Do you compulsively overspend? Or maybe you have been called an extreme cheapskate? Do you ignore your finances or are overly-obsessed with them? Financial trauma is a real issue that many of us have. If you have an unhealthy relationship with your finances and money, it is likely that you suffer from some form of financial trauma.
In this post we will define financial trauma, discuss the signs and symptoms of it, the causes of it, and how to begin to heal from it.
Key Takeaways:
- Financial trauma leads to an unhealthy relationship with your money and finances
- Everyone handles events uniquely and what may cause trauma to one person may not impact another
- Any event may trigger a trauma response in a person – from a divorce or bankruptcy all the way to perpetual anxiety of financial insecurity.
- The most common signs of financial trauma are: overspending, underspending, financial avoidance, accepting financial abuse, and a scarcity mindset
- You can overcome financial trauma, but it may take work and help & support from trusted people.
What is Financial Trauma?
Financial trauma is an unhealthy relationship with your finances and money due to life events. Like most forms of trauma, it is unique to you, both in what may trigger it and how it manifests in your behaviors.
Two people can experience the same event and one can be fine while the other develops long-term financial trauma.
All personal finance is dependent upon your behavior, and financial trauma can be a big hinderance to reaching your financial goals due to how it influences your behavior.
What are the 5 Signs of Financial Trauma?
Financial trauma can manifest in many ways, but there are 5 common symptoms showing you may be suffering from it:
- Overspending or compulsive buying
- Underspending or extreme frugal behavior
- Avoiding Finances and talking about money
- Accepting of Financial Abuse
- Scarcity Mindset or Inability To Grow Wealth
Financial Trauma Caused Overspending
Overspending and compulsive spending is a common response seen in people with unprocessed financial issues. This can show up in many ways – spending too much on major purchases or splurging on a particular item obsessively.
Some people manifest an almost obsessive-compulsive disorder like need to collect items, even if they can’t afford it. For instance, people who have dozens of purses or sneakers that they don’t use. If you are unable to avoid purchasing a new item, it can be a sign you suffer from compulsive spending.
Other people use spending as a cathartic experience when they get stressed or lonely. If you had a rough day and go buy an item to feel better, this can be a sign of an unhealthy relationship with your finances.
No matter how you compulsively spend, it is likely setting back your financial success, especially if you are spending money you don’t have or didn’t budget for.
Financial Trauma Caused Underspending
In contrast, some people turn to extreme frugalness when they experienced financial trauma. This can manifest even if you are well-off financially and have the money to spend.
Being excessively risk adverse is a sign of fear and scarcity and usually stems from experiencing poverty or past financial failures.
At first glance, it may seem like extreme underspending would lead to long-term wealth, but many of the behaviors can actually be counterproductive to wealth.
Some people will spend hours clipping coupons and driving to different locations to save small amounts of money. The resulting dollars per hour payoff from their efforts is significantly below even minimum wage. You would be better off financially from working a few hours and spending normally than all the time spent trying to save a miniscule amount.
Compulsive underspending can also lead to hoarding behaviors as you hold on to items rather than risk needing to make a future purchase.
Financial Trauma Caused Financial Avoidance
Sometimes financial trauma shows up as a complete avoidance of all things financial. It is a self-defense mechanism to avoid experiencing the anxiety and stress of your finances, so you just ignore and avoid the topic.
You may avoid opening bills, or looking at bank statements, or avoiding the topic of money and finances completely.
Financial avoidance can lead to large fees from penalties and accruing large amounts of interest from not making payments. It can also lead to not saving and even missing out on free money like your company’s 401(k) contribution match due to not enrolling.
Financial Trauma Caused Financial Abuse
If you are experiencing financial trauma, you may not be comfortable setting financial boundaries. If you are unable to discuss money or say no when people ask you for money (especially money you don’t have), it can lead to under-earning and under-saving.
For example, if your boss asks you to work extra and you are unable to ask for compensation for the time, you are hurting your income.
Or if a friend or family member continually asks for money and you can’t say no, even if you don’t have it, you will be hurting your own financial security.
A lot of times, this is driven from a learned mindset about your self-worth and believing you don’t deserve to be financially stable.
Financial Trauma Caused Scarcity Mindset
Lastly, financial trauma can manifest in a scarcity mindset. This is where you view the world as limited and avoid risk to hoard your resources.
People may avoid investing their money and instead keep it all in bank accounts, or worse, in cash. Most bank accounts perform at or below the level of inflation, meaning every year they don’t gain any additional purchasing power and are treading water.
