A financial writer says the only way to stay wealthy is a mix of 'frugality and paranoia'

  • Getting wealthy and staying wealthy require different skills, writes Morgan Housel in his new book, "The Psychology of Money."
  • To maintain wealth, you have to be paranoid enough to plan for the worst, but optimistic enough to stay the course.
  • Housel says this type of "survival mindset" is what helped Warren Buffett become so successful.
  • SmartAsset's free tool can find a financial planner to help you take control of your money »

A lot of people share the same overarching goal to become wealthy, though everyone's goal number may be different.

Thankfully, there are many, many ways to acquire money and assets if you're willing to take reasonable risks, writes Morgan Housel in his new book, "The Psychology of Money." 

But no one wants to be a flash in the pan. When the ultimate desire is to stay wealthy — or hang on to money, whatever amount it may be — Housel says the only way is through "some combination of frugality and paranoia." In other words, live far below your means and accept that the good luck of the past might not repeat itself in the future.

Warren Buffett's trajectory exhibits more survival than skill, Housel writes, and yours should, too.

The 3-step method to staying wealthy

In his book, Housel explains that wealth is the money people don't spend on cars, homes, and vacations. It's unseen and left to grow, affording the saver-investor freedom of choice later on.

Maintaining a "survival mindset," as he calls it, is essential to holding onto that wealth. And there are three steps to surviving, according to Housel.

1. Be financially unbreakable

The stock market is fickle, and it can mess with a person's emotions. But the most reliable way to make money in investments, research shows, is to stay consistent and calm. Breaking with that plan can prove disastrous.

Staying the course over many years is much harder than it looks, Housel acknowledges, which is why you have to become "financially unbreakable." Mostly that means reconciling your behaviors and your goal.

For example, Housel explains, if consistently keeping a portion of your portfolio in cash gives you the confidence to stay invested during a bear market and avoid selling stocks in a panic, then it's worth the lower returns you'll earn on that cash when the market is up.  

"Compounding doesn't rely on earning big returns. Merely good returns sustained uninterrupted for the longest period of time — especially in times of chaos and havoc — will always win," Housel writes.

2. Plan with room for error

The COVID-19 pandemic caught everyone by surprise. It upended entire industries, financially destroyed families and communities, and wrecked the economy. It might be an extreme example of unpredictability, but it offers a valuable lesson: Every plan should leave room for error.

"A plan is only useful if it can survive reality," Housel writes. "And a future filled with unknowns is everyone's reality." Whether it's a global health crisis or a mistake of your own making, there's no avoiding bumps in the road, so why not prepare as much as possible?

Housel suggests everyone create a plan that includes a margin of safety that allows you to "live happily with a range of outcomes." The more specificity is needed to execute your plan — for example, you have to earn 8% on your investments year after year to retire — "the more fragile your financial life becomes," he writes. 

3. Be sensibly optimistic

Being slightly paranoid that bad things could happen doesn't mean you're not optimistic. In fact, Housel says, you should be both. 

"You can be optimistic that the long-term growth trajectory is up and to the right," he writes, "but equally sure that the road between now and then is filled with landmines, and always will be."

This worldview demands nuance, which is why it's harder to embody than being either optimistic or pessimistic. But it's in that sweet spot — which Housel deems "sensible optimism" — where paranoia keeps you humble enough to expect trouble, but confident enough that if you adapt to it, you'll be OK.

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