Mental Health Awareness Week: Eight-Step Plan to Tackle Financial Stress as Cost-of-Living Squeeze Continues

There’s no disputing the effect the cost-of-living crisis has had on people’s finances, with household budgets coming under increasing strain since late 2021 when the financial squeeze reared its ugly head. First it was pandemic-fuelled supply chain disruption and the effect of stimulus measures driving up prices, then Russia’s invasion of Ukraine in March 2022 accelerated the situation, sending food and energy prices to new highs.

As inflation ramped up, so did interest rates, with pay growth struggling to keep up, squeezing disposable incomes in the process and leaving many households struggling to cope. While the Government stepped in with a range of support packages, the toxic effects of high inflation, rising borrowing costs and falling real incomes have caused stress and anxiety, even in households who had thought themselves comfortably off.

Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, comments: “The fallout from the cost-of-living crisis has damaged some people’s mental health with a spike in financial stress levels. UK adults have been increasingly suffering from stress, anxiety and hopelessness because of financial concerns, as the legacy of the pandemic and the financial squeeze take their toll on people’s wellbeing, a November 2022 study from the Mental Health Foundation found.

“A separate report* found 56% of UK mortgage holders believe the cost-of-living crisis is affecting their mental health with 30% worried they will miss a repayment within the next year and a third admitting they could not cover their mortgage for more than two months if the household’s main breadwinner lost their job. Meanwhile, Citizens Advice says it helped record numbers of Britons grappling with their finances between January and April this year, with more people than ever facing a monthly bills deficit.  

“Money and mental health are closely aligned with those struggling to pay their bills more likely to perform poorly at work making it hard to hold onto a job, compounding the situation further.

“Nearly two years on from the start of the cost-of-living crisis and household incomes are still failing to keep up with rising living costs with average real household disposable incomes not expected to return to 2021-22 levels until 2027-28 and remember, even in that year living standards were still below pre-pandemic levels in real terms.

“With economic growth contracting in March and inflation remaining stubbornly high causing the Bank of England to hike the base rate for the 12^th time in a row last week, the situation is not going to ease in the short term. There are some signs of economic optimism, with inflation expected to soften significantly in the coming months and interest rates either at or nearing their peak, but that will be little comfort for those in the eye of the storm right now, who might be forced to turn to credit cards, loans and overdrafts to maintain their living standards.”

Mental Health Awareness Week 2023 – which runs from May 15 to 21 – focuses on anxiety this year, something many in financial trouble will understand too well. When people struggle financially, anxiety levels can escalate very fast with each missed bill or unexpected expense only adding to the strain.

With that in mind, here is an eight-step strategy to tackle financial stress head on and improve your health in the process.

Burying your head in the sand is not the answer. Someone whose finances are so dire that they cannot afford the essentials in life, such as food, electricity, transport and household bills, will inevitably find the stress of the situation has a detrimental effect on their health.

They may feel afraid to check their bank balance or open bills sent by post, feel guilty about spending or ashamed to ask for help. This can lead to feelings of anxiety or irritability around family members, problems at work or feeling isolated or lonely if they shut themselves off from social interactions. Let the situation fester for too long and physical symptoms can emerge, such as tiredness, lethargy, poor sleep, eating disorders and more worrying symptoms such as breathlessness, palpitations, and chest pain.

These are all clear signs to take control of your money with the first step in the process actually admitting there is a problem. Being open and honest about your financial woes with family or trusted friends acknowledges the issue and starts the journey towards resolving it. Loved ones can offer emotional support and practical advice on cutting down expenditure in the household, while friends can direct you to the right organisations to get the help you need.

Speaking to your creditors is important but before you do that, it is vital to be in the right headspace to communicate your struggles effectively. Crying or shouting down the phone without a rational plan won’t fix the problem, nor will self-medicating with excessive drinking or drugs. Instead take some time out to get some help – something you can get access to without even speaking to your GP.

Talking therapies on the NHS, such as counselling, guided self-help and cognitive behavourial therapy are effective ways to treat symptoms of anxiety, depression or panic. The service is confidential, with patients able to refer themselves directly without going through their local medical practice, with options for one-to-one or group help. If the situation is desperate or at a crisis point, organisations such as Mind and the Samaritans offer confidential telephone support lines to talk through money problems.

Other ways to get on the right track include lifestyle tweaks such as staying active, whether exercising regularly to boost your mood or having more contact with friends and family, eating a healthy diet, reducing alcohol intake and sticking to a regular sleep pattern by going to bed at the same time and getting up at the same time each day.

Practical actions include updating your CV if you have been made redundant or need a new role with a higher income to cover financial obligations. Paying bills on time, or at least striving to pay part of them, will help keep creditors happy while you try to resolve the situation.

Start by identifying the main issues weighing on your mind, whether it’s a large outstanding credit card balance, expenditure outstripping income, a plummeting credit record, missed debt payments or poorly performing investments. Jot down your money worries in list form and give each one a rating of one to 10, with 10 the worst rating to identify the most pressing challenges.

Sometimes the easiest things to fix can be causing the most anxiety, such as a missed bill payment that you could perhaps dip into your savings to clear. As hard as that may be if the money was being saved for a specific purpose, it will instantly erase the fear that comes with defaulting on a bill.

Then commit to tackling each money woe one at a time. Doing everything at once will feel overwhelming so focus on them one by one, ticking them off as you go to relieve the mental burden.

The easiest way to improve your cashflow is to reduce your expenditure. Creating a monthly budget will help you understand how much money comes in, the essentials you must spend on and the things you can cut out.

