The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel
My Actions
1. Avoid unfamiliar high-return investment
Avoiding to invest money in something unfamiliar, even with a high return, is one of my investment principles. For investment such as Non-Fungible Token (NFT) and Profile picture (PFP), I haven’t invested any of my money because I couldn’t properly understand how they work, even after some research. People might have made a fortune by chance and luck if they bought cryptocurrencies like Dogecoin, whose price likely inflated when Elon Musk supported it. However, without luck or thorough research beforehand, you could also lose all of your money in this type of high-risk investment if you simply follow others’ encouragement. While the allure of high-return investments with very high risk is enticing, including to me, I am not willing to risk my money in such uncertain investments. Instead, I stick to my long-term investment plan, especially investing in Exchange-traded funds (ETFs) with low management fees, and review it annually. After adhering to my plan for a few years, I now see steady annual returns on my investments, even though ETF prices can fluctuate aggressively during both bull and bear markets. Market fluctuations are normal, and this is a reasonable risk I can take in order to earn long-term returns. Investing money in something familiar with reasonable risks to tolerate matches my investment principles better and allows me to sleep better at night.
2. Avoid spending money on something to impress others
Avoiding expenses on possessions to impress other people prevents me from wasting money on necessary things. Years ago, when I started my very first job at a hospital, I hung out with some colleagues frequently and followed the flow to buy something ‘fashionable’, such as fashionable clothes and trendy shoes, like popular rain boots. However, I haven’t had much use of them before I dumped them or gave them away. While those nice clothes made me feel good to own, they didn’t really fit my dressing style. As for those popular ankle rain boots, I felt uncomfortable wearing them in rainy days, as water ran into my boots from the inner cut edges, designed for fashion, and my ankles and feet became damp and freezing when it poured. As these things were expensive, I held onto them for a long time before finally giving them away. Now I’ve learned a lesson and make an effort to spend money on necessary things and inspect the quality of products every time before making a purchase, not simply for my preference. It takes time to do so, but it is beneficial and saves me money on unnecessary purchases. I now plan ahead to buy items of good quality that will last longer. When I see something fancy but am unsure if I need it, I ask myself a few questions to explore my real need before the purchase. This helps me make better use of money.
3. Financially optimise to allow for room for error and always have emergency funds available
Having financial room for error is so imperative and always included in my financial plan. I follow the principle of ‘Don’t put all your eggs in one basket.’ and invest my money in several safe places, and I always make sure to have enough emergency funds to cover at least 6 months of expenses in case of no income. By applying these two principles into my financial plan, I can have good sleep every night, no need to constantly worry about the fluctuation prices of markets. I stick to my plan because I’ve seen people experience difficult situations due to not having a financial buffer for unexpected expenses. A university classmate of mine borrowed $1,800 from her friend to cover necessary daily expenses, including food and other expenses. In some way, she manipulated that friend emotionally and unapologetically told her friend that she could starve to death if no one lends her money. She even proudly announced that she invested around $1,800 into an investment fund after she felt like everything was sorted after a big accident that could cost all her savings. What surprised me more, she also proudly announced that she smartly calculated every dollar she could spend with after tax pay and literally spend down all the money every fortnightly. Whether her friend lent her money or not wasn’t important. Let’s hope for the best for people who choose to befriend her. To me, this kind of financial plan might work for some, but not for everyone, especially not for those who prioritise wise financial management. It’s ideal to spend down all the money when you have no clue how long your life will last. However, more reasonably, it’s better to save for room for error as I do. There’s nothing wrong with more savings when your savings can save your ass. Spending down all the money without enough emergency funds is simply too risky to me, and I will still apply making financial plans with room for error and emergency funds.
