Listen to a narrated version of the article above, or download it here
Listen to an AI podcast-style discussion of the article above, or download it here
If you read this article or listen to any of the audio above, you can expect to learn about:
The Mindset Shift You Need: Uncover how a scarcity mentality traps you in a cycle of stress and learn how to flip the script for financial freedom.
Psychology Meets Finance: Explore how Maslow's Hierarchy of Needs and cognitive biases like loss aversion affect your money decisions.
Actionable Steps to Stability: Get simple, practical tips to build an emergency fund, create a realistic budget, and automate your savings—even if you're stretched thin.
Real-Life Transformation: Be inspired by Sarah's journey from living paycheque to paycheque to planning her financial future with confidence.
Choose Your Own Adventure: Reflect on the parable of Maya and decide whether you'll follow the swift but unpredictable stream or the steady flow towards lasting prosperity.
The Parable of the Two Rivers
In a distant valley, there flowed two rivers, each with its own distinct character. The first, known as the Swift Stream, rushed forward impetuously, its waters racing from mountaintop to sea without pause. Its banks were narrow and precarious, prone to flooding with each heavy rain. Those who lived along Swift Stream lived in constant anxiety, never knowing when the waters might rise and wash away their carefully built homes.
The second river, called the Steady Flow, moved more deliberately. Its waters were deep and its banks wide, with natural basins and pools along its course that would fill during times of plenty and sustain the flow during drier seasons. The communities along Steady Flow's banks thrived, secure in the knowledge that their water source would remain reliable through both flood and drought.
One day, a young settler named Maya arrived in the valley, seeking a place to build her home. She stood at the fork where the two rivers diverged, contemplating her choice...
Modern Financial Crossroads
Have you ever found yourself at a crossroads, unsure which path leads to a secure and prosperous future?
Picture Sarah, a marketing professional in her early thirties, sitting at her kitchen table on a Sunday evening. Bills scattered before her like autumn leaves, she plays a familiar game of financial Tetris—trying to figure out which expenses she can delay until her next paycheque arrives. Her annual salary of $100,000 sounds impressive on paper (as of May 2024, the Australian Bureau of Statistics reported that the average weekly earnings for full-time adults were $1,923.40, equating to an annual salary of approximately $100,016.80—this is obviously before tax is taken out), but between Sydney's astronomical rent prices, student loan payments, and the rising cost of living, she feels like she's running on a financial treadmill—moving fast but getting nowhere.
The Reality of Living Paycheque to Paycheque
Her story isn't unique. In fact, it's becoming increasingly common in Australia, where an alarming number of people live paycheque to paycheque. A survey by Finder suggested that 50% of Australian workers live paycheque to paycheque, equating to over 6.9 million people. Additionally, 17% couldn't survive financially for more than a month if their income ceased.
Does any of this sound uncomfortably familiar to you?
Only around 40% of people would be able to live off their savings for 3 months or more if they were to suddenly become jobless.
To me, statistics like this are harrowing. In order to understand this problem better, I genuinely believe that we really need to explore the psychology behind this modern money trap, and most importantly, how to break free from it.
Australia's Financial Tightrope
Australia is often described as "the Lucky Country"—a term coined by Donald Horne in 1964, though ironically it was meant as criticism suggesting Australia prospered despite a lack of innovation. However, the phrase has been embraced more positively over time.
I feel incredibly fortunate to have been born here. However, the numbers paint a sobering picture of financial vulnerability in Australia. According to recent surveys:
Nearly half of Australians have less than $1,000 in savings
20% have no savings at all
25.1% of Australians find it difficult to get by on their current income
47% of Australian adults with debts have struggled to make repayments in the past year
55% don't feel confident about their current financial situation
These aren't just numbers—they're stories of stress, anxiety, and financial vulnerability affecting millions of Australians. If you are experiencing financial hardship, I can pretty much guarantee that you’re not alone.
The COVID-19 pandemic has only exacerbated these issues, pushing many who were previously financially stable into precarious positions.
But why is it so difficult to break free from this financial cycle?
The Psychology of Living on the Edge
Living paycheque to paycheque isn't just about money—it's about mindset. When you're constantly focused on financial survival, your brain operates differently. Psychologists call this "scarcity mindset," where the pressure of immediate financial needs tunnels your vision, making it harder to see long-term solutions or opportunities.