It can be as simple as writing down your outgoings on a piece of paper or logging it on a spreadsheet. Include the payments you ‘need’ to make such as rent or mortgage costs, utility bills, council tax, insurance, food, transport costs, phone, broadband and debt payments. Then add in the expenditure you ‘want’ to make such as eating out, holidays, streaming services, gym memberships, saving and investments and so on. Add it all together and then deduct that figure from your net income - the amount you take home every month after paying taxes.

This tells you whether you are living within your means. If you are spending more than you earn, cut expenses from your ‘wants’ list first. Do you really need to go clothes shopping every week or watch four different streaming services? Put saving and investment plans on hold if you cannot meet your everyday bills, and if the situation requires aggressive action, scrutinise the ‘needs’ list too. Food bills can be trimmed by switching to a cheaper supermarket, a car can be traded in for a cheaper model without finance or a holiday switched to the UK rather than overseas. There are always ways to live more frugally.  Carry out a detailed audit of your direct debits and standing orders, for example, by checking your bank and credit card spending, stripping out anything you no longer need.

Treat this cutting-back exercise as a challenge rather than a curb on your lifestyle. It will improve your life, not harm it any further, as the ultimate goal is to live well within your means and be able to save and invest for your future to prevent a similar situation happening again.

One budgeting strategy to ensure regular bills are met and futures safeguarded is the 50-30-20 rule where people direct 50% of their income towards their needs – the essential living expenses such as household bills, food and transport to work.

A further 30% goes towards wants – the things that we like to have such as leisure activities, shopping trips, gym memberships and holidays – while the final 20% focuses on paying off debt, saving for short- and medium-term goals, and investing for the long-term.

If you have missed bills or fear you might do so soon, contact the providers and ask for their help. Ignoring default letters will only exacerbate the situation. By being open and honest, your creditor will offer options to reduce payments in the short term and hopefully develop an affordable repayment plan to help you catch up on missed payments.

You can also apply your own strategies towards problem debt, such as the ‘debt avalanche’ strategy where the aim is to clear the highest-interest debt first. Once that is cleared, you then focus on the next highest-interest debt, clearing each liability one-by-one until they are all gone, while also being mindful to make the minimum payments on your liabilities. This approach reduces the overall cost of your debts, which will please those who like to watch the pennies as they won’t feel they’ve been ripped off by high-interest charges.

Alternatively, the ‘debt snowball’ approach targets the smallest debt first and the biggest debt last with the theory that the smaller liabilities will be easier to clear. This will supply that much-needed psychological boost for those that need encouragement to stay on track, with quick wins along the way as each credit card or loan is cleared.

Finally, a quick fix for credit cardholders with high interest charges is a 0% balance transfer deal, which allows consumers to apply for a new card to clear a debt and then have 0% interest applied for a set period.  This is a great short-term solution as the high-interest charges are immediately removed, instantly reducing stress and offering breathing space to clear the debt at their own pace without fear of it compounding out of control. Just ensure the balance is cleared within the 0% period and remember most of these cards charge a balance transfer fee.

Organisations such as Citizens Advice, the Debt Advice Foundation and StepChange Debt Charity offer free advice on repaying debt and managing money. The support is confidential and includes guidance on creating a budget or debt management plans tailored to your situation – where they step in and liaise with your creditors on your behalf.

For the lucky ones, employers that recognise the link between their staff’s financial wellbeing and the health of the business may offer support. Employees worrying about the state of their finances are likely to be distracted at work, impacting productivity in the workplace and the company’s bottom line as they are more susceptible to leaving.

Whether it’s a salary advance in a time of crisis or private healthcare that offers quick access to a private GP, some employers are getting better at delivering support with some even rolling out full financial wellbeing strategies. These can include free money coaching to help staff track expenditure, budget effectively and save and invest for the future to make their finances more robust. Helplines and financial coaching services can also be laid on to offer further guidance.

Financial coaching is gaining in popularity with Bestinvest also offering free coaching with a qualified financial planner, whether someone is a client of the company or not. While the coach can offer guidance on investment queries such as rebalancing a poor-performing portfolio, they also support those in financial distress through the basics of money management and how to plan for short, medium and long-term financial goals effectively.

Once you have a handle on your financial stress, set out a fresh strategy for the future to ensure you don’t face the same issues again in the future. Set up your finances so that you have enough in your current account every month to cover essential bills, as well as access to emergency funds to cover any surprise expenses. Also, automate all of your big payments to leave your bank account at the start of the month after you have been paid, whether it’s utility bills, mortgage, car finance, debt payments, phone bills and also savings and investments. That way you know exactly how much you have left for everyday expenses.

If overspending is your issue, make it harder to access your cards so that you cannot shop online easily, develop strategies to delay purchasing such as taking a 24-hour break before you buy after spotting something you like. Even putting your credit card in a plastic box filled with water in the freezer would help, though an easier option is to request a pause on new transactions with your card provider.

Once the immediate crisis is under control, building an emergency fund to cover surprise expenses is vital, with this money ideally held in an easy-access savings account separate from your current account so it is there when you need it but not so accessible that you dip into the fund all the time.

Having the right insurances in place, such as critical illness, life cover and loss of earnings will also give you greater protection against the unexpected, as will sound home and car insurance policies to protect key assets – though of course the more cover you take on the more you pay so be selective.

Finally, set out short, medium-term and long-term goals for your savings and investments. While a summer holiday can be saved for in a regular savings account, longer term goals such as a child’s education, a wedding, house deposit or retirement can take advantage of low-cost, tax-efficient options such as Individual Savings Accounts that let up save up to £20,000 free of any tax on your income or savings. Meanwhile, private pensions are a great way to secure your future and reduce your income tax liability as the government gives you generous tax relief in return.

* According to Dye & Durham