Stress can keep you up at night and have a negative impact on how you interact with the world around you. While stress of any kind can take a toll on your health, certain kinds of stress are especially prevalent in American society. Financial stress is one type of stress that can permeate your life.
While financial stress manifests itself in different ways, the Financial Health Institute defines financial stress as “a condition that is the result of financial and/or economic events that create anxiety, worry, or a sense of scarcity, and is accompanied by a physiological stress response.”
If you want to alleviate the financial stress in your life, there are ways to address it. Let’s explore the common causes of financial stress and how to get your financial stress in check.
How Common Is Financial Stress?
If you are struggling with financial stress, you are not alone. Many surveys have shown that Americans feel the pressure of finances in their lives.
A February 2022 study conducted by the American Psychological Association (APA) found that 65% of respondents identified money as a significant source of stress. Specifically, the rising costs of household essentials is compounding stress, with 87% of survey respondents citing inflation as a significant source of stress.
A 2019 study conducted by CreditWise found that 73% of U.S. consumers find finances to be a point of stress in their lives. According to the survey, stress caused by finances outweighs the stress caused by politics, work, and family.
A more recent study by Bankrate found that money impacts mental health in different ways for different people. Here are some key findings from the survey:
Money and mental health: The survey determined that 42% of U.S. adults say that money negatively impacts their mental health.
Women tend to feel the negative impacts more: Based on the survey, 46% of women report money having a negative impact on their mental health. In contrast, 38% of men report the same.
Low earners worry more: 48% of households with an income of $50,000 or less reported money negatively impacted their mental health. In contrast, 30% of those with a household income of $100,000 or more tied a negative impact of money on mental health.
Age matters: Based on the survey, Millennials tend to worry the most about money. 48% of Millennials reported a negative impact of money on their mental health. In contrast, 46% of Generation X reported similar feelings.
Money concerns can be a daily woe: Of the survey participants who said money has a negative impact on their mental health, 28% reported worrying about money on a daily basis.
Events can trigger money stress: Everyday financial events can lead to financial stress. Some of the events that reportedly caused negative money feelings include looking at your bank account, paying a bill, making a purchase, talking about money, getting paid, and looking at social media.
Regardless of when or how you feel financial stress in your own life, it’s usually not a good feeling. The good news is that you don’t have to deal with financial stress forever. You can find healthy ways to channel your feelings into positive outcomes.
Common Causes of Financial Stress
Financial stress can crop up when you least expect it. Or it can become a pervasive part of your daily life. Below we will explore some of the common causes of financial stress.
Too Much Debt
While taking on some kinds of debt might push your life forward, all debt comes at a price. At some point, you’ll have to repay the funds plus interest. And it’s easy for monthly debt payments to turn into a burden for your budget.
According to a recent Bankrate analysis, the average debt per American is $96,371. While each household might take on debt from different sources, some of the most common debt sources include credit cards, auto loans, student loans, and mortgages.
The amount of debt that’s considered “too much” varies from person to person. In general, experts recommend keeping your debt-to-income ratio below 43%.
However, the ideal debt-to-income ratio is a matter of personal preference. Some borrowers cannot stomach the idea of carrying debt for the long term. Others are more comfortable making debt work as a part of their monthly budget.
Be honest with yourself about how much debt you are comfortable with. If your monthly debt payments are pushing your budget to the limit, your debt burden might be too high.
High Cost of Living
The cost of living isn’t equal across the country. In some places, like New York City and San Francisco, the cost of getting by is significantly higher than in other locales. Regardless of where you live, you might feel the pressure to make ends meet every month.
According to a LendingClub study from January 2023, 60% of adults in the United States are living paycheck to paycheck. If you are living in the paycheck-to-paycheck cycle, without the security of an emergency fund, you’ll likely have to contend with financial stress most days.
Inflation Pinching Paychecks
Inflation has been a pressing issue across the economy for over a year. The Consumer Price Index (CPI), which is a commonly used measure of inflation, has documented the rising costs facing households across the nation.
Based on the latest Consumer Price Index report, inflation is sitting around 5%. In other words, the cost of consumer goods rose by 5% from this time last year. It’s not surprising that higher costs could put a pinch on your household budget.
Of course, higher costs impact households across the income spectrum. However, some households feel the pressure of inflation more acutely. According to the Federal Reserve Bank of Dallas, inflation tends to hit lower-income households the hardest.
Without a healthy supply of savings, financial stress can hit harder. The reality is that without savings, you might be one unexpected expense away from a financial trainwreck. If you are living without savings to fall back on, it might be easier to succumb to financial stress.
How to Lower Financial Stress
It’s clear that financial stress is a significant issue for many people. If you are dealing with financial stress, the good news is that it’s possible to take action and minimize your stress levels over time.
Evaluate Where You Stand
Before you can move away from financial stress, you need to determine the root of your stress.
If you aren’t sure where to start your sleuthing, take a tally of your net worth. You can determine your net worth by subtracting the sum of your liabilities from the sum of your assets. For example, if you have $10,000 in a savings account and $2,000 in debt, then your net worth would be $8,000.
