Your Wallet and Your Well-being: How Money Impacts Mental Health

Financial stress is a reality for many people, but when it goes unchecked, it can become an underlying cause of mental and physical health issues. For young adults, developing a healthy relationship with money and mastering personal finance concepts can help them avoid financial strain and improve their overall well-being.

Through education and personal effort, financial well-being is attainable, and it’s not about earning a huge salary or owning expensive things. Rather, it's about taking control over your everyday finances, putting protections in place so you have financial security, and working toward larger financial goals while you enjoy life.

If you recently graduated from college or are just starting your career, here's what you should know about how money impacts your mental health and strategies you can implement to help achieve financial well-being. 

The Link Between Money & Mental Health

What is Financial Stress?

Financial stress is feelings of worry and anxiety related to money. It could be day-to-day concerns like not having enough money to cover basic needs, or a general sense of not being able to manage debt or achieve personal goals like buying a home or affording a car because of fund shortages.

For young adults who are early in their careers and perhaps facing down major financial responsibilities for the first time, financial stress can be overwhelming.

“Money is one of the biggest stressors in life,” says Carolyn McClanahan, M.D., CFP, founder of Life Planning Partners. “And when you're stressed over anything, that creates physical issues within your body, like those stress hormones that make you not sleep or bring down your sense of well being overall.”

Money Stress in Young Adults

People may have different types of financial stress depending on their life stage. So while someone in their 50s might be concerned about not being able to retire, people in their 20s are more likely thinking about the here and now, says McClanahan. “How do you meet daily expenses without going into credit card debt? It's day-to-day things that they think about and because we do such a bad job of teaching financial literacy, many younger people just don't know how to handle it,” says McClanahan.

Navigating young adult life can be challenging regardless of financial stability since there are so many major changes in a relatively short period of time, agrees Curtis Pope, CFP CFT-I, founder of Pope Wealth Planning.

“There are a lot of unknowns. This stage of life can mean new living situations, new cities, a new job, full independence for the first time in many cases, etc.,” he says. “If personal finances feel unstable during this time, it's another layer of new challenges during an already tricky time of navigation.”

On top of that, a good portion of young adults are also grappling with student loan bills. According to The College Board’s Trends in College Pricing 2023 report, more than half (51%) of 2021-22 bachelor’s degree recipients graduated with debt, and the average debt among borrowers was $29,400.

Effects of Financial Stress on Your Health

According to a Harvard study, more than half (56%) of young adults ages 18-25 report that financial worries negatively influence their mental health. “How we take care of our physical and mental health all goes together. And if we're having basic things like money stress or poor relationship issues, then that can start a cascade of poor mental health and physical health,” says McClanahan. 

As a financial therapist, Pope shared a list of some of the most common effects that he’s seen result from financial stress:

Anxiety and depression: Constant worrying about finances can manifest into increased feelings of anxiety and depression, affecting overall mental well-being.

Sleep disturbance and insomnia: Ever lie awake at night doing calculations in your head to try to figure out how you’ll pay for new brakes for your car, or if you can afford a quick road trip with friends? In a study by the American Academy of Sleep Medicine, 87% of people cited finances as a worry that has caused them to lose sleep; one-fifth of those respondents said they “almost or almost always” lost sleep worrying about money.

Physical health problems: Long term chronic stress can manifest into physical health issues such as headaches, digestive problems, and a weakened immune system. The American Psychological Association points out that stress can actually impact every body system, causing long-term problems for your heart, gut health, nervous system, and more.  

Relationship strain: Among Gen Z, 29% of people say money is their greatest relationship challenge. And that’s no surprise given the pressure that financial strain can put on relationships with partners, friends, and family. It could be from disagreements over money or lifestyle choices, but also, money worries can cause people to feel irritable and lash out at others.

Reduced work performance: Financial stress can lead to decreased productivity and focus at work, affecting overall job performance. In fact, nearly 3 in 4 employees (71%) say that financial stress negatively affects both their work and personal lives, according to a study conducted by Morgan Stanley at Work.

Avoiding social interactions: People under financial stress may withdraw from social activities due to lack of funds or embarrassment. One study found 72% of respondents skipped events with family, friends, and co-workers because they couldn't afford to attend.

Negative impact on self-esteem: Because money is so tied to value and worth, financial difficulties can lead to some people feeling like they are failures, impacting self-confidence. 

Strategies for Managing Financial Stress

For anyone dealing with financial stress, the good news is that turning things around is within your power. “It's all about learning the tools of how to take care of yourself financially,” says McClanahan. This includes learning budgeting, saving, and understanding basic financial concepts like how your 401(k) works, understanding how to use your health insurance, etc. 