Think of it like trying to drive through a dense fog. You can only see a few feet ahead, forcing you to focus solely on immediate obstacles rather than your ultimate destination.
Have you ever felt like you're navigating your finances without a clear view of the road ahead?
This tunnel vision can lead to decisions that make sense in the moment but may hurt you financially in the long run.
Scarcity
Uncertainty is bad.
Research from behavioural economists Sendhil Mullainathan and Eldar Shafir shows that scarcity—whether of time, money, or other resources—captures our attention and changes how we think. In their book Scarcity: Why Having Too Little Means So Much, they discuss how financial scarcity can lead to:
Decreased cognitive bandwidth: Scarcity consumes mental resources, reducing cognitive capacity and executive control. This "bandwidth tax" impairs problem-solving and decision-making abilities.
Increased impulsivity: The mental load from scarcity can lead to more impulsive behaviours, as individuals focus on immediate needs at the expense of long-term considerations.
Difficulty planning for the future: Scarcity-induced "tunneling" narrows focus to pressing concerns, making it challenging to plan ahead or consider future consequences.
Poorer financial decisions: The cognitive strain from scarcity often results in suboptimal financial choices, such as taking high-interest loans or neglecting savings.
So, what's really holding us back from focusing on long-term financial goals?
One of the most famous psychological theories of all time was introduced back in 1943 by the psychologist Abraham Maslow. Maslow's hierarchy of needs is a psychological theory that organizes human needs into a five-tier model, ranging from basic physiological necessities to self-actualization. The levels are:
A. Physiological needs: Basic survival requirements like food, water, and shelter.
B. Safety needs: Security and protection from harm.
C. Love and belongingness needs: Social relationships and a sense of connection.
D. Esteem needs: Respect, self-esteem, and recognition.
E. Self-actualization needs: Personal growth and fulfillment.
Like clearing stages in a video game, individuals must satisfy lower-level needs before addressing higher-level ones. When basic needs remain unmet, it becomes challenging to focus on higher-order aspirations.
We can’t even think about love and belongingness (or bigger bosses like esteem and self-actualisation) until we have met basic physiological and safety needs.
Mullainathan and Shafir's research tracks here. They found that scarcity—such as financial hardship—captures attention and impairs cognitive functions, leading to:
Reduced cognitive bandwidth: Limited mental resources hinder problem-solving and planning.
Increased impulsivity: A focus on immediate needs can result in hasty decisions.
Difficulty planning for the future: The urgency of current needs overshadows long-term considerations.
Poorer financial decisions: Cognitive strain leads to suboptimal choices.
These effects suggest that when individuals struggle to meet basic needs, their mental capacity to pursue higher-level goals reduces. This creates a cycle where unmet lower-level needs prevent progress toward self-actualisation. Thus, addressing scarcity is crucial for enabling individuals to achieve higher-order needs.
It's like trying to pack for a trip while your house is on fire—the immediate emergency consumes all your mental resources, making it impossible to think strategically about the future.
But before I offer anything resembling helpful advice, let me belabour the point a little more. Sorry in advance…
The Emotional Toll: Understanding Financial Stress
The impact of financial stress goes far beyond your bank account. Research shows that constant money worries can also lead to:
Mental Health Impact
Increased anxiety and depression
Persistent worry and rumination
Reduced self-esteem
Feelings of hopelessness
Physical Health Consequences
Sleep disruption
Increased blood pressure
Digestive issues
Weakened immune system
Social and Relational Effects
Strained relationships
Social isolation
Increased conflict with partners
Reduced social activities
Professional Impact
Reduced work performance
Difficulty concentrating
Increased absenteeism
Lower job satisfaction
It's a vicious cycle: financial stress affects your mental health, which can impact your work performance, potentially threatening your income—and the cycle continues.
Being broke, living paycheque to paycheque is THE WORST!
How do we vanquish this marauding terror?
I wish I could just offer some trite clickbaity wisdom (‘This one simple trick…’), but I can’t and won’t—that would be both irresponsible and deceptive.
Breaking Free: The Path to Financial Stability
It takes work and it takes time.
1. Acknowledge the Psychological Barriers
The first step is recognizing that your relationship with money isn't just about numbers. Our financial behaviours are deeply rooted in psychological patterns, often established in childhood. Understanding these patterns is crucial for changing them. Know thyself.
