What is financial stress and how does it affect our decisions?

With rising fuel costs and interest rates on top of our already high cost of living, financial stress is hitting many of us hard. 

If you’re worried about money right now, you’re probably already looking for ways to cut back your spending.

And if it’s causing distraction — for example, you’re worrying about money when you should be concentrating on driving or work — there might be something deeper happening.

It’s not always easy to spot when you’re in the thick of things, but it’s important to note the possibility so you can do something about it.

Financial stress impacts your thinking

When you’re worried about money, your brain runs a script in the background.

It’s the voice in your head asking questions like:

“What will I do if my landlord puts up the rent? Maybe I’ll have to move back in with my parents.”

“Which meals do I need to skip this week?”

These questions aren’t hypothetical. Recently, a friend had confided in me she had to choose between using toilet paper instead of tampons so she could afford food that month.

While that script is running, it’s chewing up your brain space, formally known as cognitive capacity.

That’s space you need to make good decisions. The effect is known as “poverty brain” (you can thank researchers at Princeton University for the unflattering name).

They measured the impact: it’s the same as losing 13 IQ points. Like being over the legal alcohol limit for driving or going 24 hours without sleep.

You wouldn’t be allowed to operate a vehicle or work on a construction site like that, but you’ll go about all your normal daily duties under similar impairment when money is worrying you.

The problem is, bad decisions aren’t just constrained to your finances. You can make worse decisions than you normally would in your work life, your relationships, and with your health.

But until that day arrives, what can you do about it?

You might need an expert’s help

There’s a lot of rhetoric about getting financially educated to solve this issue.

While I’m generally supportive of education, expecting to solve your own problems when mired in stress is like expecting a drowning person to save themselves by reading a book on swimming.

It’s not the right time.

You need help to get out of trouble first. You can learn how to avoid getting back into that situation when you’re feeling more secure.

So, who’s going to save you?

Financial counselling is your best bet

I suggest calling a financial counsellor (FC) first. FCs are the unsung heroes of Australia’s personal finance landscape. They’re free, they can’t sell you anything, and anyone can access their services.

You can talk to an FC on the phone via National Debt Helpline (NDH), or find one local to you and book in for a meeting face-to-face or online.

FCs can help you navigate options like asking for financial hardship assistance with creditors such as power companies and banks.

They can talk to creditors on your behalf, advocating for you. And they will refer you to complimentary services such as Legal Aid, Way Forward or Good Shepherd if they fit your needs.

Specialised financial counselling services listed on NDH’s website include:

• Mob Strong Debt Help, to speak to a First Nations FC
• Rural Financial Counselling Service
• Small business financial counselling

Choose the one that best suits your situation.

While you’re waiting, NDH has excellent explainer articles on everything from rent to school expenses. These are a great starting point for anyone feeling the pinch right now.

For those who haven’t quite hit the point of financial stress yet, you can still see an FC to get on the front foot if you want to.

Or, you can do something I do regularly, and certainly more often when I’m feeling a bit worried …

Create a risk management plan

Worry is the absence of a plan. You’re stressed at least in part because you don’t know what you’re going to do. 

It’s time to change that, in three steps:

• Write down what’s worrying you. The thing that’s keeping you up at night, or running through your head when you’re distracted.

• Write down what you could do in advance (if anything) to stop it happening. For example, is there an insurance policy you might want to take out? In risk management parlance, this is called prevention. If there’s something feasible you can do in advance, pop it on your to-do list and get it done.

• Write down what you could do to lessen the impact if the worry comes to pass. For example, are there services you might access, or people you might turn to for help? This is known as mitigation. Having your mitigation steps written down gives you something to refer to if things get dire.

If you’re not sure what you would do to prevent or mitigate a risk that’s gnawing at your brain, again, talking to a financial counsellor is a great place to start.

Lacey Filipich is a financial educator and the author of Money School.

This article contains general information only. You should consider obtaining independent professional advice in relation to your particular circumstances.

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