What are financial illnesses?

Elin Helander, chief scientific officer at financial wellbeing app, Dreams, answers all our questions on financial illnesses. 

1. How would you define "financial illness" and what are the main types of money-related disorders?

financial illness

Financial illness is about low financial literacy, a lack of emergency funds and a lack of long-term savings or a lack of retirement plans. In scientific studies that we at Dreams conduct together with our scientific advisors from UCLA and Linköping University, we define it as low financial security and high financial anxiety.

When it comes to financial illness, it is important to not only look at an individual’s actual financial situation but also their psychological experience of it. Many people suffer from financial illness, and for some, their negative financial behaviour is severe enough to be classified as a diagnosis.

"Financial illness describes those with low financial security and high financial anxiety"

When it comes to money disorders, there are formal diagnoses that can be found within the Diagnostic and Statistical Manual of Mental Disorders (or DSM). Some of the many money disorders defined in the DSM include impulsive consumption, addictive gambling, buying lottery tickets instead of saving money and believe in being saved by "the big jackpot".

In today’s world of complex monetary systems and irrational economics, widespread financial illiteracy stands between many individuals and their overall wellbeing. Financial literacy numbers are sobering. Worldwide, two in three adults are financially illiterate. In major advanced economies, on average, 45 per cent of adults are financially illiterate.

Scientific studies show mixed results about whether financial literacy automatically leads to better financial decisions, but if you are financially literate it certainly helps you to pay attention to fees, better grasp the concept of different costs of borrowing money or how to accumulate retirement wealth, to name a few examples.


financial pressures
It is important to note that our emotions and other external factors play a key role in our spending habits and how we actually behave when it comes to our finances. This is why we have developed our app to target both the users’ financial knowledge and to nudge and boost their behaviour in a direction that leads to more savings.

Compare it to climate change if you will. We are all very informed of its negative effects and know of ways to combat it, but still, it is hard to change people’s actions. To achieve positive change, we need to make it easy for people to ‘make the right decisions’; what’s typically called nudging or choice architecture.

 

2. How common are money-related disorders and financial stress?

british coins

What we have seen from previous surveys is that 60 per cent of young adults lack minimal savings (Scottish Widow, 2018) and three in four millennials mention money as a top source of stress in their day-to-day lives. Seventy-three per cent of millennials say their generation overspends on unnecessary indulgences and 21 per cent states that they are not planning and saving for retirement (Better Money Habits, Millennial Report, 2018).

Of those who have some form of debt, two fifths (38 per cent) have felt anxious and a third (34 per cent) have suffered from stress, depression (29 per cent) or mood swings (21 per cent) because of their financial situation (The Money Advice Service, 2017).

As a way to mitigate the negative feelings that often comes with having debt, close to one in five (18 per cent) of those with debt reveal that they have spent more money in an attempt to make them feel better (The Money Advice Service, 2017).

 

3. Are these disorders likely to have become more common during the UK lockdown?

shopping online

At Dreams we're currently running a scientific study on the impact of lockdown on spending habits and financial illnesses, together with our scientific network from UCLA and LiU. Looking at existing data from the latest months, we have reason to believe that this is the case and that people are developing money disorders during the lockdown.

We have, for instance, seen that around 65 per cent of people in the UK are feeling worried about the future, 62 per cent are feeling bored, 60 per cent are feeling stressed or anxious, and 28.5 per cent report that the lockdown has worsened their mental health (Opinions and Lifestyle Survey, Office for National Statistics, 2020).

Amongst adults (regardless of whether their well-being had been affected), over 1 in 5 people (21 per cent) report that they expect it would be more than a year before life get back to normal, and more than 1 in 3 (36 per cent) expects their financial situation to worsen over the next 12 months (Opinions and Lifestyle Survey, Office for National Statistics, 2020).

"People are developing money disorders during lockdown"

All these feelings of stress, anxiety, worry, and loneliness can make us more present-focused—that is to say, focused on our immediate reality and circumstances—and do things here and now that will mitigate those negative feelings. Data has shown that online shopping has gone up in many countries since the COVID-19 pandemic. Some are even applying for a direct loan online to fund this activity. For instance in the UK in April, the proportion spent online reached a record high at 30.7 per cent (Retail sales, Great Britain: April 2020, Office for National statistics). Online gaming has also increased since the COVID-19 outbreak; 36 per cent worldwide and around 24 per cent in the UK (Coronavirus: impact on the gaming industry worldwide, Statista, 2020).

being financial savy

For those experiencing loneliness and boredom due to lack of excitement and interaction from spending most of their time at home, activities like online shopping and gaming can fill that void of novelty. It becomes a way to entertain ourselves and cope with any unpleasant feelings that may have arisen due to our circumstances. Many people will be able to keep their shopping and online habits on a decent level, but for some these behaviours might cause them to shop more than they can afford or, alternatively, spend too much time and money on gaming.

