Studies show that stress around our finances takes a toll on cognition, causing us to make poor decisions. Karen Carr, CFP®, outlines how to keep calm and regain control.

Are money woes keeping you up at night? If your answer is yes, you’re not alone. Whether you’re nervous about making your next student loan payment, worrying you won’t be able to cover an unexpected expense, or troubled about your financial future, this kind of stress can have a big impact on more than just your sleep habits. Let’s take a closer look at what we know about financial stress, how it affects our lives, and what we can do to combat it.

Who’s Stressed About Money?

Americans report that money is their leading cause of stress. We all have stressful moments, but too much stress has been shown to cause a wide array of health issues from migraines and muscle tension to stomach ulcers and chest pain. And those are just the physical symptoms: Mental health issues and behavioral changes are also common reactions.

Millennials report higher levels of stress than the average American and have more difficulty coping, reports the American Psychology Association (APA) in their 2014 study Stress in America. In fact, 51 percent of Millennials have “lain awake at night in the past month due to stress, compared to 45 percent of Gen Xers, 37 percent of Boomers and 27 percent of Matures.” No wonder we’ve been labeled the anxious generation.

Unsurprisingly, lower-income individuals also reported higher stress levels than those earning higher incomes: 5.2 versus 4.7 on a 10-point scale, according to the same study. However, the gap between the two groups is relatively small. Higher incomes, age, or another factor alone does not preclude individuals from stress.

How Does Financial Stress Impact Decision-making?

Studies have also shown that stress around our finances can take a toll on our cognitive abilities. This can cause us to make poor decisions, worsening money stress, which only compounds over time.

One study examined the effects of a profit-sharing program, established by the Cherokee Tribe in North Carolina’s Great Smoky Mountains, after they opened a luxury casino. Not only were the casino’s profits used to improve infrastructure in their community, but each individual tribe member also received a portion of the proceeds directly. This annual stipend started at $500 and grew to $6,000 per person by 2001.

The community impact was tremendous: Teenage mental health improved, behavioral problems in children plummeted, and grades improved among school-aged children. One explanation: Some of the financial pressure on families was alleviated, and parents reported having more time for their children (despite working the same amount of hours).

While mental health and behavioral issues cannot be eradicated by limiting financial stress, this particular example shows it can certainly help.

What’s the Psychology of Scarcity?

With their book The Psychology of Scarcity, Eldar Shafir, a Princeton psychologist, and Sendil Mullainathan, a Harvard economist, further demonstrate the far-reaching effects of financial stress. According to their research, our minds see things differently when we feel something is scarce, whether that be money, time, or support.

Although this mindset can sometimes be helpful, it also stops us from seeing the big picture because we can only focus on the immediate problem at hand. This can be particularly harmful when we face a strain on our financial resources. If we perceive money to be scarce, we may be more susceptible to making poor decisions.

They ran an experiment at a New Jersey mall: Shoppers were asked to consider an unexpected car repair. Some were told the fix would cost $150; others were presented with a $1,500 job. So, how would they pay for it? While participants mulled it over, they were asked to complete unrelated cognitive tests.

Higher-income participants scored the same on the test regardless of the cost of the repair. Those with a lower income performed similarly when faced with the $150 repair. However, their scores suffered when they were faced with a $1,500 repair. The results were telling: “The mere thought of a major financial setback impaired their cognitive ability.”

It is important to note that much of the research on the cognitive effects of financial pressures focuses on those living in poverty. For the record, I am not conflating the idea of being stressed about money or being broke with the realities of living below the poverty line, and my intention is not to make light of this difference. Despite this distinction, though, many impacts of scarcity on mental health and decision-making seem to span all income levels by varying degrees and is something we can all learn from.

What Does This Mean for Grownups?

If money issues are stressing us out, clouding our judgment, and impairing our abilities to make the best decisions, what can we do about it?

Make a plan. A well thought-out plan to pay down debt, save for a big purchase, contribute to retirement, or all of the above can give us a solid starting point to take action and feel more in control. From there, be flexible. Your plan is based on moving targets and a bunch of assumptions, so don’t be afraid to tweak things over time. Your plan should alleviate stress, not add to it!

If you’re having trouble getting started, consider meeting with a CERTIFIED FINANCIAL PLANNER™ professional to help.

Focus on the day-to-day, but don’t lose sight of the big picture. We all need to focus on the task in front of us, whether that be figuring out what’s for dinner tonight or how we are going to pay for that unexpected car repair. There’s no getting around that, but it can help to step back, take a deep breath, and gain some perspective. Sure, buying new tires is going to set you back, but it’s unlikely it will lead to total financial ruin. Avoid the catastrophe mindset. You may even find some solace by looking back at that plan you created.

Talk to family and friends. Stress around money can often lead to feelings of loneliness and isolation. This isn’t surprising when we consider that many of us don’t talk about money with even our closest family and friends. In fact, money ranked above death, politics, and religion as the most difficult topic to discuss with others.

However, the APA’s 2014 Stress Report found that survey respondents who had some form of emotional support also reported lower levels of stress and better outcomes than those who don’t. Break the cycle and seek out emotional support from family and friends. Encourage more open and honest conversations around money by starting small. You don’t have to discuss every aspect of your financial situation at once. It will get easier the more you do it.

Find healthy, stress-relieving activities. Many of us fall back on vices like drinking alcohol, smoking, or overeating to get through stressful times. Data also shows that Millennials rely more on sedentary stress management techniques like watching TV, listening to music, or going online than other age groups. Judging by the fact that Millennials are the most stressed-out generation, we don’t seem to be doing ourselves any favors.

Aim to find appealing stress relief methods that won’t damage your health along the way. Consider taking a walk, exercising, or even playing Pokemon Go to set your mind at ease.

Focus on one good financial habit at a time. If your financial future feels overwhelming, stay in the present and focus on something small you can do right now. (Something is better than nothing!) For example, aim to save an extra $20 this month, try to cut your grocery bill this week, or take 30 minutes to read a few articles to boost your personal finance knowledge. Feel good about the progress you make and keep moving forward.

It’s Not All Bad News…

Believe it or not, there is a certain type of stress that can actually be productive. It can boost our performance, increase our overall well-being, and even help us have a more positive outlook. What determines good stress from bad? The ability to turn it off and stop it from interfering with other areas of your life.

Rather than aiming to banish all financial stress from your life, push to temper the bad variety and keep the good. Good stress can motivate us to reach our financial goals without robbing us of our health. When we realize that a certain level of stress is just par for the course, we can think more positively about it.

While scarcity and financial stress are in no way a perfect explanation for poor decision-making or deteriorating mental and physical health, they certainly play a role. If we can be more aware of stress’s impact, take action to relieve it, and even harness the good variety, we can make a conscious effort toward good financial decision-making for both the short- and long term.

Karen Carr Brady is the founder of Simplie, a financial planning company that offers virtual appointments with CERTIFIED FINANCIAL PLANNER™ professionals. Karen is a former member of the Society of Grownups planning team and is now based in New York City. When she’s not writing about personal finance or meeting with clients, you can find her roaming around NYC looking for the best place to eat.

Any third-party resources or websites referenced above are not under Society of Grownups control. Society of Grownups cannot guarantee and are not responsible for the accuracy of the resources, websites, or any products or services available through such resources or websites.

 While Society of Grownups hopes the information is useful, it’s only intended to provide general education. It’s not legal, tax, or investment advice, and may not apply or be useful to your specific financial situation. If you need recommendations geared to your personal financial situation, schedule time with a financial planner.

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