Financial Health Network study shows circular relationship between financial, mental health

A new Financial Health Network study released last month shows a circular relationship between mental and financial health. While it is well-known that mental health challenges lead to financial issues, financial issues often produce additional mental health concerns.

Vice president of policy and research Angela Fontes said the past 15 years have been tough on society, with a financial crash, pandemic, supply chain challenges and inflation. That can produce scarcity and a lack of slack in their budgets, where people worry about the financial impact of even small decisions.

But we only have a finite amount of energy to devote to our lives, and the more often smaller decisions consume us, the less there is to devote to major issues. The strain begins to show.

“It takes a lot of mental energy to figure all those things out,” Fontes said. “And that’s just adding to stress now around inflation. The student loan pause that we had during the pandemic is now over and some are back to paying, in some situations, pretty hefty student loan payments. Unfortunately, it’s an opportune time to study the connection between mental and financial health.”

The percentage who were financially healthy rose during the pandemic but dropped in 2022 before plateauing in 2023. Fontes said what is growing is the number of financially vulnerable people who are one step away from trouble.

“Where can we identify these consumers that are on that bubble?” She asked. “One missed shift could impact these consumers in a pretty substantial way. When we think about that in the context of mental health, it gets really tricky and pretty problematic.”

How mental health affects the individual and economy

Mental health challenges hurt the economy. Nearly half of the study participants called in sick to work due to their mental health. Many said their motivation at work suffered.

Our reactions often dig a deeper hole. Some spend impulsively and rack up debt. Others do the opposite, retreating from social activities and fostering feelings of isolation. The distraction interferes with saving for the future and paying bills in the present. 

Some solutions worsen the problem. Making tradeoffs between expenses is a stopgap that can leave a sense of foreboding. Applying for public assistance or asking friends and family for money may produce shame and frustration. 

And we haven’t even considered the financial shock of a car repair or medical expense. Outstanding debt contributes to feelings of anxiety and depression.

Tactics for improving mental health

Participants shared several strategies to help manage financial stress, with Fontes saying many successful tactics help restore a sense of control over one’s life. Assess budget allocations. Create positive momentum by paying off small bills first. Focus on short and long-term goals, recognizing the difference between the two. The act of planning helps restore that feeling of control.

The benefits of exercise, even mild forms like walking, are well-known. Exercise releases endorphins and interrupts the focus on debt.

Governments and employers can play roles. Participants, including counsellors and financial planners, want to access professional help to address financial stress. Perceived cost and availability were perceived barriers to both. Benefits such as childcare subsidies, tuition and loan assistance, financial guidance, therapy and opportunities for time off also help.

The circular relationship between financial, mental health

Financial challenges contributing to mental health challenges aren’t front-page news, but the reverse, where mental health issues then feed additional financial challenges, is something to watch.

Angela Fontes said mental health challenges can affect one’s financial health.

“We were a little surprised to see how strong the connection was in the other direction,” Fontes admitted. “People pointed to things like compulsive buying as a way to cope with challenges. Many folks talked about being unable to go to work, feeling bad, skipping shifts or not being as productive; thinking through the financial implications of (their) hours or, God forbid, losing a job just because someone’s not able to be productive. 

“That was one thing that struck us is that the bidirectional relationship leads to a bit of a vicious cycle.”

Fontes said it is important to distinguish between mental health and mental well-being. Mental health challenges can include diagnosed conditions, while mental well-being includes how someone feels about their daily ability to manage life. The stigma is beginning to lift, which allows everyone to consider the connections and discuss solutions.

Can earned wage access help?

Some respondents cited the benefits of earned wage access. Fontes said the discussion must begin with identifying the different types. Those provided directly to consumers, without an employer link, are often more expensive.

“There’s a body of research that suggests that folks can get in this cycle, particularly with the direct-to-consumer, because there may be multiple opportunities for someone to take these earned wage advances,” Fontes said. “The research is still emerging on earned wage access… We did hear from several consumers who feel this is helpful for them.”

The challenge of providing effective financial literacy

Financial literacy comes in many forms. However, providing it effectively is challenging. Consumers must be financially capable, knowing how to open an account and discern the differences between credit cards. Create a foundation, then build on it.

“We like to think if we can impact financial institutions and encourage them to provide for the financial health of their customers, that’s one path,” Fontes said. “The inner economist in me says it is a necessary but insufficient condition for financial health. As much as we applaud anyone tossing up some videos on financial literacy, we think it’s not enough. 

“It’s about figuring out how to create the right products to support people.”

The key is to provide timely education at the ideal moment. Mortgage classes in high school don’t cut it. Better to offer it during the mortgage application process.

“As financial institutions or other organizations try to think about effective financial education and literacy, I think providing it when consumers are going to need it is important,” Fontes offered. 

“It’s about making it easy, relevant and fun. And if you can do those things, you will be far more effective.”

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  • Tony Zerucha

    Tony is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT's Unchained, a blockchain exposition in Hong Kong. Email Tony here.