How Do Normal People Get Rich?

Key Takeaways

have you ever heard the story of rynal Reed a janitor at JC Penney who donated millions of dollars to good causes many call him the janitor philanthropist Ronald Reed was a mechanic at a gas station for 25 years then he swept floors at JC Penney for another 17 years Reed's life was as simple as it gets he had a small two-bedroom house and many of his friends said that his main hobby was chopping firewood Reed passed away in 2014 at the age of 92 and that is when the humble janitor made national headlines because Reed left his kids with $2 million and donated over $6 million to his local hospital and Library those who knew him were shocked but there was no secret lottery win or inheritance Reed saved the little he could and invested it in the stock market and just waited he waited long enough until his tiny savings compounded into over $8 million in that same year Eric Williams an NBA player who made nearly $40 million playing pro basketball was homeless and with tens of thousands of dollars in debt what is interesting about these stories is how unique cases like these are to finance in no other industry can you see someone with no college degree no training or connections massively outperform a person with the best education training and opportunities but how in the book the psychology of of money author Morgan household says it all comes down to our psychology idea number one Behavior outperforms intelligence when we go to school we are taught to learn in a mechanical way we are taught math and science everything makes sense and there's a rule for everything as adults we begin to see money the same way we would solve a math problem if we want to retire with Millions we can just do the math invest x a y return and retire a millionaire we are taught to just put numbers in a formula and the formula will tell us what to do but it assumes that we are just going to do it there is much more to investing than just the numbers what happens in your mind while you're trying to accomplish your goals is just as important as understanding the numbers you need to get there for example most people know what they need to do in order to lose weight or be healthy yet many don't do it it doesn't have to do with how much they know but what happens in their mind when they try to do it Morgan housel says that we are taught to view money like math or physics with laws and rules and not enough of psychology with emotion and Nuance we cannot understand why people go into debt by analyzing credit limits and interest rates but rather by understanding the emotions that lead to overspending Morgan hell says that financial success is not a hard science it's a soft skill doing well with money has little to do with how smart you are and a lot to do with how you behave idea number two reasonable over rational we've established that creating wealth is a little more than just a math problem it has to do with understanding who you are and how you behave there are great Investments that might work on paper but will not help us sleep at night for example there's an investment strategy that proposes that a good Investment Portfolio should have a 2 to1 leverage in our younger years and taper out as we get older to lower risk basically for $1 that you put into your Investments fund you will borrow $2 and the math works but how many of us will actually be comfortable having two times as much debt than our entire life savings in a volatile Market how many of us would continue with this strategy after we see 100% or more of our life savings disappear in a market crash this is why Morgan household says it is better to be reasonable than rational the goal is to stay in the market for as long as possible to take advantage of compounding but if we can't emotionally handle a highrisk high reward strategy it won't matter that it might give us the better return if we jump ship as soon as it gets rough it would be much easier for us to continue with an investment strategy that actually makes us feel comfortable and ultimately it would provide with the better return since we are able to stay invested for the long run making a lower but safe return on your Investments can be more reasonable than having a higher but significantly riskier return if it means we can't emotionally handle it risk causes stress stress can cause emotional decisions and emotional decisions especially in the investment world can mean financial disasters so knowing yourself and what you're comfortable with will help you decide what reasonable means to you idea number three everything has a price in the last 30 years the S&P 500 had a 9 146% return all you had to do is invest your money and wait that's seems easy when we see the end results but it doesn't seem easy when the markets are losing 30% of their value in a market crash and we're losing our life savings it's not easy when we lose our jobs and investing is the last thing in our mind like everything successful investment Demands a price and it's not in dollars and cents it's in uncertainty fear and volatility imagine wanting to buy a car you can either pay the $50,000 to get the brand new car you can go find a used car for cheaper or you can go and steal it okay most people wouldn't steal it because they know the price they would pay if they got caught now what is this have to do with investing well what if you want a 20% return on investment this is the brand new car it is possible but it's not free it comes with extreme volatility big ups and big Downs the price tag can mean many sleepless nights just as buying the new car many investors will pay the price to get the chance of higher returns but with the higher risk of loss others decid that they don't want to pay that price they go for the still very good but slightly used car they choose to pay the lower price of lesser volatility of a diversified Index Fund which means they would get lower but steady returns some will try to steal the car and get the benefits without paying the price many of these investors try to create strategies to time the market and take advantage of the growth without suffering the losses some lucky ones might get away with it but the majority end up losing more than if they just paid the price so decide which one you are and be ready to pay the price idea number four even if you fail you can still win most of us see Disney as the company that owns pretty much everything from superheroes animated films theme parks to Star Wars but did you know that if it wasn't for the movie Cinderella Disney would probably not exist today around the 1950s the company Disney wasn't doing super great the company had a few million dollars in debt and many of their films had lost a lot of money just to stay afloat Disney got a contract with the US government to create short films with World War II propaganda but it wasn't until Disney released Cinderella and made $8 million in the first 6 months which adjusted for inflation would be around 100 million today that Disney was able to pay their debts by a state-of-the-art studio Finance the next few films and eventually led to the creation of Disneyland and Disney World the point of this story is that you don't need to get everything right all the time virtually all financially successful people have many failures and losses and that is just part of Building Wealth like billionaire Mark Cuban says you only have to be right once so don't be afraid to lose because you can still win even if you lose idea number five wealth is invisible whenever we think of being rich or wealthy many think about the luxuries but as Morgan hous says you can't really see wealth we tend to judge wealth by what we see the cars the Mansions the luxuries but in reality we don't know anything about the person who has these things they could be wealthy or they can just be spending all their money or even be in debt there's no way of knowing the only thing we know about someone driving a $200,000 car is that they have $200,000 less than they did before or they just rented the car wealth is what you don't see the house not purchased the car that was never bought the vacation not taken there are some wealthy people who choose to buy these luxuries but what you see is just money not their wealth you don't see their investment portfolios and their assets you see the house they have not the house they could have it's easy to be fooled into thinking that being riches the goal because it's easy to see but what most people really want is freedom and the ability to have control over their life which is what real wealth can provide idea number six when is it enough we live in a world where the sky is the limit there is virtually no limit on how much money a person can make this can create a problem on its own and that is the question when is it enough there are two things that modern capitalism is good at generating wealth and generating Envy the problem is that the ceiling of social comparison is virtually unlimited someone who is doing great financially might end up feeling like they're not doing enough you see to be in the wealthy as 1% of the US one must make around $500,000 a year let's say that my friend Jerry here is a hard surgeon and he makes $500,000 a year he is part of the 1% he lives a great life drives a great car and hire somebody to do all of his housework and is able to afford trips all around the world he feels very accomplished but one day in one of his vacations he meets John a wealthy CEO who makes $25 million per year Jon makes Jerry's entire yearly salary in just under a week Jon is not only in the 1% but he is in the 1% of the 1% to JN Jerry doesn't make that much money you would think that JN feels great with his accomplishments but John is friends with entrepreneur and investor Mark Cuban whose net worth is over $5 billion this makes John's $25 million look pretty small Cuban is not only in the 1% he is on the 1% of the 1% of the 1% and we can keep going Jeff basos has a net worth of $143 billion making Cuban's net worth seem small in comparison and Dr Jerry's wealth look microscopic you see there will always be someone out there with more the SE of social comparison is so high that virtually no one will be able to hit it the goal is not to go into the battle in the first place but instead focus on what we want on what makes us happy money is just a tool that we can use to create the freedom that we want and give us control over our own life