shares some shocking statistics when it comes to that.
- [09:40]
Jim
Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.
- [10:00]
Omar Zenhom
Yay.
- [10:02]
Jim
Free your team from expense reports today.
- [10:05]
Omar Zenhom
Switch your business to ramp.com one of my favorite chapters in the book is chapter 10 save money where he makes a very constructive argument on why you should save money. It's not sexy, it's not fun, but it really is power to have Money in the bank don't listen to people who say you should have money in the bank and your money should be always invested and in inflation and all that kind of stuff. The cost of inflation is far less than the cost of being restless and having no peace of mind that you don't have a safety net. Saving money is just all about making sure your expenses are lower than your actual income. And the difference of that is your savings. And if you save enough consistently, month over month, year after year, that savings becomes more and more of a nest egg to give you more and more safety. Now this is not in the book, but my advice to you if you are horrible at saving is to just get started with any amount, okay? Just get in the habit of any amount and don't worry about how significant or insignificant it is. Even if you're just saving $100 a month. I know that sounds ridiculous and silly, but a hundred dol that's $1,200 in the year. In five years that's $6,000. Most people don't have $6,000 that they can just have in savings as a safety net for an emergency, for an urgent spur of the moment decision you have to make for a car repair. Whatever it might be. The mere fact that you're saving and you have some money aside will just make you feel better about your financial situation. It'll make you feel a little bit more comfortable that you have something or you're working towards something to give you a little bit of peace of mind. Now, obviously, if you can save more, and you should save more, you should go for it. The more the merrier. I think a good number is 10%. 10% of whatever your income is. It's not astronomical. You're not saving half your money or a quarter of your money. It's 10%. And I find that 10% is not actually something you feel that much. Your life can continue and you're really not missing out on much. Maybe you eat out once or twice less a month. It doesn't actually destroy your budget. So let's say, for example, you take home $5,000 a month. That means you're putting away $500 every month. And then after that you pay your bills. That $6,000 I mentioned, if you saved $100 every single month, it would take you five years to hit that $6,000. Well, $500 gets you there in a year. Pretty cool. Another great chapter dives into why being reasonable is more important than being rational when it comes to money. If you're intrigued, you should, because this chapter is fire. I'm going to leave it to Morgan Hassell to explain that one to you in the book. The book wraps up nicely in 20 chapters, leaving you with a lot to think about and a lot to do. Which is great because that's what a great book is supposed to do, is to change your mindset, get you thinking, and get you to change your habits. This book just on its own, just reading it and consuming the information is going to help you. But what's really going to help you is you taking action, is you implementing the suggestions and the strategies that he mentions in the book. I can't recommend this book highly enough. It's probably one of the best books I've read in the last few years when it comes to finances. Probably a book I will gift to many people because it's such a fantastically written book and approaches the subject of money without inflicting any guilt or shame, which is often associated with our own finances and the way we deal with money. Thank you so much for listening to the $100 NBA show. If you love what you hear, hit subscribe. Hit follow on your favorite podcast app so you get our next episode automatically. If you want to give us big love, go ahead and share the show on social media. Let your friends and family know that, hey, I listened to the 100 NBA show. Tell me love about it so they can go ahead and listen to before I go, I want to leave you with this. If you're the kind of entrepreneur that sees yourself as a big thinker and a builder and a mover, and you're like, money is not my thing and finances on my thing, I don't really feel comfortable there. I'm really about just building something big and putting it out in the world and let it grow. You kind of see yourself as a Steve Jobs visionary person. You think money is details. I'm going to stop you there and say, don't do that to yourself. Money is oxygen for every business. In order for a business to survive, to grow, to thrive, it needs money. And you need to be good with money. And more importantly, you need to be good with money so that you could be good to yourself with money. When it comes to your personal finances and allowing the business to fuel your lifestyle in a reasonable way. I always think that the best books are the books I go into knowing that I might feel confronted. I go in with an open mind and try to learn something. Because one thing is for sure. The world's gonna change. You gotta change with it. You gotta get better. You gotta improve so that your business, your life can improve as well. Thanks so much for listening and I'll check you in Wednesday's episode. I'll see you then. Take care. Foreign.
- [15:22]
Jim
Got a 7am meeting on a Monday expensing breakfast because it's in policy wasting all afternoon submitting an expense report for that breakfast. If your company used Ramp, you could submit expenses with just a text.
- [15:42]
Omar Zenhom
Yay.
- [15:44]
Jim
Free your team from expense reports today.
- [15:47]
Omar Zenhom
Switch your business to ramp.com.