In a survey of 1,000 British gamers, it was shown that, since the COVID-19 outbreak, three-quarters of gamers are spending more money on gaming–and nearly one in five (17 per cent) admitted to paying £100 ($123) more every month on “in-game purchases, new games, hardware or other related items” than they would have done previously (Bullguard and custom builder Chillblast, 2020).

 

4. What should you do if you think you have a money-related disorder?

money worries

First of all, don't feel ashamed. You should know that you are not alone having money related issues and feeling stressed and worried as a consequence, and there are things you can do to better your situation.

  1. Ask for help. If you have reason to believe that you are suffering from a money related addiction, for instance, linked to gambling, gaming or online shopping, you should talk to a professional therapist that can help you handle the triggers behind your addiction. Acknowledging that you need help is never easy, but it’s one of the best things you can do for yourself. We live in a society where companies are experts at getting us to use their services and consume their products. Online we are frequently bombarded with digital ads perfectly tailored to targeting our needs and psychological reward system. However, we are all responsible for our own financial situation, and therefore it’s important to get help as soon as possible if you don’t feel as if you can handle your situation on your own.
  2. Create a budget. If you do want to control your spending behaviour, or at least buy a little more mindfully, you should start with creating a budget. This gives you the opportunity to get an overview of your finances, what incomes you have and what financial expenditures you have. When we are feeling stressed about our money situation it’s very easy to stick our head in the sand and go into denial about our situation. But denying and ignoring our financial situation only gives us short term anxiety relief, and to create a better financial situation in the long term, we need to start taking control of our finances today.
  3. Save for a buffer. A buffer (“emergency fund”) is our lifeline when facing unforeseen circumstances and emergencies. Having a saving account with 3–6 months of your living expenses set aside for future unforeseen expenses will help you feel more in control and less financially stressed.
  4. Set up a long term savings account in a fund. Start saving for a long term goal. You don’t have to put aside a lot every month (depending on your financial situation) but through the power of compound interest, this long term savings will grow over time. Many of us are affected by something called “accumulation bias”, which is a cognitive bias describing our tendency to not understand that small sums grow big over time. By making new contributions to your account regularly, this long-term savings account has the potential for your money to steadily grow until you're ready to use it in the future.

 

5. What are some money-saving/handling tips that could help people to stay financially healthy and avoid spending traps?

looking after money

Increasing our self-control is one important predictor to good financial health. This means improving our ability to regulate our emotions, thoughts, and behavior in the face of temptations and impulses. Ways you can strengthening your self-control is by:

  1. Think about your future self

Research we have done at Dreams together with researchers from UCLA has shown that thinking about your future self can make you save more money. By making our future self more closer to our present self, we feel a closer connection to the person we want to be and the life we dream of living in the future.

  1. Visualise your saving goal

Whatever your savings goal is, make sure to create a visual representation of it. By imagining our savings goal it feels more concrete and within our reach. It keeps us motivated and committed to doing what it takes to achieve the dream. In the Dreams app you can describe and add a picture when you create a dream, where the idea is that your dream will thus become more personal and real to you. Which type of visual description you choose to use does not matter, but a good tip is to have it visible to you in everyday life (for instance in your mobile phone).

  1. Make it easier

One of the most effective ways to achieve a savings goal is to make savings automatically, you could set up automatic savings with your bank or through a saving app like Dreams. It is easy to postpone saving in favor of temptations we want to spend money on here and now. Furthermore, if we do not have a habit of saving, it is difficult to remember to put money away if we have to do it manually every time. We can get around this by automating our savings, as we do not have to rely on ourselves to remember to save. This can make it easier for you to reach your saving goal, perhaps even faster than you thought.

  1. Use tools

There are several apps and digital tools out there that can nudge you to make better financial decisions every day. One of them is our savings app, Dreams, which is designed with insights from behavioural science to help people save money in an easy and entertaining way. Creating new healthy habits often takes time and effort, but with the help of technology, it can become a lot easier to set targets and help us stick to the behaviours needed to reach them.  

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