The pain of financial stress, and what you can do about it

Money is among the most common sources of stress. And while some stress encourages positive changes, long-term financial insecurity can manifest in serious physical and mental health complications.

“From an evolutionary perspective, there are clear advantages to people becoming stressed by money problems. The psychological arousal from stress motivates us to try and tackle the problem, for example to download a budgeting tool or put money away for the future,” University College of London professor Dr Joe Gladstone said. “The problem occurs when financial stress becomes acute — when people are stressed [about money] all the time, in which case stress stops leading to positive beneficial behaviours but actually the reverse.”

Financial stress varies in its seriousness, and symptoms differ. But regardless of the level of financial stress an individual is experiencing, there are ways to mitigate and avoid it.

What is financial stress?

Although there is no widely agreed-upon definition of financial stress, it can be looked at in two ways: as part of general stress or as a specific kind of stress. 

Finances are among the most common causes of general stress for individuals. Financial distress — or financial insecurity, more specifically — is the opposite of financial well-being.

“It’s an area where people lack the tools or abilities to make good financial choices and are constantly worried about their financial situation, and they feel there’s no way out of that,” Gladstone said.

Stress caused by money is more difficult to overcome than other forms of stress because the person experiencing financial stress cannot easily escape it, Gladstone said.

What causes financial stress?

Human psychology sets people up for failure when it comes to long-term financial well-being. 

“Our brains aren’t wired to value financial rewards in the future. We’re focused on financial rewards today,” Gladstone said. “This bias towards the present means we’re ill-equipped to make optimal decisions.”

In some instances, people’s bias to overweight the present has knock-on effects for both individuals and society in future, Gladstone said.

“We overestimate how much spare money we will have in future, which contributes to people saving too little today. This is leading to a ticking time bomb in society, where as a population we are saving dramatically too little given our increasing longevity,” he said.

While greater financial advice would help, it is not always easy to obtain for those who need it most. Financial advice is often expensive and generally only available to people who are already wealthy, Gladstone said.

What are the physical and psychological effects of financial stress?

Gladstone describes research showing that paying for items triggers the same responses in the brain as physical pain — and paying with cash is more “painful” than using debit or credit cards.

“The same parts of the brain light up when you fork out cash as when you actually experience real pain,” Gladstone told the BBC World News.

Psychological effects of financial stress (PDF, 254 KB) may include depression and anxiety, workplace absenteeism and poor workplace performance, memory and mood problems and substance abuse. Physical health complications of financial stress may include cardiovascular disease, increased mortality, inflammation, hypertension, diabetes and digestion problems.

Poor work performance can lead to further financial insecurity, a cycle Gladstone calls the “poverty trap.”

The looming threat of a fiscal recession and market volatility can amplify the effects of existing stress that stems from money. Stressors related to financial decisions can be exacerbated by panic when individuals are experiencing sudden loss of income or unexpected unemployment.

Does financial stress affect people from all income brackets, ages, genders and ethnicities? 

Those with lower incomes generally experience more financial stress than people with higher incomes, Gladstone said. But high-income households are not immune to stress stemming from money. As he explained, financial behaviour is comparative: People do not feel rich if their neighbours appear richer than them, and workers do not always become happier after a raise because their expenses grow to match their new income. 

In terms of demographics, the oldest and youngest age groups in society are most susceptible to poverty, and younger people are more likely to experience financial stress than middle-aged people, Gladstone said. More women tend to be affected by financial stress than men because there are more female single-parent households, he said.

The “Financial Lives Survey 2017” study by the Financial Conduct Authority found half of the UK population was potentially financially vulnerable, meaning they “may suffer disproportionately if things go wrong, because they have low financial resilience, … [or] may be less able to engage with their finances or with financial services.” 

More than half of UK adults had less than 5,000 pounds in savings, the survey indicates. And depending on the region, between 46 per cent and 56 per cent of the UK population could only cover their living expenses for less than a week if they lost their main source of income, according to the report. 

“It’s actually very surprising how many people live paycheque to paycheque in the UK, even people solidly in the middle class in terms of incomes,” Gladstone said, pointing to his research on bank account data. “Even people who are objectively wealthy … many go right down to tens of pounds before their next paycheque.”

The number of people going insolvent in the UK has been growing since 2015. More than 30,000 individuals went insolvent in the third quarter of 2019 (PDF, 352 KB) — up 22.7 per cent from the same quarter the previous year. More people are seeking help on managing debt, too: The number of clients who sought debt advice from the Step Change Debt Charity grew 13.8 per cent (PDF, 242 KB) from 2014 to 2018, according to a 2018 report from the organisation.

