The best financial advice you’ll ever hear
The best financial advice you’ll ever hear comes from Morgan Housel, author of “The Psychology of Money” and “The Art of Spending Money.” With over 10 million copies sold, Housel has revolutionized how we think about money, wealth, and financial independence. His insights have changed countless lives, including mine, by shifting focus from complex investment strategies to simple behavioral changes that anyone can implement.
What makes Housel’s advice so powerful is that it’s not about secret formulas or insider knowledge. Instead, it’s about understanding the psychology behind our financial decisions and making small, consistent changes that compound over time. The best part? You don’t need to be a financial expert or have a high income to benefit from these lessons.
Lesson 1: Money is about behavior, not intelligence
One of the most empowering insights from Housel is that financial success has very little to do with intelligence or education. Instead, it’s almost entirely about behavior and mindset. This is fundamentally different from other fields where expertise matters.
As Housel explains, “It is impossible to think of an ordinary person who didn’t go to high school, didn’t go to college performing open heart surgery better than a Harvard trained doctor. That’s impossible. That will never happen. But it does happen with money because it’s not about what you know.”
Why behavior trumps intelligence
Financial success comes down to a few simple behaviors:
- Patience: Being able to think long-term and delay gratification
- Keeping expectations in check: Not constantly comparing yourself to others
- Using money as a tool: Rather than a yardstick to measure yourself against others
- Living below your means: Spending less than you earn consistently
- Investing regularly: Putting money to work for your future
These aren’t complex financial concepts that require years of study. They’re simple behavioral changes that anyone can implement, regardless of their background or income level.
Lesson 2: The two-bucket spending rule
Housel introduces a powerful framework for understanding why we spend money. Every dollar you spend falls into one of two buckets:
- Spending to make you and your family happier
- Spending to impress other people (most of whom are strangers)
This simple distinction can transform your relationship with money. When you’re about to make a purchase, ask yourself: “Am I buying this to make me and my family happier, or am I buying it to impress other people?”
The reality of other people’s attention
Here’s the uncomfortable truth: “Nobody is thinking about you as much as you are.” When you buy that expensive car or designer clothes, you imagine everyone noticing and being impressed. But the reality is that people are too busy worrying about themselves to pay much attention to you.
As Housel discovered during his time as a valet at a five-star hotel, when someone drove up in a Ferrari, he would look at the car and be impressed, but he would never look at the driver and think, “That guy is so cool.” Instead, he would imagine himself as the driver, thinking, “If I was driving, people would look at me and say, ‘Look at Morgan, he’s so cool.'”
This realization can be liberating. Once you understand that people aren’t thinking about you as much as you think they are, your desire to impress others naturally decreases.
Lesson 3: Independence is the ultimate wealth
Housel makes a crucial distinction between being rich and being wealthy:
- Rich: Having money in the bank to buy the things you want
- Wealthy: Having money in the bank that you’re not spending, giving you independence
True wealth isn’t about having the biggest house or the nicest car. It’s about having the freedom to wake up every morning and do whatever you want. It’s about being beholden to no one else’s influence but your own.
The Vanderbilt family example
Housel shares the fascinating story of the Vanderbilt family, who were the richest family in the world in the 1800s. Cornelius Vanderbilt had the equivalent of half a trillion dollars in today’s money. The family decided to give all their money to their children and grandchildren with the expectation that they would live the most ostentatious lives possible.
The result? Every single Vanderbilt heir was miserable. They had no independence because everything was dictated by their family’s social expectations, including who they were allowed to marry. By contrast, Anderson Cooper, the first Vanderbilt heir who didn’t receive a trust fund, had to build his own career and is considered one of the happiest members of the family.
This illustrates a powerful point: you can be one of the richest people in the world and have no independence, or you can have very little money and be completely independent.
Lesson 4: The power of compound interest and patience
Housel emphasizes that success in investing has more to do with long-term thinking and avoiding jealousy-driven behavior than with picking the right stocks or timing the market.
Understanding compound interest
Compound interest is the process where you earn returns on your returns. Here’s how it works:
- Year 1: You invest $100 and earn 10% = $110
- Year 2: You earn 10% on $110 = $121
- Year 3: You earn 10% on $121 = $133.10
The magic happens over time. Warren Buffett, the greatest investor of all time, accumulated 99% of his net worth after his 60th birthday. This isn’t because he became a better investor in his 60s, but because compound interest works exponentially over long periods.
The key to investing success
You don’t need to be an extraordinary investor to achieve extraordinary returns. You need extraordinary patience. As Housel explains, “If you can be an average investor for an above average period of time, you can achieve absolutely incredible returns.”
His parents exemplify this perfectly. They have no financial background or special knowledge, but they’ve been investing consistently every month for 40 years, never selling anything. Their returns would put them in the top tier of professional money managers, simply because they had patience and discipline.
Lesson 5: Treat savings as an expense
One of the most practical pieces of advice Housel shares is to view savings as an expense, just like rent or food. This mental shift can transform your relationship with saving money.
The 10% rule
No matter how much or how little you make, save 10% of every dollar you earn:
- If you make $50 in tips, save $5
- If you earn $100 dog-sitting, save $10
- If you get a $1,000 paycheck, save $100
This rule works because it’s simple, consistent, and builds the habit of saving regardless of your income level.
Automate your savings
Housel recommends automating your savings whenever possible. Set up automatic transfers from your checking to your savings account every payday. The more you can remove emotion and decision-making from the process, the better you’ll do over time.
The happiness equation: Expectations vs. Reality
Housel shares a profound insight: “All happiness is just the gap between expectations and reality.” The wider that gap, the more miserable you’ll feel. The narrower the gap, the happier you’ll be.
