The Role of Objective Financial Situation and Psychological Outlook in the Relationship Between Personal Life Shocks and Financial Well-Being

Abstract

Existing research examines the relationship between personal life shocks and financial well-being primarily through the lens of objective markers of the individual's financial situation (e.g., liquidity). Little attention has been paid to the relative roles of these objective markers and more intuitive or affect-based factors in how an individual makes sense of their financial situation post-shock. Using longitudinal data from 1745 Australian adults, we take a dual-process perspective to examine the roles of objective financial situation and psychological outlook as explanations for the association between the experience of a personal life shock and change in the current and future dimensions of financial well-being. We found that the experience of a personal life shock (i.e., job loss, health emergency, occurrence of any personal shock) is associated with a decrease in present and future financial well-being. Objective financial situation significantly mediated the association for present and future financial well-being, while psychological outlook significantly mediated the association only for future financial well-being. These findings suggest that an individual relies primarily on analytical, deliberative thought, especially when making sense of their situation, for their sense of current money management stress. For expected future financial security, they are more likely to use dual-process thought, although analytical, deliberative thought plays a larger role than intuitive, affect-based thought. These results suggest that the typical individual relies on relevant information (i.e., objective facts) in assessing their financial well-being, an inherently subjective assessment. However, more intuitive considerations (i.e., psychological outlook) play a role when the individual attempts to anticipate their future state.