The Psychology of Money
Understanding the Problem
Money is an essential part of our lives, yet many of us struggle to manage it effectively. While some people seem to build wealth effortlessly, others struggle to make ends meet. The difference often lies in our mindset and attitudes towards money.
As we grow up, we are taught many things by our families and society, including how we should think about money, what it means, and how we should handle it. Some of us are taught that money is the root of all evil and that rich people are greedy, while others are taught that money is the key to success and happiness.
Both of these extreme beliefs can have a profound impact on our relationship with money and how we manage it as adults. However, the truth is that money is neither inherently good nor evil - it is simply a tool that can be used for good or bad purposes, depending on how we approach it.
Growing up, my family was comfortable but not wealthy. My father worked for the Suez Canal Authority, one of the highest-paid governmental organizations in Egypt. Although he had a stable income and a good standard of living, he did not have a financial or investing mindset. For example, The Suez Canal Authority provided good living and housing options for its employees at an incredibly low cost, such as 50 EGP per month for a 200 square meter apartment or a standalone villa. However, there were no discussions about investments or growing money because everything was stable.
It wasn't his fault, though. Like most of his middle-class generation, my father was exposed to the Socialism mindset that prevailed in Egypt at that time. As a result, he did not receive the proper talk about money and how to grow it. The prevailing belief was that the government was responsible for providing for its citizens' basic needs, and personal financial growth was not encouraged or discussed.
As a teenager, all I wanted was to have fun and spend money. When my father passed away when I was 17, I realized that simply receiving a decent inheritance was not enough. What mattered most was how I treated the money and whether I had the right mindset to make it grow. It took many years of irresponsible spending behavior even after I started working in the stock market industry and earning good income at my 20s to understand that it's not just how much you earn but also how you treat and grow your money. But unfortunately, this realization came relatively late, and I wasted my 20s and maybe even my mid-30s focusing only on my career without paying much attention to my personal finances.
I came to understand that personal finance and career development are both crucial aspects of overall self-development that should go hand in hand from the start, without any delays. Even if you think that your career and earnings need improvement first before thinking about investing or saving, it's important to be aware of what you need in order to achieve a certain level of wealth or lifestyle and to create a savings and investing plan from day one. Putting your financial goals into specific numbers and creating a plan can help you make progress towards them, even if your income is not yet where you want it to be.
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Is Personal Finance Really About Numbers & Math?
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In one of my favorite books, 'The Psychology of Money' by Morgan Housel, he pictured a nice example addressing the question." Here is an excerpt from the book,
“A genius who loses control of their emotions can be a financial disaster. The opposite is also true. Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.
My favorite Wikipedia entry begins: “Ronald James Read was an American philanthropist, investor, janitor, and gas station attendant.”
Ronald Read was born in rural Vermont. He was the first person in his family to graduate high school, made all the more impressive by the fact that he hitchhiked to campus each day.
For those who knew Ronald Read, there wasn’t much else worth mentioning. His life was about as low-key as they come.
Read fixed cars at a gas station for 25 years and swept floors at JCPenney for 17 years. He bought a two-bedroom house for $12,000 at age 38 and lived there for the rest of his life.
He was widowed at age 50 and never remarried. A friend recalled that his main hobby was chopping firewood. Read died in 2014, age 92. Which is when the humble rural janitor made international headlines.
2,813,503 Americans died in 2014. Fewer than 4,000 of them had a net worth of over $8 million when they passed away. Ronald Read was one of them.
In his will, the former janitor left $2 million to his stepkids and more than $6 million to his local hospital and library.
Those who knew Read were baffled. Where did he get all that money?
It turned out there was no secret. There was no lottery win and no inheritance. Read saved what little he could and invested it in blue chip stocks. Then he waited, for decades on end, as tiny savings compounded into more than $8 million.
That’s it. From janitor to philanthropist.
A few months before Ronald Read died, another man named Richard was in the news.
Richard Fuscone was everything Ronald Read was not. A Harvard-educated Merrill Lynch executive with an MBA, Fuscone had such a successful career in finance that he retired in his 40s to become a philanthropist. Former Merrill CEO David Komansky praised Fuscone’s “business savvy, leadership skills, sound judgment and personal integrity.” Crain’s business magazine once included him in a “40 under 40” list of successful businesspeople.
But then—like the gold-coin-skipping tech executive—everything fell apart.
In the mid-2000s Fuscone borrowed heavily to expand an 18,000-square foot home in Greenwich, Connecticut that had 11 bathrooms, two elevators, two pools, seven garages, and cost more than $90,000 a month to maintain.
Then the 2008 financial crisis hit. The crisis hurt virtually everyone’s finances. It apparently turned Fuscone’s into dust. High debt and illiquid assets left him bankrupt. “I currently have no income,” he allegedly told a bankruptcy judge in 2008.
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First his Palm Beach house was foreclosed.
In 2014 it was the Greenwich mansion’s turn.
Five months before Ronald Read left his fortune to charity, Richard Fuscone’s home—where guests recalled the “thrill of dining and dancing atop a see-through covering on the home’s indoor swimming pool”—was sold in a foreclosure auction for 75% less than an insurance company figured it was worth.
Ronald Read was patient; Richard Fuscone was greedy. That’s all it took to eclipse the massive education and experience gap between the two.
The lesson here is not to be more like Ronald and less like Richard—though that’s not bad advice.
The fascinating thing about these stories is how unique they are to finance. In what other industry does someone with no college degree, no training, no background, no formal experience, and no connections massively outperform someone with the best education, the best training, and the best connections?
I struggle to think of any.”, Morgan, says.
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The Financial Clarity Challenge: Uncovering Your Money Blind Spots
Let's take a moment to reflect on where we are coming from and what influences our financial decisions the most. This is the first step to improving our financial situation. It's important to be honest with ourselves and ask the tough questions. Are we in a stressful financial situation due to outside circumstances or because of our own mistakes?
Let's be gentle with ourselves and ask:
Am I being a risk taker?
Am I a risk-averse?
Am I worrying too much?
Am I working on my retirement plan?
Am I neglecting to educate myself about real personal finance and investing (not gambling)?
Am I an impulsive buyer?
Do I keep comparing myself to others?
Do I have issues with returns or growing my money, or both?
Do I have a clear monthly budget plan that includes expenses, saving, investing, entertainment, and more?
There are many more questions we can ask ourselves, but the key is, to be honest and open-minded. Once we identify our issues, we can work on solutions and start seeing a positive change in our financial situation. To get started, I recommend downloading this simple spreadsheet "Conscious Spending Plan " designed by New York Times best-selling author Ramit Sethi. This sheet will help you understand where you currently stand and what areas you need to improve.
Remember, be gentle with yourself, as we all have unique circumstances, depending on our personal background and the country we live in. It's important to keep that in mind and tailor our financial approach accordingly.
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Remember, It takes a lot of effort & commitment to get on the right track, but the earlier you start, the better impact it will have on your life.
In our upcoming articles, we will delve deeper into the fascinating world of money psychology and explore ways to address the financial challenges we face. From understanding the basic concepts to implementing more advanced investment approaches, I try to provide you with the tools and insights you need to automate your financial planning and build a brighter future. So, whether you're looking to create a budget, save for your dream vacation, or invest for your retirement, I will do my best to help you every step of the way. Stay tuned for the next articles, and let's embark on this exciting journey towards financial wellness together!