This explains why people making six-figure salaries can still feel broke and stressed, while others with much less money feel content and secure. It’s not about how much money you have; it’s about the gap between what you have and what you expect to have.
Managing your expectations
In today’s world, managing expectations is more challenging than ever. Social media has created comparison groups that include the most successful people on the planet. Every time you open Instagram, you see someone who looks happier, more successful, and more beautiful than you.
Housel’s advice: focus on what you can control. Instead of trying to keep up with others, focus on building your own definition of success based on what truly matters to you.
Redefine Your Own Success
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Find Your Next Opportunity →Practical steps to implement these lessons
1. Start with awareness
Check your bank account balance every single day. This simple habit takes 10 seconds but creates awareness of your money flow. Most people who struggle with money have no idea how much they’re making or spending.
2. Apply the two-bucket test
Before making any purchase, ask yourself: “Am I buying this to make me and my family happier, or am I buying it to impress other people?” If it’s the latter, reconsider the purchase.
3. Focus on independence, not status
Ask yourself: “If I was on a deserted island with just my family, what kind of lifestyle would I choose?” This helps you distinguish between what you actually want and what you think others want you to want.
4. Start small with savings
Don’t wait until you can save large amounts. Start with the 10% rule, even if it’s just $5 or $10. Every dollar you save is a piece of your future that you own.
5. Invest in index funds
Keep your investments simple. Housel invests in index funds, which are low-cost funds that own every stock in the market. The simpler your investments, the more likely you are to stick with them long-term.
The psychology of contentment
Housel emphasizes that true wealth isn’t about having more; it’s about wanting less. As he writes in “The Art of Spending Money”: “Desiring less can have the same impact on your well-being as gaining more money.”
This doesn’t mean giving up on your goals or aspirations. It means being content with what you have while still working toward what you want. You can have both ambition and contentment.
The Stephen Hawking example
Housel shares a powerful example from Stephen Hawking, who had every right to complain about his circumstances but chose gratitude instead. When asked about his secret to happiness, Hawking said: “My expectations were reduced to zero when I was 21. Everything else since then has been a bonus.”
While we don’t need to experience such extreme circumstances, we can apply this mindset to our financial lives by appreciating what we have rather than focusing on what we lack.
Common financial mistakes to avoid
1. Chasing status over utility
Many people buy things to impress others rather than to improve their lives. Focus on utility over status.
2. Letting expectations spiral out of control
As your income increases, it’s natural to want to upgrade your lifestyle. But be careful not to let your expectations grow faster than your income.
3. Comparing yourself to others
Social media makes it easy to compare yourself to the most successful people on the planet. Remember that you’re only seeing their highlight reel, not their struggles.
4. Trying to time the market
Instead of trying to pick the perfect time to invest, focus on time in the market. Consistent investing over long periods is more important than perfect timing.
Building financial independence at any age
One of the most encouraging aspects of Housel’s advice is that it applies to people of any age and income level. Whether you’re 22 and just starting out or 55 and trying to catch up, the same principles apply.
For young people just starting out:
- Start with the 10% rule immediately
- Focus on building good habits rather than making perfect decisions
- Don’t worry about having the perfect investment strategy
- Focus on increasing your income through skills development
For people in their 30s and 40s:
- If you’re behind, start now – it’s never too late
- Focus on increasing your savings rate
- Automate as much as possible
- Don’t try to make up for lost time with risky investments
For people approaching retirement:
- Focus on what you can control
- Consider working longer if possible
- Downsize your lifestyle if necessary
- Focus on the non-financial aspects of retirement
The ultimate goal: Financial contentment
The ultimate goal isn’t to become the richest person in the room. It’s to achieve financial contentment – the ability to be happy with what you have while still working toward your goals.
This means:
- Having enough money to cover your basic needs
- Having a cushion for emergencies
- Being able to make choices based on what you want, not what you need
- Not being controlled by money or the opinions of others
FAQs
Q: What’s the most important financial skill to develop?
A: The most important financial skill is patience. The ability to think long-term and delay gratification is more valuable than any investment strategy or financial knowledge.
Q: How much should I save each month?
A: Start with the 10% rule – save 10% of every dollar you earn, no matter how small. You can increase this percentage as your income grows.
Q: What’s the difference between being rich and being wealthy?
A: Being rich means having money to buy what you want. Being wealthy means having money you don’t spend, giving you independence and freedom.
Q: How do I stop comparing myself to others financially?
A: Remember that people aren’t thinking about you as much as you think they are. Focus on your own goals and what truly matters to you rather than what others have.
Live example — user point of view
I used to be terrible with money. I was making $45,000 a year but spending like I made $80,000. I was constantly buying things I didn’t need to impress people I didn’t even like. My credit card debt was growing, and I felt like I was drowning.
Then I discovered Morgan Housel’s work, and it completely changed my perspective. I started applying the two-bucket test to every purchase. When I wanted to buy a $200 jacket I didn’t need, I asked myself: “Am I buying this to make me happier, or to impress other people?” The answer was clear – it was pure status seeking.
I also started the 10% rule. Even though I was barely making ends meet, I committed to saving 10% of every dollar I earned. It started with just $20 per paycheck, but it built the habit. I automated the transfer so I couldn’t talk myself out of it.
Most importantly, I shifted my focus from trying to look successful to actually building independence. Instead of buying a fancy car I couldn’t afford, I focused on building my savings. Instead of trying to keep up with my friends’ lifestyles, I focused on my own goals.
Two years later, I have $15,000 in savings, no credit card debt, and I feel more financially secure than I ever have. The best part? I’m actually happier now with less stuff because I’m not constantly worried about money or trying to impress people.
Morgan Housel’s advice didn’t just change my bank account – it changed my entire relationship with money and gave me a sense of peace I never had before.