The American Psychological Association (APA) published some disturbing, yet not entirely surprising, news in 2015: Money is the #1 cause of stress in America.
According to their research, 72% of respondents worried about their financial situation in the past month, while 77% state that money is an ongoing source of stress.
Interestingly, a 2022 Federal Reserve study found that 78% of Americans were either doing okay or living comfortably in regards to money. And yet, when you dig into their extensive research, you find that many of the same anxiety-provoking issues arise for families across the country.
How is this possible? How are nearly four-fifths of American adults doing at least okay financially yet still chronically stressed by money? Considering that between 75-90% of all medical visits are stress-related, we need to seriously rethink our psychological relationship with money.
Which is exactly what economist Morgan Housel did.
The psychology of money
Unfortunately, many of us believe rich people are smarter than us. A built-in bias states that more money equals more brains, which, as Housel explains in his book, The Psychology of Money, simply isn’t true.
The premise of this book is that doing well with money has a little to do with how smart you are and a lot to do with how you behave.
While that sounds simple—change your behavior and you’ll change your financial situation—Housel qualifies that sentiment by assuring readers that behaviors are exceptionally hard to teach.
Part of the “smart” myth depends on believing that people rely solely on intellect when making financial decisions. As Housel points out, many financial choices stem not from analyzing charts but during dinners, while out with the family or friends, even on whims.
And the reasons for financial success are multivariate. They’re demographically-driven; they might be the result of family funds. And, to the chagrin of many, sometimes it’s just luck.
Social conditions—inflation, wars, new technologies—also play a role. In fact, Housel writes that shifting goalposts is one of the most frustrating aspects of finance. What worked today might not cut it next month.
That isn’t the only factor worth mentioning: social comparison, risk assessment, and refusing to settle for “enough” all play a role in our anxious relationship with money.
That last factor is telling: as the study above shows, 78% of Americans feel that they have enough and yet money remains the top source of stress. How do we square that?
Slow and steady
Spend enough time on Twitter and Reddit threads and you’ll find plenty of get-rich-quick dreams: identifying the next Gamestop stock or the token that’s going to 100x by next week.
This is not sound financial psychology.
Housel makes clear he’s not giving financial advice—no good economist would. But he does point out a few important psychological factors that might change your mindset.
These five, from The Psychology of Money, are worth considering.
Remember what’s important.
According to Housel, what people really want is control over their time. And yes, money plays a role in that, but the ultimate goal isn’t actually about money, but crafting a life you love. Starting with the true goal gives you a clear pathway forward—and reminds you what money is really all about.
If your goal is financial, make it concrete. Research shows that people who quantify their goals, such as “I want to make a million dollars next year,” are more likely to achieve them than people who say, “I want to get rich.” There’s something about numbers that keep people focused. Ambiguity is a detriment in this regard.
Quick money is seductive. For most people, it doesn’t exist. So find a savings rate that will work for your money. (Hint: you won’t find them at most large banks.) Then let your money compound. The most astounding fact from Housel’s book: $81.5 billion of Warren Buffet’s $84.5 billion fortune hit his bank account after his 65th birthday. That’s foresight—with a serious side of compound interest.
You know who cares most about the car you drive? You. As Housel points out, when you drive around in a car you can’t afford, people are looking at the car, not you. You’ll sleep better at night when you learn how to manage your expectations and not overextend yourself financially. Yes, “enough” really can be enough, but too much is rarely beneficial.
Define your goals.
No one has the same goals. Don’t judge your success against someone else’s bank account. When you can define the game you’re playing, you won’t be so influenced by other people’s games. In the long run, that’s the best course for your own goals—and stress levels.