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The Psychology of Financial Wellbeing


The Psychology of Financial Wellbeing


Financial wellbeing takes more than learning how to budget. It’s also about how you think (and do not think) about money.

13 min read

In a previous article, we explored how to assess and improve your financial wellbeing, so you can enjoy more financial security and freedom of choice. Today we focus on the psychology of money, and how that plays a major role in your financial wellbeing.

Thinking about money like a human being

Morgan Housel, a former columnist at The Motley Fool and The Wall Street Journal, and the author of The Psychology of Money (2020), has been writing about the psychology of money since the 2008 global financial crisis. Housel believes the way we think about and are taught about money is too much like physics, with rules and laws, and not enough like psychology, with emotions and nuance.

Housel explains that money is often taught as a math-based topic where data and formulas prescribe what to do. However, in the real world, he says, we don’t make financial decisions on spreadsheets. We make them around the dinner table or in meeting rooms where our personal histories, unique perspectives on the world, ego, pride, marketing and incentives converge.

Let’s take a look at four lessons on the psychology of money from his book, along with two tools.

Lesson 1: No one’s crazy

“Your personal experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works” (Housel, 2020, p. 9)

We have all had vastly different financial experiences. The generation and region of the world we were born into, the family we were raised by, and our specific economy and job market all mean we have learned different lessons about how money works. Because personal experience is far more compelling than what we learn second-hand, we end up seeing the world through different lenses. Housel explains, “We all think we know how the world works. But we’ve all only experienced a tiny sliver of it” (Housel, 2020, p. 13). It’s not surprising then that there is so much disagreement about money management, sometimes even among experts.

Another reason we find money decisions so difficult, says Housel, is because we are all relatively new to this game. The idea of saving and investing for retirement, for example, has only been around since the 1980s. Index funds are less than 50 years old. Mortgages, credit cards and car loans didn’t take off until after World War II.

Housel concludes that we do some crazy things with money, but no one is crazy. What looks unwise to you might make sense to me. We are all making decisions based on our own highly individualized experiences, and they make sense to us at the time we make our choices.

Lesson 2: Luck and risk

“Nothing is as good or as bad as it seems” (Housel, 2020, p. 23)

Housel argues that the world is far too complex for our financial results to be purely determined by our effort and decisions. Because luck and risk are hard to measure and hard to accept, we often overlook the role they play. Housel cautions us to keep this in mind when judging people including ourselves. We often attribute other people’s failures to bad decisions while chalking up our own failures to the downside of risk.

We tend to want to emulate the actions of successful individuals and avoid those of people we deem failures. But studying specific people can be dangerous, says Housel, as extreme outcomes are more likely to represent the extreme ends of luck and risk. Instead, he recommends looking for broad patterns of success and failure for actionable takeaways.

Reflection Questions

  1. Do you have any financial heroes?
  2. Do you attribute all their success to skill and hard work?
  3. How much do you really know about their journey? Is it possible that the inevitable failures along the way have been edited out of their narratives?
  4. Is it possible that they were lucky as well as skilled and hard working?

Lesson 3: Never enough

According to Housel, modern capitalism excels at two things: (1) generating wealth, and (2) creating envy. Social comparison can prevent us from feeling a sense of enough. For this reason, Housel believes the hardest financial skill to master is getting the goalposts to stop moving. Without this skill we will risk what we have and need for what we don’t.

What, in Housel’s opinion, is never worth risking, no matter the potential gain? Reputation, freedom, independence, family and friends, being loved by those who you want to love you, and happiness. Our best shot at keeping these things is knowing when to stop taking risks that might jeopardize them, that is, knowing when we have enough. Fortunately, says Housel, the most powerful tool for building enough doesn’t require us to risk any of what really matters.