After you know where you stand in the big picture, take a look at your spending and income. Ideally, you’ll spend less than you earn in a given month. If you are spending more than you make, that might be a key part of your financial stress.
Write Down Your Long-term Financial Goals
Getting clear on your long-term financial goals can help you chart a course toward whatever success looks like to you.
If you aren’t sure what financial goals make sense for your life, take a few minutes to daydream about your ideal life. Here are some questions to ask yourself and how money plays a role:
Where do you want to live? The cost of living changes based on where you live. If you have dreams of living in an expensive area, that’s something to save for. In contrast, plans for a low-cost-of-living area could mean more wiggle room in your budget.
Lifestyle: Hobbies like sports, traveling, reading and more all impact your budget in different ways. Consider what funds you need to pay for the activities you prefer.
Retirement: Most of us would love to leave the working world behind at some point. But getting to a comfortable retirement often involves saving for decades.
When you start to tie your life plans to money needs, you’ll have a better idea of what you’ll need to do to make your dreams come true.
Pay Down Debt
A heavy debt burden can weigh you down. Depending on your situation, a significant amount of debt could take a big bite out of your budget each month. Imagine what your money situation might look like if you eliminate debt for good.
If you want to eliminate debt from your balance sheet, the right strategy can make all the difference.
The snowball method is one popular choice. In this strategy, you’ll throw all extra funds available for debt repayment toward your debt with the smallest balance. Once you eliminate this first debt, you’ll roll the extra funds and the monthly payment you eliminated into paying off the debt with the next highest balance. As you make progress, the snowball will grow to help you tackle bigger debts.
Another option is the avalanche method. In contrast to the snowball method, the avalanche method focuses on paying off the debt with the highest interest rate first. You’ll work on paying off your debt with the highest interest rates to the lowest interest rates.
Both methods offer advantages. You’ll need to choose which option sparks more motivation to stick with the plan.
Build a Budget That Works
The word budget might strike fear into the hearts of many. But budgeting doesn’t have to be a negative thing. With a bit of mindset reframing, budgeting gives you the opportunity to build room in your spending for the things that matter to you most.
For example, you might choose to make space in your budget for your favorite hobby each month while putting aside savings for your future.
Stretch Your Dollars Further
A little bit of creativity can help you squeeze more value out of your dollars. More traditional methods of stretching your dollars further include signing up for your favorite stores’ rewards programs, taking advantage of sales, and clipping coupons where you can.
Credit card rewards can also help you get more value out of your spending. You can tap into rewards credit cards that offer points or cash back for every dollar you spend.
However, these strategies can also make it tempting to spend more, so be careful not to fall into a spending trap.
A good credit score can go a long way toward relieving financial pressure. Typically, borrowers with a good credit score can lock in lower interest rates when financing major purchases. Interest rate savings can make a significant difference in your budget.
For example, let’s say you have a good credit score that helps you lock in an interest rate of 4% on your 30-year home loan of $250,000. You’d find a monthly payment of $1,424 and pay $179,853 in interest over the life of the loan.
In contrast, let’s say you have a lower credit score which leads you to lock in an interest rate of 6%. With all other details of your home purchase staying the same, you would have a monthly payment of $1,729 and pay $290,160 in interest over the life of the loan.
It’s clear that a better credit score can lead to significant savings in interest payments over your lifetime. With that, taking action to build credit is a worthwhile choice. A few ways to get started include making on-time payments to your debts, paying down debt, and cleaning up any errors on your credit report.
Pick Up a Side Hustle
A side hustle is an extra income stream that can completely transform your financial trajectory. At the very least, having more income can serve to relieve some financial pressure.
The great thing about a side hustle is that you can choose to make it a temporary or permanent part of your life. Many choose to tap into an established side hustle when they need the extra funds to cover an expense. But others choose to funnel their side hustle earnings into long-term savings goals.
Don’t be afraid to give a new side hustle a try. It might be exactly what you need to lower your financial stress.
Build Your Savings
Accessible savings provide a safety net for the unexpected costs that life throws your way. If you find yourself worrying about potentially expensive situations, building a robust emergency fund might help you feel more in control.
Many experts recommend tucking away between three to six months’ worth of expenses in an emergency fund. However, any amount of savings can help to relieve financial stress. Start building your emergency fund slowly. With time, you’ll create a financial cushion to help you handle bumps in the road.
Build Financial Literacy
When you aren’t sure what you should do with your money, it’s easy to feel stressed. The unfortunate reality is that most of us don’t receive an adequate education about money in school. But the good news is you can build financial literacy by reading books and educating yourself about the topic. As you build the tools to be confident about your money moves, you might feel the financial stress you’ve been dealing with recede.
How Do I Stop Feeling Financial Stress?
Taking action to improve or take control of your financial situation might help you lower your stress levels. For example, making a plan to pay off debt or building a side hustle might help you feel less stress surrounding money.
What Causes Financial Stress?
Financial stress can stem from many sources. A few commonly cited sources of financial stress include paying bills, having a low income, living paycheck to paycheck, and having too much debt.
The Bottom Line
Money plays a big role in our lives. Depending on your relationship with money, you might feel financial stress regularly. If you want to live without this pressure in your life, start by taking control of your finances.