“All those concepts are building blocks to maintaining good financial health so that you can hopefully reduce the effects of money on your mental health,” adds McClanahan.

Here’s a step-by-step plan for coping with financial stress and healing your relationship with money:

1. Get to Know Your Money Habits

Before you can get into budgeting or creating savings goals, you should do a deep dive into your finances to see where you stand. 

“I'm not talking about monitoring your avocado toast intake,” says Pope. “Either create a spreadsheet or simply write down the numbers.” To get the figures you need, ask yourself these questions, and analyze your bills and banking and credit card statements to find the answers: 

• What is my take home pay every month? 
• How much are my fixed monthly bills? Include things like rent, car payment, student loans, insurance, gym, subscriptions, etc. 
• How much money is "left over" after I pay my bills?

This exercise could be eye-opening if you have never stopped to look at where your money was going. 

2. Create a Monthly Budget

Once you have your numbers, you can get to work on your actual budget.

“If there's $1,000 left at the end of each month, you'll want to set aside a certain dollar amount for savings and then spend the remainder on lifestyle,” says Pope. By lifestyle, he means the flexible spending that you do each day such as groceries, carry out, shopping, entertainment, etc.

If you find yourself without enough of a leftover cushion to live, then you’ll need to go back to your bills to do some trimming, or look for ways to increase your income.

For example, you might realize that there are streaming services you really don’t use but still pay for, or you might be able to carpool with friends to save on tolls/parking costs. You might also need to set some restrictions on spending when it comes to eating out or buying new clothes.

3. Build and Maintain Your Emergency Fund

Did you notice that Pope suggested that savings is the first item that you should take care of with your leftover funds? There’s an important reason why. “Having an emergency fund will provide a lot more peace of mind,” he says, and therefore, reduce your overall financial stress.

Start off by automating a set deposit amount into a separate account with every paycheck. Contribute what you can, adjusting as needed based on the budget your created and your income over time. Ultimately, you want to grow your account so that you have enough to cover at least three months worth of your fixed bills, says Pope.

Though it can take some time to fully fund your emergency savings, even knowing you have a few hundred dollars set aside in the meantime to cover an unexpected expense—rather than having to rely on borrowing—can be empowering and offer some peace of mind.

4. Find Extra Sources of Income

In most cases, people work a steady job and over time as they gain experience, their income increases. But if you can also find a way to introduce extra income streams, you may be able to fast track your financial goals and give yourself some budget wiggle room.

For example, you might be able to take on some freelance or gig work in your spare time. Or, if you are good at something like swimming or playing an instrument, see if there is an opportunity to teach lessons on that skill.

5. Use Education For Empowerment

People tend to stress more when something is unknown or unclear to them, and that can certainly be true when it comes to financial matters. But once you gain knowledge and demystify things that once seemed so complicated, you can feel less intimidated.

Here are some of Pope’s and McClanahan’s financial literacy resource recommendations:

Books:

• The One-Page Financial Plan 
• The Psychology of Money

Podcasts:

• Behavior Gap Radio
• Afford Anything

 Self-education:

• Khan Academy Financial Literacy

6. Seek Professional Help When Needed

Depending on your money goals and current situation, there could be times when you may need to reach out to a professional for some guidance. Here are a few financial service providers to consider:

Financial therapists: “Financial therapists live and work in the overlapping Venn diagram between traditional financial planning and conventional (mental health) therapists,” says Pope. Financial therapy goes deeper into the psychology of money, helping you to think critically about your finances and begin to take positive action toward your goals. 

Certified Financial Planner: A professional can help you with your long-term financial planning and investing goals. Starting to plan and save for retirement while you're young can help you reap the benefits of compound interest.

Credit counselor: If you find yourself struggling with debt or trouble creating a budget, you can seek help from a non-profit credit counseling agency like the National Foundation for Credit Counseling (NFCC). You can typically get a free consultation, but then services may have a low cost fee thereafter.

Certified Public Accountant (CPA): If your finances are fairly simple, you may not need an accountant just yet. However, it can be a good idea if you decide to start your own small business or do a lot of freelance work since a CPA can help guide you from a tax savings perspective.

The Bottom Line

Financial well-being is an important component for your overall mental health. By taking the steps to address your financial situation, you can take charge of your money and make it work for you – rather than just working to pay your bills. Once you flip the script, you can stress less about money matters and improve your financial mindset.