Common psychological barriers include:
Money shame and avoidance
Impulsive spending as emotional regulation
Learned helplessness about financial situations
Fear of looking at bank balances or bills
2. Create a Realistic Budget
Notice I said "realistic," not "perfect." Start by tracking every expense for a month. Don't judge—just observe and be honest. This awareness alone can be transformative, like turning on a light in a dark room. You might be surprised by what you see.
Key budgeting principles:
Use the 50/30/20 rule (50% needs, 30% wants, 20% savings)
Include irregular expenses
Build in flexibility for unexpected costs
Review and adjust monthly
3. Build an Emergency Buffer
Start small. Even $500 in savings can provide a psychological buffer that reduces stress and prevents minor setbacks from becoming financial emergencies. Think of it as your financial airbag—you hope you never need it, but you'll be glad it's there if you do.
Emergency fund strategies:
Start with a goal of $1,000
Aim to eventually save 3-6 months of expenses
Keep funds easily accessible but separate from daily accounts
Consider high-interest savings accounts for better returns (you could even do some research on robo-advisors or low-cost managed funds)
4. Automate Your Finances
This is one of my favourite recommendations for building financial prosperity. Not because it’s necessarily ‘the best’ (arguably no option will ever be the forever-best, super-optimal; the question really just should be “is it better than what I am doing now,”—if the answer is yes then you should probably toss it in the pile of options worth considering), but it surely is one of the easiest things to do and our brains like easy stuff. To be a bit more accurate, we really dislike hard stuff, and will go to great lengths to avoid doing it.
Make technology work for you. Set up automatic transfers to savings accounts the day after your paycheque arrives. It's like paying your future-self first, before present-you has a chance to spend the money.
Automation tips:
Schedule bill payments automatically
Set up recurring transfers to savings/investment accounts
Use apps to track spending
Enable alerts for low balances or unusual activity
5. Increase Your Income Streams
Look for opportunities to develop additional income sources. This might mean:
Freelancing in your field
Selling unused items
Taking on part-time work
Developing marketable skills
Starting a side business
Investing in dividend-paying stocks
The Power of Small Changes
Remember Sarah from our opening story? She started making small changes:
Automating her bill payments to avoid late fees
Building a modest emergency fund
Learning new skills to increase her earning potential
Finding ways to reduce regular expenses without feeling deprived
Six months later, she still sat at her kitchen table on Sunday evenings. But now, instead of juggling bills, she was planning her financial future.
Can you imagine the relief of turning financial chaos into confidence?
She had managed to save $2,000 in her emergency fund and started a side gig doing social media management, adding an extra $500 to her monthly income.
The Psychology of Financial Success
Understanding the psychological principles that drive financial behaviour can help you make better money decisions:
Loss Aversion
One of the reasons that people don’t like taking risks is that we feel losses more intensely than equivalent gains. You can actually use this cognitive bias by framing savings as "avoiding loss" rather than "missing out on spending."
Present Bias
People are not really good at forecasting. We tend to prioritize immediate rewards over future benefits. Combat this by making saving automatic and immediate.
Social Comparison
I’m sure you’ve heard the saying that comparison is the thief of joy. We often judge our financial status by comparing ourselves to others. Focus instead on your personal financial goals and progress. The only person that you should be comparing yourself to, is you, 6 months ago, one year ago, 5 years ago, whatever.
Anchoring
We tend to rely too heavily on the first piece of information we receive. Many persuasive talkers will tell you that if they want their audience to believe something, then they will present that information at the start or the end of the talk. Be mindful of this when making financial decisions, especially about purchases or investments.
Moving Forward: Your Action Plan
Breaking free from the cycle of living paycheque to paycheque might feel overwhelming, but remember, even the smallest steps can lead to significant changes over time. Here's an action plan designed with simplicity and ease in mind—perfect for those who are feeling the financial squeeze.
When was the last time you took a detailed look at your finances?
1. Paint Your Financial Picture
· Grab a Notebook: Spend 15 minutes listing all your income sources and monthly expenses. Don't worry about creating a detailed budget just yet; simply get a clear view of where your money is coming from and where it's going.
