I recently read “The Psychology of Money” by Morgan Housel. It was a different take on a finance book as it looks at the nuances of how people think about and handle money. In the book Morgan relays stories of people who have found themselves in various financial positions, from riches they could never even have imagined to those who have had it all and lost it all.
What’s interesting when reading through the examples he gives is that so much of the outcome of people’s financial position comes down to their behaviours and decision making. Success with finance is not always based on knowledge but our points of reference around money which stem from our childhoods and the way our parents and grandparents used to talk about and behave with their own money.
When I was reading the book, it really made me think about the real-life examples we are surrounded by – the perceived success or failure of other people’s finances and how in reality nothing is ever quite as it seems!
Here are some of the key lessons I took from the book:
- The Role of Luck and Risk: Housel explains that success is often influenced by factors beyond our control when it comes to finances. Sometimes timing and luck can play their part – recognising this can help us to be less judgemental about our financial successes and failures.
2. The Power of Compounding: The book highlights the importance of long-term thinking and patience in building wealth. Small, consistent actions over time can lead to significant results.
3. Managing Expectations and Emotions: Housel discusses how emotions like fear and greed can drive financial decisions, often leading to poor outcomes. Being aware of these emotions and managing them is crucial for financial stability.
4. The Value of Frugality and Flexibility: Living below your means and maintaining financial flexibility can protect you from unexpected downturns and provide opportunities for investment and growth.
So, what can the learnings from this book teach us about our business finance.
Become aware of our behaviours: As business owners we need to recognise our financial habits and how they impact our business decisions. Are you driven by fear, greed, or overconfidence? How do these behaviours show up for us in our businesses and our personal finances? Understanding these behaviours can help you make more rational, objective financial choices.
Think long-term: Consider your goals – where do you want to be in 1-, 3- and 5-year’s time? Taking a longer-term view can help us to consider what else we need to be looking at when it comes to our finances. Should you be saving and investing while you grow your business? Some patience might be required here but taking the long-term view can help with sustained growth.
Learn to regulate your emotions: Develop strategies to manage your emotions in financial decision-making. This could involve setting strict investment criteria, having contingency plans, or seeking advice from mentors or coaches. Remember that making decisions based on logic not emotion will lead to different outcomes.
Create a financial plan and be disciplined: Implement detailed financial plans and stick to them. Regularly review your financial performance, adjust your strategies as needed, and stay disciplined in your spending and investment habits. When it comes to your business you need to keep on top of your numbers – make a point of recording the number you need to know to make great decisions on a regular basis.
Keep learning: Continuously educate yourself about financial principles and best practices. Attend workshops, read books, and seek guidance from experienced coaches to enhance your financial literacy. There is always something to learn!
Understanding the psychology of money is crucial for both personal and business financial success. Remember, success is not just about what you know, but how you apply that knowledge through disciplined, informed actions. Invest in your financial education, understand your behaviours, and implement strategic plans to unlock your business’s full potential.
