financial-trauma

This article includes brief mentions of self-harm, gun violence, sexual assault, and other difficult topics.

Anyone who’s ever lost a job knows how much your finances can affect your health. But it wasn’t until recently that scientists discovered an underlying connection between trauma and financial distress—and how experiencing trauma can sabotage your financial future.

By understanding this relationship, psychologists hope to identify the financial traumas in people’s lives, open a dialogue and, ultimately, help them foster a healthier relationship with their money.

What is financial trauma?

Trauma, defined as an emotional response to a devastating event, comes in different sizes. The most intense, or acute traumas, known as “big T” traumas, are life-threatening events such as a car accident, sexual assault, or school shooting. “Little t” traumas aren’t as severe but still create distress, such as experiencing a breakup, getting bullied, or being rejected by a friend group. Traumas that happen during childhood, known as adverse childhood experiences (ACEs), are particularly harmful because they take place at critical times of growth, when a person’s brain and emotional development are especially vulnerable. According to the CDC, 60% of Americans have experienced an ACE.

A person often carries the physical effects of trauma with them through the their lives, ranging from shock and denial after the initial event to flashbacks, sleeping disturbances, and anger. Left untreated, they can lead to self-harming actions like substance abuse, difficulties sustaining relationships, and even suicide.

Recently, psychological research scientists have presented evidence that stresses surrounding your finances—or financial traumas—can actually create the same negative thoughts, feelings, and behaviors that are more commonly connected with post-traumatic stress disorders (PTSD).

According to a study by the financial wellness company Payoff, one in four Americans suffers from financial trauma—and that number increases to one in three for the Millennial Generation, which has been plagued by credit card debt, student loans, and job insecurity through the COVID-19 pandemic.

What are the symptoms of financial trauma?

Like victims of PTSD, people who suffer from financial trauma experience agitation, irritability, isolation, and anxiety that make them feel incapable of taking steps toward positive change.

Indicators of financial trauma include:

• Maladaptive behavioral responses, such as avoidance of financial-related issues, not opening bills, or failing to keep track of expenses through a budget.
• Not advocating for one’s needs, which could stem from feelings of low self-worth and are manifested through a lack of boundaries, such as failing to make payments on time or not speaking up for raises or promotions at work.
• Overspending is another sign of financial trauma, as a stress response, self-medication, or even a quick way to achieve feelings of adequacy.
• Underspending, the opposite of overspending, is a sign of what is known as poverty trauma, which stems from feelings of fear and scarcity due to events of the past.

While financial trauma often manifests in the form of negative thoughts, flashbacks, and anxiety, it also can trigger self-destructive behaviors. For example, members of the Silent Generation, who survived the Great Depression, helplessly watched their family’s savings disappear in the stock market crash of 1929 and subsequent bank runs. They were so traumatized by these events that they were unwilling to invest again in the stock market, and thus missed out on historic annualized returns that could have provided a comfortable retirement or even generational wealth for their descendants.

What are the causes of financial trauma?

Psychologists believe that financial losses cause stresses that can stay with families for many years; this phenomenon is also known as generational financial trauma. For instance, the grandchildren of the Silent Generation may also present anxieties about investing in the stock market, perhaps because they listened to their grandparents’ cautionary tales or may have even inherited their debts—thus perpetuating the cycle.

Other financial traumas stem from the financial losses related to life events, such as going through a divorce, which often reduces one’s assets or real estate holdings, or experiencing a business failure, which may involve debts that need to be repaid—even after declaring bankruptcy.

World events can also wreak havoc on a person’s finances and foment trauma. The financial crisis of 2007–2008 stemmed from rising interest rates, which caused millions of American subprime mortgage holders to default on their monthly house payments. During the subsequent Great Recession, 10% of American workers became unemployed, and it took years of struggle for individuals—and the economy as a whole—to get back on their feet again.

Financial trauma can even be caused by systemic issues, like discrimination. For instance, the 2008 Senate Subcommittee on Investigations reported how predatory lenders at companies like Washington Mutual often targeted low-income and minority mortgage applicants for their toxic, adjustable-rate and subprime mortgages because they lived in neighborhoods that banks had historically avoided, leaving them with little access to other lending options.

Is there a cure for financial trauma?

Luckily, there are ways to resolve financial trauma, and they’re often as simple as talking things out with someone you trust: There are even licensed financial therapists who can provide guidance and support.

If you feel plagued by overspending, making a budget, communicating a monthly spending plan, and refraining from shopping online could help ease some of the anxieties surrounding your finances.

Those suffering from poverty-related financial traumas, who stretch what they have because they know what it’s like to not have enough, could break the cycle of underspending by learning how to feel secure making routine and necessary purchases.

Above all, establishing—and maintaining—boundaries is key for those who have experienced financial trauma. Separate yourself from the narrative associated with the financial trauma, and stop blaming yourself. By decreasing the shame and stigmas associated with this condition, you can develop healthier money habits and, ultimately, foster healing. As with other traumas, learning your triggers, practicing self-care, and creating routines can go a long way in breaking this destructive cycle.