Understanding the psychological toll of financial instability

Economic downturns are often met with conversation about plunging stock markets or rising unemployment. But beyond the numbers and headlines we see in the news, economic downturns can have a deeper, more personal impact on individuals’ mental health, shaking our sense of safety and identity. Researchers continue to look into the link between psychological wellbeing and economic state, and as they do it is becoming more clear that economic hardship is a mental crisis much as it is a financial one. With the current state of our economy, it is important to understand the often invisible effects of financial instability, and how to work through it effectively.

Economic recessions are usually caused by a shock to aggregate supply (when something interferes with the economy’s ability to make something), or aggregate demand (when something interferes with businesses’ or individuals’ ability to consume or invest in something). The specific causes of a recession vary, and is usually the combination of multiple factors including financial crises and external events.

The most recent stock market crash was driven by concerns about President Trump’s tariffs and the implications they would have on our economy. The announcement of these tariffs, especially on Chinese businesses, led to extreme selling pressure as investors were fearful that it would trigger a trade war, causing economic slowdown. The uncertainty that these tariffs caused led to a change in investor sentiment. Many became more risk-averse, sold off their stocks, and contributed to a sharp decline in market values.

As individuals know, the effects of a stock market crash can be deeply personal, reducing an individual’s wealth, affecting things like retirement savings, and potentially leading to job losses. Beyond this, the impacts of financial instability can ripple outwards, impacting relationships, the development of unhealthy habits, and families.

Recent research on the several social determinants of mental health has shown that health is shaped largely by social and economic conditions, as well as by health and welfare systems. Recessions can amplify key risk factors for poor mental health – specifically unemployment, debt, and loss of socioeconomic status. Navigating these factors, on top of the regular stressors of daily life may be extremely overwhelming. In other cases, economic downturn can impact mental health by impacting certain protective factors, such as job security and welfare protection programs. Especially for families who do not have a financial cushion, losing the sense of stability in their job can be detrimental.

Financial strain has immediate impacts on the individuals’ mental health. Recent reviews assessing health consequences of economic crises have highlighted a strong relationship between periods of economic downturn and psychopathology ranging from suicide to the onset of mood and anxiety disorders, to exacerbated psychological distress.

Financial stability gives people a sense of control over their lives – and this sense of control is fundamental to mental well-being. When finances, or the state of the economy is uncertain, this can cause individuals to feel hopeless, often developing unhealthy habits or coping mechanisms in an effort to reclaim that sense of control.

One specific impact on the development of negative habits can be seen in an increase in alcohol usage. Stress and anxiety caused from loss of jobs or other financial hardships, can lead to individuals resorting to alcohol consumption to cope. This alcohol usage, and in extreme cases, dependence, can worsen mental health, starting an unhealthy cycle that feeds into increased intake as well as the development of poor mental health. The behaviors and mental state of an individual can ripple outwards, putting strain on the family dynamics.

The family stress model is an influential family process model that illustrates how socioeconomic disadvantage can impact child outcomes via the effect it has on the parents. Children are extremely sensitive to their environment, and parental treatment towards their children, as well as observed behavior can be strongly correlated with the emotions children feel and the habits they develop. The stress that is put on parents may lead them to act differently (perhaps more harshly) toward their children, who then may internalize this behavior, thinking they did something wrong. This tension between children and parents can weaken the mental health of individuals on both sides of the relationship. In fact, it has been found that higher poverty rates are associated with increased rates of family conflict, child neglect and abuse, and intimate partner violence.

Beyond the home, a worsening economy can impact different funding for public schools and community health centers, both of which are needed by youth and families. Research has shown that different tools for positive parenting, prevention of child neglect, and developing resilience can allow for families to cope effectively with the stress that an economic downturn can produce.
This is all important to keep in mind as we work through the weakening and ever-changing economy we have been facing in the past months. Opening the news right when you wake up, you are faced with new updates of where our economy stands. It’s important to recognize the toll that this constant stream of financial uncertainty can have on our mental health. By understanding the fragility of our emotions in response to periods like economic recession, we may be able to implement certain habits or coping mechanisms to mitigate the stress or anxiety felt.

Oftentimes, people assume that being resilient during a recession means staying focused on practical matters—budgeting, saving, investing wisely. While these are essential steps, resilience also means protecting your mental health and emotional well being. It is important for individuals to find healthy coping mechanisms to face their stress. For some, this may mean intentionally making time in your day for outdoor walks, journaling, or getting away from your screens. For other individuals, they may prefer therapy, support groups, or talking openly with loved ones about their concerns. These practices of emotional grounding can make a big difference in the long run. While it may sound silly to hear someone say that journaling or meditation can help you cope with something as serious as an economic downturn, the point is that caring for your mental health is never trivial – especially in times like the present when the world can feel unpredictable. In fact, caring for your mental health may be one of the wisest and most sustainable practices you can adopt.