By not seeing the opportunity of capturing more money, you wind up with a lower net worth.
What Causes Financial Trauma?
Everybody handles events differently so the causes of financial trauma will vary between individuals. There are common major financial events that tend to lead to most cases and they consist of:
- High Debt & Financial Insecurity – carrying high debt and/or being financially insecure leads to a culmination of financial stress. This can lead to you being anxious and easily triggered with money. The student loan crises may be a sign of impending wide-scale relationship issues with finances.
- Evictions, Defaults, & Bankruptcies – Losing a house or claiming bankruptcy can lead to decades of financial struggles and a feeling of personal failure.
- Divorce – Divorce can be an expensive life event. Even in an amicable divorce you can see your assets cut in half or more. And on top of that, your expenses can increase as you need to have your own residence, start dating, and need to pay the full price for items that were being shared. Additionally, if your spouse handled the money, you may need to learn about managing finances while going through an already emotionally trying time.
- Unforeseen Life Setbacks – Accidents, natural disasters, and crime can all be a sudden financial shock. These events can derail even a strong financial situation.
- Generational & Collective Trauma – If you grew up in area that was financially disadvantaged or parents who had an unhealthy relationship with finances, it can lead to you inheriting the trauma. This can be some of the most difficult trauma to process as it has been ingrained in you since childhood and you don’t have strong financial role models.
Whatever the source of the financial issues, it can have a debilitating or destructive effect on how you interact with finances. It is crucial to process your financial trauma and try to heal so you can grow wealth.
How to Heal Financial Trauma
The first step to resolve your financial trauma is to recognize the signs that you may be experiencing it. Then you should watch for what triggers you and causes you to have counterproductive behaviors.
You should also find a trusted person you can communicate with about your situation. This can be a spouse, friend, family, or even a therapist. As part of this, you should try to develop a plan on how go foward and address your issue.
For instance, if you are a compulsive underspender, you may go through and throw out some of the items you are hoarding and start making small planned purchases.
It is important to progess at a rate that is sustainable for you. You want to push your comfort zone, but not so much that you pull back.
Additionally, if you fall off your plan and revert to your prior habits, it is important to not let it derail you further. Objectively look at what caused you to go off the target and set up a plan to handle that trigger in the future.
You will need to do some self-work in recognizing your emotions without feeling shame or judgement on them. It is ok to feel anxiety, but try to create space to experience and recognize the emotion and let it pass without judging it. Then calmly proceed with the action you should take.
For instance, if you compulsively buy shoes and you are in a store and feel the compulsion. Don’t feel shameful. Recognize the emotion you are feeling, say it out loud if it helps, and let it flow through you till you are able to move on without the unnecessary purchase.
Above all, realize that financial trauma is something you can beat, but you need to take it at a pace that sets you up to succeed.
The Final Word
If you feel like you have an unhealthy relationship with money, you may be suffering from financial trauma. Even if you never had a big traumatic event in your life, the daily stress of money can be enough to manifest in certain behaviors.
If you find yourself suffering from any of the signs of an unhealthy relationship with your money and finances, you can take steps to heal. It is important to fix your mental money issues to make progress on your financial goals.
Frequently Asked Questions (FAQs):
Financial trauma is an unhealthy relationship with your finances and money. It is triggered from a negative financial event and can manifest into many different behaviors depending on the individual.
Financial trauma can stem from any negative interaction with money & finances. However, some common sources of financial trauma are:
1) High Debt & Financial Insecurity
2) Evictions, Defaults, & Bankruptcies
3) Divorce
4) Unforeseen Life Setbacks (Accidents, Natural Disaster, Crime, Etc.)
5) Generational & Collective Trauma
Financial trauma can manifest in a unique way for every individual. However, there are 5 common signs of financial trauma:
1) Overspending or compulsive buying
2) Underspending or extreme frugal behavior
3) Avoiding Finances
4) Accepting of Financial Abuse
5) Scarcity Mindset or Inability To Grow Wealth
Everyone heals differently. If you are struggling with ingrained money issues, you will likely need time to heal. Some of the recommended steps are:
1) Identify the problem and how it manifests into symptoms for you.
2) Identify your triggers
3) Make a plan to address the problem
4) Find a support system and accountability partners
5) Don’t feel shame when you feel an emotional response, let it pass with out judgement and give yourself space to make a decision
6) If you fall off your plan, realize it can be a temporary set back but don’t let it spiral into completely derailing your progress.
Above all else, realize it takes time to heal trauma but in the end it is worth it.