03/22/2017 12:34 EDT | Updated 03/22/2017 12:34 EDT

When We're Stressed About Money We Make Bad Decisions

Couple, Man angry and upset after looking at credit card statement.
IuriiSokolov via Getty Images
Couple, Man angry and upset after looking at credit card statement.

If you're stressed about money, you're in good company. According to the 2015 American Psychological Association (APA) study Stress in America, nearly 72% of Americans reported feeling stressed about money at least some of the time, and 22% reported experiencing extreme money stress in the past month.

You might think of money stress as just a fact of life. A lot of people struggle with credit card debt, debt management and other financial problems.

Here's what the research says about the link between money stress and financial problems -- and four ways to mitigate that stress.

Money Stress Is Mentally Exhausting

Mental bandwidth is the cognitive capacity of the human brain. Once you've reached the end of your mental bandwidth, you run out of the steam to stay sharp and make well-thought-out decisions. For instance, you could easily forget that you were supposed to babysit your grandkids if you're distracted by a broken computer, a sick assistant, or a looming deadline.

What behavioral economists have recently discovered is that our mental bandwidth can easily be used up by money stress. The consistent stress of dealing with money problems is mentally exhausting, a burden similar to losing 13 IQ points or an entire night's sleep.

So what does the mental burden of money stress do to you? Specifically, your brain on money stress is more focused on rewards and less able to recall the consequences of various courses of action. This is why it's not unusual for someone to become so stressed after receiving their credit card bill that they wrack up another $200 in retail therapy. At the time of the stress, all they can think about is the pleasure of shopping, even though mounting debt is what triggered the stress in the first place.


Stress can also affect your reaction to risk. The reflection effect describes the nearly universal tendency of people to make risky decisions when facing large possible losses, and conservative decisions when feeling tempted by big gains. Though the reflection effect can come into play even in non-stressed decision makers, it's much more acute when individuals are dealing with extreme stress.

4 Ways To Cope With Money Stress At Any Age

All of these studies may give you sense that money stress is a catch-22: whether you ignore or worry about your money issues, they multiply. Thankfully, there are several scientifically proven methods for dealing with money stress without adding to it:

1. Use a money management app.

Personal finance apps are incredibly easy to use. You can manage your money more quickly. They help you pay bills, stick to your budgets, and even keep an eye on your investments. Here are five money management apps we particularly like.

2. Worry for a set amount of time.

Money stress often zaps our mental bandwidth because it's constantly on our mind. If your financial worries are intruding on your thoughts consistently, set yourself a five-minute timer and indulge in your money concerns. To make the most of this timed worry, commit to coming up with something each time that will help you feel more in control. For instance, you might decide to meet with a financial advisor if you're worried about your investments.

3. Practice self-compassion.

Often, money stress can be compounded by comparisons to others or by where you believe you should be at a certain age. Practicing self-compassion can help ease your stress. Self-compassion will remind you that there's nothing wrong with struggling, and it may give you the motivation to improve rather than blame yourself.

4. Don't let stress take control.

Money stress may be a fact of life, but it doesn't have to make your financial decisions for you. Being aware of stress's effect on your decisions and relationships can help you keep it from derailing your life.

Emily Guy Birken is a financial blogger and the author of three books: The Five Years Before You Retire, Choose Your Retirement, and Making Social Security Work For You. Based in Milwaukee, Wisconsin, she specializes in writing about retirement and behavioral economics.

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