Some degree of concern about money is healthy, though, because it helps people plan, budget and organise their finances. Gladstone’s research has demonstrated that people with different personalities have different levels of risk in suffering from financial difficulty. In particular, a recent study of more than 3 million people in the UK and the United States showed that nicer people — those with warmer, more agreeable personalities — were more likely to save too little, get into excessive debt and even to go bankrupt. “This seems to be because nicer people simply care less about money, and this lack of attention leads to worse outcomes,” he said.

UK adults who were in financial difficulty, surviving or financially resilient, by region in 2017

Of all the regions in the UK, Yorkshire and Humber’s population saw the highest percentage of people in financial difficulty in 2017 (11 per cent), while South East saw the highest percentage of adults that were financially resilient (71 per cent), according to a survey analysis by the Financial Conduct Authority. Percentages derived from the analysis and associated calculations were rounded to the nearest whole number, so totals may not add to 100 per cent.

How can financial stress be prevented or reduced?

Almost everyone — except for those who are truly impoverished — has parts of their budget they could reduce, Gladstone said. Making small changes in spending can help most people alleviate financial insecurity. The following strategies, based on tips from Gladstone, may prevent, manage and reduce financial stress.

Talk about money. 
It’s an unspoken rule that talking about money is taboo, and people at the top end are particularly hesitant to open up. When people tell others what steps they’re going to take to improve their financial position, this helps motivate them to move from the red to the black.

Have a pension.
Nearly everyone in the UK now has a pension, with employees added to pension schemes when they change jobs.

“Since auto-enrolment began, many more employees are now in a scheme. However, with increasing numbers working freelance and in the gig economy, not everyone is making the most of the tax benefits of pensions. There are new tools, such as FinTech apps, that will do all the work for you, including finding past pension pots and aggregating them into the same dashboard,” Gladstone said. “We need to embrace technology to help us think longer term with our money.”

Create a financial buffer.
Rates of savings in the UK are perilously low in terms of what the average person has saved for a rainy day. In addition to a pension (which should be contributed to automatically), set aside two or three months of income to deal with unexpected life events. 

“People underestimate the likelihood of a very bad thing happening,” Gladstone said. “The odds are small for any one bad thing, but the [probability] of one of many bad things happening is very likely. And you should have some money saved to cope with it.”

Automate financial decisions.
“Our money mantra should be: automate, automate, automate. If you need to pay off your phone bill every month, you’re relying on your future self always having the motivation and mental energy to do that,” which Gladstone said contributes to financial stress. Shorten your to-do list by automating recurring payments and debt payments. Once your debt is paid off, those funds can seamlessly be transitioned to your savings without feeling the pinch.

Create feedback loops.
Feedback loops reinforce positive financial habits and discourage bad habits. “FinTech apps and new banking providers [that] aggregate all your spending over a period of time, such as a week or a month, can help you identify excessive spending in specific categories,” Gladstone said.

Small changes add up.
Tiny adjustments can have big effects over time. Online investment calculators will show you that an extra 0.5 per cent of earnings saved over a lifetime will have a dramatic change on a person’s wealth in old age. And saving a small amount over time can help offset unexpected expenses. 

Make your money work for you.
It is difficult to provide a single set of advice that applies to everyone. Gladstone’s research has demonstrated that we are all different when it comes to money. Gladstone suggests trying to adapt your financial plans to these differences. “If you know you are an impulsive spender, experiment to try to limit your spending, such as putting each week’s spending money on a separate bank card and only carrying this with you. The first step to improving [your] financial position is recognising what [your] specific problem areas with money are.”

Glossary: financial stress, behavioural economics and inequity terms

Bankruptcy: legal process and status that relieves people of their debts. Learn how to apply to become bankrupt at gov.uk.

Commitment device: technique to lock oneself into an action plan and avoid acting against better judgment.

Intertemporal choice: how decisions made in the present affect financial opportunities at different points in the future for choices with different levels of risk, payoff or likelihood of occurrence. The likelihood of selecting a positive outcome is higher the sooner it will occur.

Fungibility: idea that all money is interchangeable and has no labels (the opposite of mental accounting). 

Insolvency: state of financial distress in which a person has an inability to pay their debts.

Liquidity: amount of cash a person has available on short notice.

Mental accounting: idea that the value of money differs based on its origin and intended use (the opposite of fungibility).

Present bias: higher likelihood of making choices with payoffs closer to the present.

Self-licensing effect: higher likelihood of making an immoral or bad choice after making a good or moral choice.

Status quo bias/status quo effect: increased likelihood of making similar decisions in the future as those that were made in the past.

Sunk cost fallacy: likelihood of continuing a course of action because of the level of previously invested resources, regardless of the expected outcome. 

Temporal discounting: idea that people value things today more than in the future. 

Resources for managing financial stress

For additional help managing financial stress, refer to these resources:

Citation for this content: The UCL Online MBA.