How to Develop a Survival Mentality Around Money

This article is an excerpt from the Shortform book guide to "The Psychology of Money" by Morgan Housel. Shortform has the world's best summaries and analyses of books you should be reading.

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What does it mean to have a survival mentality around money? What three ideas around money should you develop?

In his book The Psychology of Money, Morgan Housel suggests developing a survival mentality around money. This means accepting that you could lose all your money at any time, so you follow certain steps to ensure you protect your assets.

Here are the three steps for developing a survival mindset.

Develop a Survival Mentality

In order to create a financial strategy you can stick to, you must plan how you’ll keep any wealth you accumulate. To do so, Housel argues you must develop a survival mentality.

Housel explains that when you have a survival mentality, you recognize that you could lose all your money and not be able to gain it back—and so you take measures to prevent that from happening: You are humble, frugal, and you avoid unwise risks. You focus not on building your wealth but on protecting it so that your assets can accumulate the maximum possible amount of compound interest.

(Shortform note: Housel’s recommendation to develop a survival mentality is somewhat similar to advice given in financial advice classic The Richest Man in Babylon, in which George Clason suggests that the first thing you should do with the money you’ve saved is to protect it. But unlike Housel, who discusses the importance of a survival mentality primarily when investing, Clason recommends several ways to protect your money that have nothing to do with investing—like not loaning your money to friends and family who won’t repay you.)

#1: Prioritize Stability Over Profit

Housel explains that when you have a survival mindset, you believe that long-term consistent gains from compounding will make you the most money in the long run. As such, you prioritize the measures that keep your returns the most stable over time instead of measures that might temporarily increase your earnings but ultimately destabilize your earnings and lose you money.

For example, you may be tempted to liquidate all your stocks and invest heavily in a burgeoning cryptocurrency market. But with a survival mindset, you’ll realize that given the volatility of cryptocurrency, you should leave at least some of your stocks in the stabler stock market so they can compound long-term.

(Shortform note: In Fooled by Randomness, Taleb shares another reason to prioritize stability over profit: Even if you do get lucky and win a windfall, you’ll probably lose it again. He argues that both good and bad luck eventually run out, and outliers of either success or failure eventually earn outcomes more closely matching their skills—so you should focus on succeeding via measures that are less prone to chance.)

#2: Prioritize Room for Error When Creating Plans

As we discussed earlier, the future is uncertain. So if your financial plan only works in a narrow range of possible futures, you’re placing yourself in a precarious position. When you have a survival mentality, Housel explains, you include lots of room for error in your financial plan. By doing so, you plan for a wide range of possibilities and increase the likelihood that you’ll become financially successful even if a lot of things don’t go your way.

(Shortform note: Housel shares several ways to build room for error into your financial plan in Lesson #10, but one area he doesn’t discuss is your career. In Range, Epstein recommends becoming a generalist who has broad competence in many professional fields instead of a specialist who masters just one. Epstein argues that generalism helps you solve problems you’ve never seen before—so being a generalist will likely provide you with more career flexibility, which is a form of having room for error in your financial plan. With career flexibility, you can survive even if your industry becomes obsolete.)

#3: Be Realistically Optimistic

Housel explains that with a survival mentality, you have faith that you’ll gain money in the long term, but you recognize the reality that you’ll face many financial challenges in the short term. In other words, realistic optimism requires simultaneous hope and paranoia.

Believing both that you’ll gain money long-term and lose short-term may seem initially unreasonable. However, Housel explains that many financial factors—like the economy, the stock market, and your career—often follow a trajectory of long-term growth but short-term loss. For example, Housel notes, the U.S. economy grew dramatically between 1850 and 2020, with the per capita G.D.P. increasing from less than $10 to nearly $100. However, the U.S. also spent 48 of those years in 33 recessions.

As such, Housel argues, feeling simultaneous hope and paranoia is reasonable, and the two emotions are complementary: Because you’re paranoid about your short-term financial losses, you’ll take the measures necessary to protect your money so that you can gain more of it in the long term.

(Shortform note: Psychologists support Housel’s argument that realistic optimism is key to success. They explain that while the most successful people believe they’ll succeed, they also believe that this success will come with difficulty—so they plan for things to go wrong and stay in the game longer when things do. Therefore, psychologists recommend visualizing what you’ll do in order to succeed—not the success itself. Try this yourself by reviewing the US’ economic history: If you faced similar situations, what would you want to do? Keep in mind what you learned in Lesson #3 about focusing on patterns to learn most effectively from economic history.)

How to Develop a Survival Mentality Around Money