Tool #1: Deciding what’s enough

  1. What in your life would feel too painful to lose? Write these things down. Make the choice you’ll never risk them in the quest for more money.
  2. Take a moment to consider some of the ways you compare yourself to others, even if not consciously. For example, do you feel worse about your possessions or wealth after scrolling on social media? Does this make you feel like you need to keep up with the Joneses?
  3. If you’ve been in the workforce for some time, it’s likely that you’ve had raises, or times when you moved companies and scored a higher salary in the process. Did your lifestyle change with each raise or did you save more? If you engaged in ‘lifestyle creep’, stop to ask yourself if it made you any happier. If not, make the decision that any future raises will go towards saving for investing. When the time comes, set up an automatic payment from the account your salary is deposited into to a savings account earmarked for investing. This way you won’t have the opportunity to mindlessly spend the extra funds.

Lesson 4: Confounding compounding

“$81.5 billion of Warren Buffet’s $84.5 billion net worth came after his 65th birthday. Our minds are not built to handle such absurdities” (Housel, 2020, p. 45)

Compounding is growth on growth. A small amount of money can become staggeringly huge over time due to the power of compounding. Housel says we find this so logic-defying that we underestimate what’s possible, where growth comes from and what it can lead to.

The “Oracle of Omaha,” Warren Buffett, is the richest investor in history. He is not, contrary to popular belief, the greatest investor as measured by average annual returns (was he your financial hero in the previous activity?). There is no question he possesses substantial skill. But what Housel points out is that the secret to Buffet’s extraordinary results is time. He began investing when he was ten years old and he is now in his nineties!

The tool for building enough is taking advantage of compound growth via investing. The secret is to start as soon as possible. Housel says we often spend all our effort trying to earn the highest investment returns as this intuitively seems like the obvious way to get rich. But this is a misconception. Good investing is not about always earning the best returns because these are one-off hits that are difficult to replicate. It’s about earning pretty good, uninterrupted returns over a long period of time. “That’s when compounding runs wild,” he says (Housel, 2020, p. 53).

Tool #2: Discovering the power of compounding

This activity is designed to showcase the confounding nature of compounding mathematics if we let time work its magic.

  1. Open MoneySmart’s compound interest calculator.
  2. Imagine you start investing when you get your first serious job at age 25. You start with an initial deposit of $500 and make regular deposits of $200 per month. How much money would you have at age 65 if your investments earned an annual interest rate of 8% (the historic return for the stock market)? (The number of years invested would be 65 minus 25.) Take a moment to consider the scale of this growth; $500 has turned into more than seven hundred thousand dollars. But the real surprise is how much of this is from interest alone! Jot down the outcome based on these figures.
  3. Now let’s tweak the scenario. Let’s say you run up a pile of credit card debt in your twenties and don’t get around to investing until you’re 35. How much will you have at age 65 now? Are you surprised to see it’s less than half?
  4. Now for a final scenario. Let’s say you still start investing at age 35, but you’re aware you got a bit of a late start so you decide to double your monthly contributions. Will you catch up to what you could have earned had you started at age 25? Run the numbers – you’ll see you get close, but don’t quite make it despite paying in TWICE AS MUCH FOR THE ENTIRE PERIOD YOU INVEST.

What is the take home message here? Even if you can only spare a small amount each fortnight or month for investments, the younger you start, the better off you will be. If you want to be really blown away, run the numbers starting at age 15. This may influence what you teach your kids about money. If they start investing as soon as they begin earning, and manage to avoid credit card debt, they will very likely become multi-millionaires.

Key takeaways

  • Your decisions about money are based on your unique perspective.
  • Be wary of trying to emulate successful financial ‘outliers’. While effort and skill certainly matter, the role of luck and risk tends to be invisible.
  • The ‘secret sauce’ that drives financial wellbeing in retirement is investing. When it comes to compounding, the most important factor is time, not rate of return. Start today with whatever you can spare, no matter how small.
  • Avoiding lifestyle creep as your financial position improves is a skill required for long-term financial wellbeing. You can build this skill by not comparing your possessions to others. Ironically, the more possessions others own, and therefore the richer they appear, the less wealthy they probably are as the more they spend, the less money they have to invest.
  • When it comes to financial decisions, no matter how great your skill, there is always an element of risk. Some things in life are never worth putting on the line for more money. Decide what these are for you.

Related article: How is Your Financial Wellbeing?


  • Housel, M. (2020). The Psychology of Money: Timeless lessons on wealth, greed and happiness. Harriman House Ltd.