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How Anxiety Affects Our Personal Finances

The relationship between anxiety and saving money is a vicious cycle.

“The anxiety it has brought has changed the whole atmosphere in our house. We are bored and get agitated easily. ... The uncertainty is scary!” –Echo Research survey respondent (on the effects of the coronavirus pandemic).

Just two months ago, when the American economy was humming, and the unemployment rate was the lowest in decades, 77% of Americans still reported feeling anxious about their financial situation. Things have gotten a lot worse since then. The coronavirus pandemic has disrupted our lives. Millions of Americans have lost their jobs or shut down their businesses with no clear indication of when the recovery will begin or how long it will take. The future seems dark and uncertain. Virtually everyone is anxious about money and their financial futures, and those who were anxious before are even more so.

Source: Michelle Henderson/Unsplash
Source: Michelle Henderson/Unsplash

Anxiety has an adverse effect on virtually every aspect of our financial decision making. In another post, I wrote about how anxiety affects our buying behaviors. For our financial wellbeing, saving money consistently is just as important as managing how we buy products and services. For instance, having an emergency fund saved up that is enough to cover several months of expenses is the most effective way to withstand an unexpected crisis like the current one. Yet anxiety undermines saving behavior and makes it more difficult to perform the very behavior that will reduce anxiety. In this post, I want to consider what the research says about the toxic effects of anxiety on our money management activities, particularly saving behavior. I also want to provide some ideas on what we can do to avoid its harmful effects.

My research, as well as other studies, have found that to save money on a regular basis, requires that we adopt a combination of ingrained habits, and challenging and meaningful saving goals. Surprisingly, a person’s income tends to be only moderately associated with saving money consistently, whereas psychological factors play a more significant role. Economists Richard B. McKenzie and Dwight R. Lee point out that: “By world standards, most Americans start with a reasonable income base from which they can save, invest, and build their net worth.” This is the reason why the role of anxiety in saving behavior is important and needs to be understood.

Anxious people find it harder to save money consistently.

We should expect that when people feel uncertain about their future and feel threatened, they should become more concerned about saving money. However, this is not the case. Research shows that anxiety is not conducive to saving money consistently. One 2012 study conducted with households that earned between $20,000 and $80,000 annually found that lower anxiety was associated with saving regularly. More anxious people, on the other hand, were also less likely to do such things as make plans on how to use money, monitor their spending on various expenditure categories, or set savings goals. Another study conducted with college students who sought financial counseling concluded that “spending beyond earnings, difficulty in paying bills due to inadequate income, and reaching the maximum spending limit on credit cards were all behaviors significantly associated with anxiety.” These harmful behaviors explain why anxiety undermines consistent saving behavior.

Saving consistently and accumulating savings acts as a buffer against anxiety.

The reverse is also true in the anxiety – saving money relationship. Saving money consistently is, of itself, therapeutic and is associated with lower anxiety. One study of Swedish consumers found that those who saved money from each paycheck also reported feeling less anxious and more secure in their current and future financial situation. Another paper that examined “death anxiety” found that saving money essentially plays a protective role. When study participants were asked to mentally simulate positive outcomes that would occur to them after saving a substantial amount of money relative to thinking about spending a large sum of money, they reported experiencing less fear of dying. The authors eloquently point out the affirming role of saving money as follows:

“Saving can help weaken the insecurities and anxieties born from the uncertainty inherent to the future. It can help people feel competent and capable as the masters of their financial fate. It can increase the sense of possibility and hope, making people anticipate the future with joy as opposed to dread. Saving involves investing in one’s future self, which we generally believe to be conducive to existential wellbeing. Finally, given the socially desirable nature of saving in general, it can be a way for people to attain self-worth within their culture.”

What can anxious individuals do to save money?

Clearly, the bulk of the research suggests that the anxiety—saving money relationship is a vicious cycle. Anxiety makes people less effective at saving money consistently and not having savings makes people anxious. Breaking out of this vicious cycle is not easy. It requires understanding exactly how anxiety affects saving behavior. Here are three specific strategies to consider based on psychological research.

Source: Kyle Broad/Unsplash
Source: Kyle Broad/Unsplash

First, research has found that anxious people tend to generate more avoidance goals. Savings goals are, by and large, approach goals because they are about rewards such as a wedding, college education, or retirement. Second, they also tend to form more avoidance plans that favor safe and risk-averse actions and fewer approach plans. These differences suggest that framing saving money as a way to avoid negative outcomes may be effective when anxiety is high. For example, focusing on the sense of security that having savings will provide may help anxious people start saving money. And third, people are more likely to save when they use a more abstract mindset and think in high-level terms than when they focus on specific details. Thinking abstractly is something that anxious people naturally do and should leverage explicitly. Instead of thinking about saving for a specific, well-defined purpose (e.g., saving for a summer vacation to Florida), it may be more effective for an anxious person to frame the goal in more general terms (saving for a vacation).

In this time of high anxiety, when the paychecks of many are shrinking or drying up, it seems foolish to think about saving money. However, counterintuitively, given that most Americans were anxious about their finances even before the Coronavirus pandemic, this unsettled period provides us with an opportunity to break some of our bad money habits, set ambitious saving goals for our futures, and try to break the harmful anxiety—saving money vicious cycle.

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