The Psychology of Money Everyone Should Know

What I Wish I Knew About Money Sooner

Aug 09, 2025

Ever since I turned 18, I’ve been deeply fascinated by personal finance.

The subject is not only intriguing but also incredibly important. It’s a shame that most people don’t give it much thought or know how to handle their money effectively.

My interest in personal finance even led me to work in the banking industry, where I discovered that the best financial practices were not commonly taught there. This was quite eye-opening and made me realize why so many people are financially uneducated. Banks often prioritize their own interests, which can lead to less-than-ideal advice for customers

In this post, I’ll share the psychology of money and personal finance principles I wish I had known earlier. These are principles I believe everyone should know.

Why Care About Money?

Being good with money improves most areas of your life.

It allows you to make better career decisions, since you are not forced to stay in a job just for monetary reasons. It betters relationships (money is a top cause of stress/divorce). It can improve health by lowering existential stress. It can change the opportunities you say yes or no to.

Most people are never taught how to manage money. They just follow what everyone else does: save a little here, spend a little there, and maybe invest when they’re “ready.”

But waiting to figure it out later is a guaranteed way to stay stressed. Worse, a lot of the advice people get comes from institutions that benefit when you don’t know better.

Let’s fix that.

“Doing well with money has little to do with how smart you are, but a lot more with how you behave.” – Morgan Housel

Building wealth is a game of mindset, habits, and time—not intelligence.

Here’s what we’ll get into:

Assets vs. Liabilities
Why saving isn’t enough
Volatility ≠ risk
How to make compound interest your best friend
Why index funds beat 95% of “smart” investors
The real risk of doing nothing: inflation
What the rich understand about lifestyle, debt, and taxes
How to use the 4% rule to estimate your freedom number

Let’s break them down.

Disclaimer: I’m not a financial advisor. Always do your own research and consult a professional before making financial decisions. These are just principles that have worked for me.

The Foundation: Assets vs. Liabilities

At 18, the first personal finance book I read was Rich Dad Poor Dad by Robert Kiyosaki.

While Kiyosaki is a controversial figure, one key concept from his book has stuck with me: the distinction between assets and liabilities. Wealthy people own assets, while poor people own liabilities.

Assets are things that gain value over time, like stocks or real estate, while liabilities are things that lose value, like cars or consumer goods.

This simple idea has shaped my approach to spending and investing ever since.

Saving Won’t Make You Rich

Many people focus on saving money, but saving alone isn’t enough to build wealth.

Saving is the first step, but it’s not the end game. If your money just sits in a bank account, it slowly dies from inflation (we will get to that later).

Instead, consider owning assets—things that grow in value over time—and hold those over the long term.

That could be:

Stocks
Real estate
Profitable businesses
Commodities
Intellectual property

Start asking yourself: Is this purchase going to gain value or lose it?

That question alone will change how you handle money.

Volatility Is Not Risk

One of the biggest misconceptions in investing is the fear of volatility.

Many people equate volatility with risk, but they’re not the same. Volatility refers to the short-term fluctuations in the price of an asset, while risk is the potential for permanent loss.

In fact, I’d argue that volatility can be your friend if you have a long-term perspective.

Why? Because it lets you buy assets at discounted prices.

Think of it like this: When the market drops, it's like a Black Friday sale for assets. If you’re in it for the long term, downturns are buying opportunities.

Investing works the same way.

Historically, the stock market has returned around 8–10% annually. That doesn’t mean every year. But over time, it trends upward, so long as you stay invested. That is why you need to keep a long-term outlook.

Start Early, Compound Often

Compound interest is one of the most powerful forces in the universe. And the earlier you start, the more it works in your favor.

Even investing small amounts adds up, thanks to time.

As Albert Einstein famously said: “Compound interest is the eighth wonder of the world.”

Let’s run some numbers, using the long-term market average return and the traditional retirement age of 67:

Start at 40, invest $100/month → you end up with ~$92,700
Double it to $200/month → ~$185,500

Now start 10 years earlier at 30:

$100/month → ~$199,600
$200/month → ~$400,000

Start at 20, and things really get wild:

$100/month → ~$409,900
$200/month → ~$819,800

You didn’t invest more — you just gave your money more time to grow.

But here’s the real kicker:

If you invest $200/month from 20 to 30, then stop entirely...
→ You’ll still end up with ~$420,000 at retirement.

This is exactly why time is the most important thing when it comes to investing. It does not matter at what point you are at, what matters is that you start today.

"The best time to invest was yesterday. The second-best time is today."

If you want to see how different contributions affect the outcome, I urge you to play around with an investment calculator.

Index Funds vs. Actively Managed Funds: Stop Paying for Underperformance

When you go to a bank, they’ll usually try to sell you an actively managed fund. It sounds appealing: professional managers picking the best stocks on your behalf.

The goal of these funds is to outperform the market, but here’s the irony: most of these funds underperform the market average. And they charge you high fees while doing it.