· Highlight Essentials vs. Extras: Mark which expenses are necessities (like rent and groceries) and which are non-essential (like dining out or subscriptions).
2. Find Your Quick Wins
· Cancel One Unused Subscription: Do you have a gym membership or streaming service you rarely use? Canceling just one can save you money immediately.
· Switch to a Better Deal: Compare prices for your phone or internet plan. Companies often have discounts or promotions that you can take advantage of with a simple phone call.
Think saving money is impossible with your tight budget?
3. Start a Tiny Savings Habit
· The $5 Challenge: Commit to saving just $5 a week. It might seem small, but over a year, that's $260 you didn't have before.
· Use a Visual Jar: If you prefer, save physical cash in a jar where you can see your progress grow.
4. Make Spending Tangible
· Use Cash for Daily Expenses: Withdraw a set amount of cash for things like groceries or entertainment. When the cash is gone, you'll know it's time to pause spending until the next week.
5. Set a Mini Goal
· Define One Achievable Target: Perhaps it's saving enough for a month's worth of emergency groceries or paying off a small debt. Keep it specific and attainable.
6. Reward Yourself—Affordably
· Celebrate Small Successes: When you hit your mini goal, treat yourself to something inexpensive that brings you joy, like a favourite snack or a relaxing bath. Positive reinforcement helps maintain momentum.
7. Share Your Journey
· Talk to a Friend: Sharing your goals with someone you trust can provide support and accountability. They might even join you in making positive changes.
8. Educate Yourself in Bits
· Learn One New Tip a Week: Pick up a simple financial tip from a blog, podcast, or book. Over time, these small nuggets of wisdom add up. Subscribe to me: here, I’ll make it easy for you
9. Automate What You Can
· Set Up Automatic Bill Payments: This prevents late fees and reduces stress. Most services allow you to automate payments with ease.
10. Be Kind to Yourself
· Acknowledge Progress, Not Perfection:
Understand that setbacks may happen. That's okay. What's important is that you're taking steps forward, no matter how small.
It’s very possible that you need to transform your relationship with money. I appreciate that this list is long and may seem overwhelming. Just do one of these things. In a week’s time, think about doing another one. Gradually progress. Each step is a move away from stress and toward control and confidence.
Your journey to financial peace of mind starts with these small steps. Embrace them, and watch how over time, they lead you to greater stability and freedom.
Financial freedom isn't about making huge leaps—it's about taking consistent small steps in the right direction. Just as a journey of a thousand miles begins with a single step, your path to financial stability begins with small, manageable changes.
The goal isn't to become wealthy overnight—it's to build a sustainable financial foundation that gives you peace of mind and options for the future. Because ultimately, that's what financial stability provides: not just security, but choice and freedom.
Start where you are. Use what you have. Do what you can. Your future self will thank you.
Remember Maya from back at the start? Well, she chose to build her home beside Swift Stream, attracted by its energy and the lush green of its immediate banks. The first few months were exciting—the rushing waters provided plenty for her needs, and the fertile soil along the banks yielded quick harvests.
But as seasons passed, Maya learned the true nature of life beside Swift Stream. When rains came, she scrambled to protect her home from flooding. During dry spells, she watched anxiously as the water levels dropped. She lived in a constant state of reaction, never able to plan beyond the next rainfall or drought.
One particularly difficult season, Maya visited the communities along Steady Flow. She noticed how they had built systems to manage the river's flow—reservoirs for storage, channels for distribution, and deep wells that provided even in the driest times. Their prosperity wasn't built on the abundance of water in any given moment, but on their ability to capture, store, and distribute it wisely over time.
Maya understood then that true security wasn't about having more resources flowing through your life—it was about developing the wisdom and systems to manage those resources effectively. She began the patient work of relocating and rebuilding, knowing that while the transition would take time, the peace of mind would be worth the effort.
Today, Maya's new home stands as a testament to the power of steady flow over swift currents. Like the river beside her, her finances have found their natural rhythm—not in the constant rush of paycheque to paycheque, but in the measured pace of thoughtful financial planning and strategic saving.
Will you choose the swift but unpredictable stream, or the steady flow that leads to lasting prosperity?
The rivers still flow as they always have, teaching their timeless lesson to all who pause to listen: in both nature and finance, sustainability comes not from the speed of the current, but from the wisdom with which we channel it.