Ever had the feeling that no matter how much you save, it could all disappear overnight? That anxiety, that nagging fear that something will go wrong, is a form of financial trauma. It’s more common than you think, affecting every generation – from Gen Z to the Baby Boomers and even the Silent Generation who’ve lived through wars, recessions, rising costs, and a global pandemic.

Meet Sara: A Classic Case of Financial Trauma Sara, a 42-year-old marketing manager, earns a comfortable six-figure salary. But despite her solid income, she can’t shake the fear that she’ll lose everything. She checks her bank balance daily, obsessively tracks her spending, and hesitates to make even the smallest investment. 

After losing her job and seeing her investments wiped out in 2008/2009, Sara developed an intense anxiety about her finances. Even though she found a different job soon and has progressed in her career, she has never really felt financially secure. 

Sara’s story might feel familiar. Many of us carry the emotional scars of past financial hardships, and they shape the way we handle money today, from overspending to avoiding financial responsibilities altogether.

What is Financial Trauma?

Money isn't just about numbers; it’s deeply personal. Financial trauma happens when a distressing event related to money leaves an emotional scar—whether it's losing a job, going through a divorce, growing up with financial struggles, or feeling ashamed about money during your formative years.

These experiences can shape how you think and act around money, often leading to fear, anxiety, and doubt. Managing finances can start to feel stressful and overwhelming, even impacting your health and relationships. Financial trauma might show up as overspending, extreme saving, or avoiding financial decisions altogether—behaviors often driven by emotion, not logic.

Understanding how these traumas affect your money habits is key to breaking the cycle. By recognizing and addressing them, you can shift from fear and anxiety to a more empowered, confident financial mindset.

Financial Trauma: Recognizing the Signs

Understanding and identifying the signs of financial trauma is crucial for addressing its impact on your life. Financial trauma can manifest in various ways, often subtle and easy to overlook.

Some of the most common signs include

• Constant anxiety about money, even when you’re financially stable

• Fear of spending or investing, leading to excessive hoarding of cash

• Difficulty making financial decisions due to past experiences

• Trouble enjoying financial success because you're always expecting the worst

• Uncontrolled spending – hoarding of objects and even experiences

• Chasing money at all costs, including health and relationships

The most common sign that is common to all such behaviors is the emotional side, which is the first to appear. You might feel anxiety, panic, or anger. There might be the discomfort associated with the feelings of being rejected, judged, or not good enough. 

Behaviors also indicate financial trauma in the background. They range from avoidance of looking at anything to do with money to an obsession with money (saving, hoarding). 

All-or-nothing thinking is another common sign, where you view financial situations in extreme terms, believing you're either destined for poverty or unlimited wealth, with no middle ground.

Recognizing these signs in yourself is an important first step toward healing. Remember, experiencing these symptoms doesn't mean you're weak or flawed — it's a normal response to difficult experiences. The key is to use this awareness as a starting point for healing and growth in your financial life.

Overcoming Trauma's Impact on Your Finances

The good news? You can heal from financial trauma. It starts with recognizing the emotional baggage you carry and rewriting the story you tell yourself about money.

Here’s how Sara began to heal:

Step 1: Acknowledge Your Fear:

The first step is admitting that the fear is real. Sara had to recognize that her anxiety wasn’t because of her income or spending habits, but from the trauma of experiencing losses during the 2008 financial crisis and then losing her job at a time when she was already feeling financial anxiety.

Step 2: Identify Your Triggers:

What specific money situations make your anxiety flare up? For Sara, it was when any large-ish spending came by, like purchasing a car or an appliance or a trip. Her anxiety also flared up when her family/friends told her to invest her savings or discuss their own retirements. In her case, she knew that she needed to build her wealth through more than savings but could not bring herself to do so because she was anxious that she might lose a large portion of her savings again. 

By pinpointing these triggers, she was able to start to work on ways to reduce their power over her.

Step 3: Forgive Yourself and Find the Lessons:

Healing from financial trauma involves regaining confidence in your ability to manage money. But first, it’s important to acknowledge that we all make mistakes and allow past mistakes to lead to something better instead of holding us back.

For Sara, taking a look at what she had invested in and the mistakes she had made helped her realize that she had in fact ignored the best advice when it comes to investments – to have an emergency fund and to diversify. 

Step 4: Take Small, Measured Actions:

Learning from past mistakes and overcoming financial trauma also means we take actions that are in line with what “new” we want.

For Sara, that meant first setting aside an emergency fund from her savings. As a marketing manager, she knew that she would be able to find a job in about one year, so she set aside one year’s worth of emergency funds. 

From the rest of the savings, she started to invest a small amount every month, this time mindfully diversifying with the investment literacy and emotional intelligence she was gaining.

Sara’s main job now was to rebuild her trust in herself to achieve the level of confidence she needed for her well-being. She was building that trust step by step, with every small action. 

Step 5: Reframe Negative Thoughts:

When we are faced with financial trauma (or any other) we often face old patterns of thoughts, beliefs, and fear. It’s helpful to pause at such times and seek support – shifting into a self-nurturing and empowered frame helps slow/stop the downward spiral of emotions. 

Sara learned to remind herself that she was now using the safer, wiser way of investing, and had done her due diligence. Recognizing that her trauma made her feel unsafe when it came to finances, she learned to cultivate a sense of safety. Over time, this positive mindset became her new normal.

Sara also learned to listen to her fears and anxiety, letting them inform her what was the real concern for her, and then choosing the best option.

What helps this process?

1. Keeping a financial journal is an essential tool to slow down the racing thoughts, tease out the tangles of thoughts, memories, beliefs, and emotions

2. Automatic savings can go a long way in changing the behaviors around overspending

3. Similarly, automatic payments of utilities, essentials, tax, etc. can keep you on track without incurring extra charges

Final Thoughts

Financial trauma doesn’t have to define your relationship with money. Understanding how trauma affects your financial decisions is key to improving your financial health. 

To start making positive changes, try a 30-day financial reset. Begin by journaling daily about your money thoughts and habits for one week. Then, set three clear goals for the month, like cutting back on impulse purchases, saving a specific amount, or learning about a new investment option. Track your progress with a visual chart and have a weekly "money date" with yourself to review and adjust your goals. 

By the end of the month, reflect on how your money mindset has changed. This simple plan can help you gain more control and confidence with your finances.

FAQs

1. How can trauma affect my ability to plan for retirement? 

Trauma can lead to difficulties in long-term planning due to fear of future instability or a lack of trust in financial systems. This might result in inconsistent saving or investing habits, affecting retirement readiness.

2. What are some signs that trauma might be affecting my investment choices? 

Signs include overly cautious or aggressive investment behavior, avoiding investments altogether, or making impulsive decisions based on emotional triggers rather than sound financial advice.

3. Can trauma impact my ability to negotiate financial terms, like loans or salaries? 

Yes, trauma can impact self-confidence and negotiation skills, making you either too passive or overly anxious when negotiating financial terms, which can result in less favorable outcomes.