So you pay more for getting less.

The smarter alternative? Index funds or ETFs (Exchange Traded Funds). These are also called passive investment vehicles.

They track entire markets or indexes like the S&P 500 (500 of the biggest U.S. companies) and charge minimal fees. Over time, they tend to outperform actively managed funds.

The fees for actively managed funds can eat into your returns significantly.

For example, a 1% annual fee might not seem like much, but over decades, it can cost you hundreds of thousands of dollars. Index funds, on the other hand, often have fees as low as 0.04%, allowing more of your money to grow.

Inflation Is the Real Silent Killer

Many people are scared of investing because they think it’s risky.

Actually, it is riskier to have your money just sit in the bank.

If you leave $10,000 in a savings account earning 0%, and inflation is 5%, in one year that money is only worth $9,500 in purchasing power. You just lost $500 like that.

Do this for a decade and you’ve lost thousands by playing it “safe.”

Inflation is a tax on the uninvested.

Assets may fluctuate in the short term, but they generally grow over time. Inflation, on the other hand, is always there (albeit sometimes higher or lower), and it steadily shrinks your purchasing power.

With assets, there’s a chance of loss. With inflation, loss is guaranteed.

Your money is always moving, it’s either growing or shrinking. Choose growth.

Track Everything: You Can’t Improve What You Don’t Measure

Want to stop wasting money?

Track every expense for one month. Just 30 days.

It’ll show you exactly where your money goes and where it shouldn’t.

That $50 monthly subscription you forgot about? It compounds over time. Canceling it and investing that money could make you thousands in the long run, as you can verify with the investment calculator.

Not All Debt Is Bad

We’ve been taught that all debt is dangerous. But like most tools, debt is neutral. It depends on how you use it.

Bad debt: buying things that lose value (fancy cars, shopping sprees)

Good debt: using leverage to buy appreciating assets (real estate, businesses)

If you can borrow at 3% interest and invest in something that returns 6%, you're making money. That’s exactly how wealthy people use debt as leverage.

Even better: you can borrow against your investments without selling them. This lets you avoid taxes and keep compounding your wealth. So theoretically you never need to sell.

Never Sell? Here’s Why That Matters

A common question: “When should I sell my investments?” Answer: maybe never.

Why?

Because every time you sell, you trigger taxes and lose the compounding advantage.

Instead, hold your assets. Let them grow. And when needed, borrow against them rather than liquidate. You’re earning returns on money that would’ve otherwise gone to taxes.🤯

This is a not so well-known strategy the wealthy use all the time.

This strategy works best for high-net-worth individuals with stable portfolios and access to low-interest lines of credit.

Estimate Your Freedom Number With the 4% Rule

Here’s a simple way to figure out how much you need to retire:

Add up your annual expenses.
Multiply by 25.

That gives you the amount you need to safely withdraw 4% per year without running out of money.

Want to live on $30,000/year? You’ll need roughly $750,000 invested.

Now you can reverse-engineer your monthly contributions using a retirement calculator.

The Psychology of Wealth

You’d be surprised how many broke people look rich—and how many rich people look broke.

In the bank, I saw this firsthand:

Flashy clothes, new cars… $200 in savings.
Modest lifestyles… millions in assets.

Don’t fall for status games.

The goal isn’t to look rich. It’s to be free.

Keep your lifestyle inflation in check. When your income goes up, your spending doesn’t have to.

The True Value of Money

Ultimately, money is just a tool.

Its highest use?

Buying back your time.

It lets you say no to things you don’t like. Take risks. Do work you enjoy. Be generous. Sleep better at night.

And ironically, once you’re no longer ruled by money… that’s when you start using it well.

All that being said…

Money isn’t everything.

While financial wealth is important, it’s just one piece of the puzzle.

Money can solve money problems, but it won’t address other areas of your life. Strive for balance and don’t sacrifice your health, relationships, or happiness just for money.

Final Thoughts

Mastering money isn’t about being perfect. It’s about being consistent.

Own assets, not liabilities.
Embrace volatility and think long term.
Automate your investing and keep fees low.
Avoid lifestyle inflation
Start today. Let compounding do the rest.

Until next Saturday.
– Tobi

If this resonated with you, forward it to a friend who needs a wake-up call on money.

💡 Question: What are some principles that helped you on your financial journey?

📚 Further Reading

If this post resonated with you and you want to go deeper, here are some timeless books that shaped the way I think about money:

The Psychology of Money by Morgan Housel
Why behavior matters more than intelligence when it comes to wealth.
Rich Dad Poor Dad by Robert Kiyosaki
A mindset-shifting look at assets vs. liabilities and how the rich think differently about money.
The Millionaire Next Door by Thomas J. Stanley & William D. Danko
Data-driven insights on how most millionaires actually live — hint: it's not what you think.
Your Money or Your Life by Vicki Robin & Joe Dominguez
A practical guide to transforming your relationship with money and reclaiming your time.