Knowledge Is Key to Helping Consumers Move Past Financial Trauma

Living a healthy financial life is a goal for most individuals and households. However, sometimes past negative experiences with money, or “financial trauma,” can hold a person back and become a barrier to financial success. The experience is more widespread in the U.S. than many realize.

A recent Experian survey of more than 2,000 consumers found 68% of U.S. adults feel they have suffered from or are currently suffering from financial trauma. In addition, 65% of adults admit to experiencing negative thoughts, flashbacks and anxiety when dealing with financial issues.

While the topic of financial trauma is getting more attention in the media, people do not openly discuss it. Many tend to be embarrassed about the influence that past experiences can have on their current financial situation.

We need to reduce the stigma associated with financial trauma, encourage people to talk about it, and take the necessary steps to positively advance their personal financial journey. This all starts with a greater understanding of the issue at hand.

The Impact of Financial Trauma

Financial trauma refers to the various ways significant financial stressors can affect a person emotionally, cognitively, relationally or even physically. Losing a job, struggling to pay the rent or mortgage, and dealing with debt are all examples of factors that may contribute to financial trauma. These experiences not only impact a person’s relationship with money but can lead to feelings of hopelessness or shame.

The effects of financial trauma go beyond just current anxiety. It can create a snowball effect that influences the next round of a person’s financial decisions. For example, a person may react by constantly overspending, or overcompensating by not spending at all, hoping to avoid further financial insecurity.

Beyond this, financial trauma can have a ripple effect that shapes how friends, family, children and the surrounding community perceive finances. Children may adopt similar patterns, perpetuating a cycle of financial struggles for generations to come.

The reality is, even if a person feels they have moved beyond the trauma, unexpected expenses can still trigger anxiety. However, people do not have to be defined by past financial habits or challenges. While experiences matter, it’s how a person reacts and learns from those experiences that shapes who they become. Working toward building resilience and healthy financial relationships can be a strong foundation to move forward.

The Younger Generation Effect

Financial trauma is not specific to any one group. Most individuals have experienced some significant economic headwinds over the past 15 years, due to the impact of the pandemic and/or the Great Recession. However, younger generations are more likely to report feelings of financial stress. For example, 73% of Gen Zers and 77% of millennials report experiencing negative thoughts, flashbacks and/or anxiety about money. Further, 65% of Gen Z adults and 61% of millennials say they often or occasionally witnessed their parents arguing over money while growing up.

On a positive note, Gen Z adults and millennials are seeking alternative ways to achieve financial stability and improve their financial status, particularly in their desire for access to education, their reported need for an established financial plan and their habit of frequently monitoring their credit report.

Knowledge Is Power

One of the contributing factors to financial stressors is that so many individuals were raised in families where finances were not discussed, thus creating a knowledge deficit. For instance, more than 50% of Americans shared that their family rarely or did not openly discuss finances when they were growing up. As a result, they never learned about financial planning, how to leverage credit, how to build a good credit score or how to properly budget. About 36% said they took on more debt than they should have.

How can we reverse this trend and help consumers overcome their financial stressors? For many, the answer lies in improving financial literacy. The previously mentioned survey found that more than 55% of adults feel that access to more financial education would help alleviate their financial stressors, while 37% were unaware of where to access trustworthy information about financial literacy.

Having more substantial knowledge will enable consumers to face their financial futures with a proactive approach and a well-thought-out plan. For example, about 45% of adults believe that establishing a more concrete financial plan could reduce their financial anxieties. That number jumps to 75% for millennials and 74% for Gen Zers who want more financial education.

We all have a role to play in helping consumers live more financially empowered lives. Credit unions can help by providing their members with plentiful access to financial education and health information. Doing so can help consumers overcome some of the financial stressors they may currently be facing while putting credit unions in a position to build trust with new and existing members.

However, helping consumers overcome financial stress and trauma may require a multifaceted approach. Partnership plays an important role. For example, the National Foundation for Credit Counseling (NFCC) gives consumers one-on-one support from more than 1,200 certified financial counselors across all 50 states and U.S. territories.

Their services connect consumers with certified financial counselors to help them address various pain points, including debt management, homeownership, student loans or small business cash flow issues.

With a deeper understanding of the financial challenges or stress consumers may be facing, credit unions have an opportunity to anticipate challenges and respond with meaningful solutions.

Rod Griffin is Senior Director of Public Education and Advocacy with Experian.  

Bruce McClary is SVP of Membership and Communications with the National Foundation for Credit Counseling.