Budgeting · October 06, 2022

How Financial Stress and Mental Health Are Connected

On the surface, your finances and your mental outlook might seem like entirely separate areas of your life. However, people who've experienced the effects of financial stress and mental health problems will often tell you that the two can significantly impact one another.

Money troubles can weigh heavily on your mind, especially if you've lost your job or don't have enough income to cover your monthly bills. In fact, a Stress in America 2022 survey from the American Psychological Association found that 87% of Americans say the rise in prices of everyday items due to inflation is a significant source of stress in their lives. As such, taking steps to improve your financial health can benefit your mental well-being. Here's how.

Most common financial stressors on mental health

No matter how diligent you are about your money, chances are you'll experience money issues at some point in your life. Some common financial problems that cause stress include:

  • Losing your job or having your hours cut
  • Transitioning from a two-income household to a one-income household
  • Disagreeing with your partner about how to spend money
  • Incurring expenses that are too high relative to your income
  • Running up too much debt
  • Missing payments due to insufficient funds or disorganized finances
  • Taking on late fees and interest rates that grow debt faster than you can pay it
  • Failing to set up a financial safety net, such as an emergency fund or liquid investments
  • Dealing with the economic fallout of the pandemic and inflation

Unfortunately, these stressors often overlap and can snowball further into other problems, which can become overwhelming quickly. However, addressing just one of these successfully may help you do the same for others.

Behaviors that impact financial stress

Although some causes of financial stress can be out of your control, like losing your job because your employer went out of business, many can be caused by poor financial decisions.

Consumers have practiced retail therapy—the act of buying something solely to make yourself feel better—long before the pandemic turned everyone into dedicated online shoppers seeking relief. Treating yourself to something new releases dopamine in your brain, which causes you to feel good.

But if you put the purchase on an already-maxed-out credit card or use funds you need for essential bills and expenses, the emotional high of buying an item will wear off quickly and turn into financial stress.

Another behavior that can compound financial stress is falling for tempting financing plans instead of paying cash. When making a purchase at large retail establishments, it's not uncommon to be asked if you want to open a store credit card. You may even be offered a discount for doing so.

Retailers sometimes also offer special financing plans, like zero interest for a certain amount of time. The catch is that if you don't pay off the debt within the allotted time, you'll have to pay the accrued interest, which can add significant costs.

Comparing yourself with your friends and neighbors is another behavior that can cause financial stress. If they get a new car, it's natural to want a new car as well. However, mirroring their financial decisions could encourage you to spend money on things you can't afford.

Instead of feeling bad that you don't have that new car, celebrate the steps you've taken to improve your financial situation. Plus, you probably don't know the true state of your friends' and neighbors' finances. They could be swimming in debt and stressed by money themselves behind their outwardly fancy lifestyle.

Financial wellness tips to support mental health

Unfortunately, financial stress and mental health problems don't often have quick-fix solutions. They take time, attention and determination to correct, which can happen in small, achievable stages. A good place to start reducing your financial stress is to identify the most significant areas that need improvement. Let's say you and your partner don't agree on how to spend your paychecks. Or maybe you're constantly racking up hefty bank fees due to insufficient funds.

Once you list your stressors, you can then focus on how best to tackle the problems causing them. Regardless of what they are, the following strategies are always a good bet.

1 Create a budget

If you don't have a way to track funds entering and leaving your account, chances are you'll run into money problems. Create a simple budget that lists your income and expenses. Seeing your money in black and white gives you a chance to look for places to cut back or understand how much more you need to bring in.

You'll also be more organized, so you won't miss payments or inadvertently overdraw on your account. You and your partner also may be able to compromise better on spending when you see clearly where the money is going.

2 Pay down debt

Having a high amount of debt—like with a credit card, loan or mortgage—can make it difficult to achieve any level of financial wellness. To get ahead, make a concerted effort to pay down your debts. This means sending more than the minimum payments required, which may only cover the interest and never hit the principal.

Also consider paying off certain debts altogether to decrease the minimum amounts due each month. Address the debt with the smallest balance or highest interest rate first while making minimum payments on other debts. Then, take the money you were sending to that bill and attack the next debt—creating a strategy that will build on itself until you're free of debt entirely. Paying off loans also frees up cash for other goals.

3 Save for a rainy day

No matter how careful you are with your finances, an unexpected bill can send your budget into a tailspin. The key to absorbing the blow without significant damage is establishing a savings or emergency fund. Consider routing more money to your emergency fund—ideally 3 to 6 months of income—to help you manage an unplanned expense. How much you should set aside will depend on your income and several other factors. But the important thing is to start now, even if it's only a few dollars at a time. Eventually, it will add up to a significant cushion.

4 Define financial goals

If you have big goals, like paying for your children's college education, calculate how much you’ll need to start saving each month. Sign up for any available programs that automatically put a certain amount or percentage of your paycheck into a savings account. You're more likely to do it when you don't have to think about savings. Plus, you'll get used to having less take-home money, so you're less likely to overspend.

Benefits of improved financial and mental wellness

By taking steps to improve your financial stress and mental health, you'll find benefits beyond your bank account—including those related to your physical health. In fact, studies have found that stress can increase your risk for various health conditions, including diabetes, heart disease, Alzheimer's and gastrointestinal problems.

When you reduce your stress, you can also improve your relationships with those at home and work. You may find yourself a better friend or partner as a result, delivering better quality time and support.

When you’re not worried about money, you can gain a greater sense of calm and inner peace—which can help you think more clearly and make better decisions. You'll also be more prepared when life's inevitable challenges occur, having the mental bandwidth to address and overcome them.

Achieving even the first of your financial goals will inspire a greater sense of confidence as well, proving that you can get on track for financial wellness. This will make it even easier to succeed at the next goal in line.

Freeing yourself from mental and financial stress can also significantly impact your overall quality of life. You won't have to worry about getting by, and you'll have the time and funds to do the things that are important to you—and that feeling is invaluable.

Planning your future can seem overwhelming, but you don't have to do it alone. When you're ready to turn your life plan into a financial plan, talk to a trusted financial advisor who can help you get where you want to go.


A few financial insights for your life

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This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.