The Psychology of Saving Money: The Real Difference Between the Rich and the Wealthy and the Easy Way to Financial Freedom
Nowadays, achieving financial independence is not just about earning more money. We often think that if we have a great degree or a salary of lakhs, all our financial problems in life will be solved. But the real truth is that it is more about human psychology or behavior than earning money.
In a special discussion with famous American podcaster Mel Robbins and author of the global bestseller 'The Psychology of Money', Morgan Housel, some profound life-oriented truths have emerged that can change the entire way we think about money. According to Morgan Housel, "Financial success is not a hard science; it is a manifestation of how you behave."
In today's detailed guide, we will discuss how you can achieve true freedom and peace of mind in life by changing your financial habits.
1. Why do people remain poor despite having money? (The Ignorance Trap)
Morgan Housel believes that the main reason people get into financial trouble is not a lack of intelligence but financial ignorance. We live in a society and social media era where we are constantly tempted to increase our spending. Credit cards, easy loans, and platforms like Instagram or TikTok are creating competition in our subconscious minds.
A great quote by Morgan Housel:
"Every penny of debt you take out is a part of your future, which you are mortgaging to someone else."
When you use your credit card to buy something that is beyond your means, you are essentially selling your future freedom. So the first condition for becoming rich is to free yourself from the debt trap and focus on long-term peace rather than immediate pleasure.
2. Intelligence vs. Behavior: The Real Game of Money
The best part about the world of finance is that you don't need a Harvard or Wall Street degree to succeed. A layperson cannot succeed in medicine or engineering without formal education. Did you know that a layperson can never perform open-heart surgery? But history says otherwise when it comes to finance.
Research has shown that a layperson (such as Ronald Reed) invested his entire life's savings in the right places and left behind a million-dollar fortune at the time of his death. On the other hand, even famous investors who graduated from major business schools have gone bankrupt due to bad behavior. Therefore, it is very important to maintain good financial behavior.
Key elements of good financial behavior:
- Patience: Avoid the mindset of becoming rich overnight today.
- Keeping Expectations in Check: Don't suddenly increase or change your spending habits or lifestyle along with your income.
- No Social Comparison: Don't set your spending budget based on what cars your neighbors bought or who went where on social media.
3. The basic equation of happiness: the gap between expectations and reality
Morgan Housel has a great mathematical definition of happiness and mental satisfaction. According to him:
Happiness = Reality - Expectations
No matter how wonderful your reality is, if your expectations are much higher than it is, you can never be happy. For example, today, the definition of being rich for a 9-year-old child is having a private jet or an island of their own, because they see creators like 'MrBeast' on social media.
Let's give a great example of the scientist Stephen Hawking. When he was 21 years old, he was diagnosed with motor neurone disease, and his life expectancy dropped to zero. Everything he received after that felt like a bonus or an extra gift. This philosophy is also effective in the field of money. When you keep your material expectations in check, even small savings will give you deep mental satisfaction.
4. The difference between Rich and Wealthy
Many of us think of the words 'Rich' and 'Wealthy' as the same, but there is a vast difference between them.
Morgan says, "Being rich is the manifestation of your current income. And being wealthy is the money you have earned but not spent." Wealth gives you options; it gives you freedom. Waking up in the morning and feeling "I can do whatever I want today" is the sign of being truly wealthy.
5. The Magic of Compounding
We all know Warren Buffett as one of the greatest investors in the history of the world. But what is the real secret to his huge wealth? His intelligence? Of course, but an even bigger secret is his time and patience.
About 99% of Warren Buffett's current net worth was achieved after the age of 60. He started investing at the age of 11 and has continued to do so even today at the age of 94. This is called compound interest.
{Future value} = {Present value} (1 + {profit rate}){time}
Your most important element is time. Even if your rate of return or profit is modest, if you can invest continuously for 30 or 40 years, your small capital will eventually turn into a huge amount of wealth. Despite Morgan's parents not having a financial background, he was able to generate returns comparable to those of today's best fund managers by simply investing in index funds every month for 40 years.
6. A good habit: Checking your bank balance daily
For those who are saving money for the first time in their lives or wondering what to do with so little, Morgan's advice is simple and effective: Check your bank account every day.
It only takes 10 seconds. But this small habit creates an awareness in your subconscious mind. A real-time account of how much money is coming in and how much is going out is set in your brain. This is the easiest first step to eliminating financial ignorance.
7. Treat savings as a regular expense.
We usually try to save whatever is left over at the end of the month after all our expenses. But this rule is wrong. According to Morgan Housel, every time you get a paycheck or salary, you should consider saving as a 'Mandatory Expense' or mandatory bill (such as rent or electricity bill).
The 10% Rule:
No matter what profession you are in, whether you work in a restaurant and get a $50 tip a day or get a big payment from freelancing, put away exactly 10% of it immediately. Whether it's $5 or $10, any number is much more powerful than zero.
The best way is to automate this process. Set up a direct deposit in your bank account so that a certain amount of money automatically goes into your savings or investment account on a specific date every month. In this way, human emotions or spending greed cannot get in the way.
8. The real value of the investment: the ability to sleep peacefully (Sleep Well Test)
Did you know that Morgan Housel himself keeps a large portion of his investments in very simple and safe ways, such as index funds, cash and a house of his own. Many financial advisors may say that this does not provide maximum profit or return.
But Morgan's philosophy is very clear here:
"The main goal of my investments is not to please the spreadsheet, but to ensure that I can sleep peacefully at night (Maximize for how well I sleep at night)."
There will be fluctuations in the stock market or any investment. And being able to tolerate these fluctuations is the cost of admission to survive in the market. Imagine, you wake up at 2 am and worry that you will lose all your money, but even if you gain crores from that investment, it is meaningless. Your peace of mind and family security are the real utility of money.
9. Social Status vs. Utility
Morgan gives a nice hypothetical example: Imagine you are living with your family on a deserted island, where no one else can see you. What kind of car would you drive or what kind of house would you live in? You would surely build a house that would only protect you from the storm and use a car that would only take you from one place to another. That is, when other people's eyes are gone, our preference shifts directly from 'Status' to 'Utility'. Most of the extra spending we do is to impress or impress some people who don't even have time to look at us, because they are busy with themselves!The Last Word: Your New Story of Financial Freedom
This psychology of money teaches us that financial well-being is not about being a member of a secret club or a magic formula. It is completely in your own hands. Whatever your income level, starting today you can write a new story about your spending habits, expectations, and patience.
Buying expensive things with money is not real nobility or 'Flex'; real nobility is having complete control over your time, living independently, and achieving deep satisfaction or contentment. I hope that the writing will be of some use in your life or your financial life. Be well, take care of yourself.
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