Financial wellbeing and mental health: two sides of the same coin

In recent years, the link between money and happiness has been widely debated. But research is going beyond clichés. A study published in Studies of Applied Economics¹ offers a clear perspective: across 37 researches published between 2001 and 2019, the evidence shows that financial wellbeing and mental health are closely connected.

Beyond income: what financial wellbeing really means

Financial wellbeing is often equated with income or net worth. But the review shows it’s much broader: it includes the ability to plan for future expenses, manage debt, feel financially secure, and build confidence in facing unexpected shocks. In other words, it’s not just “how much you have,” but how you feel about your finances.

This perspective leads directly to three essential pillars of personal finance: having a defined time horizon (thinking both short- and long-term), so you don’t get swayed by momentary fluctuations; managing risk to prevent unexpected events from becoming financial crises; and diversifying your income sources and investments, so you’re not overly reliant on just one.

Financial stress: the key factor

The study highlights financial stress as the key mediator between money and mental health. Worries about bills, mortgages, medical expenses, or debt often fuel anxiety and depression more than absolute income levels. It’s the psychological burden of insecurity – not just the financial condition itself – that drives mental distress.

This is where a clear time perspective, risk management, and diversification prove vital: an emergency fund spread across liquid assets, a clear debt strategy, and a diversified portfolio can all reduce the intensity of financial stress.

The first steps in financial planning

In this context, it is useful to outline the key steps of a sound financial planning process – an approach that not only strengthens long-term outcomes, but also supports peace of mind.

• Understanding your investor profile: this is shaped by a combination of factors, including your level of financial knowledge, past investment experience, and your capacity to tolerate market risk in terms of volatility and potential losses.
• Defining a clear investment objective: rather than focusing solely on “making a return”, it is essential to identify concrete goals, future needs, upcoming expenses, and potential unforeseen events over the coming years – or even decades – both for yourself and for those who depend on you.
• Establishing your time horizon and determining the optimal asset allocation: this involves choosing the right mix across asset classes, as well as selecting the most appropriate instruments. Here, diversification and cost control play a critical role.

Once these foundations are in place, it is vital to test and monitor each element over time. This means regularly reassessing your financial plan in light of life goals and periodically re-evaluating your investor profile. Combined with an awareness of macroeconomic trends, this ongoing self-assessment ensures that your investments and objectives remain aligned – both in terms of timing and expected returns.

Not having the right investment approach – combined with a lack of emotional control during challenging market phases – can often be more dangerous than investing at the “wrong” time with a well-structured plan.

As highlighted by Morningstar’s Mind the Gap research, being aware of behavioural biases when facing difficult situations can help investors guard against impulsive decisions.

Financial education as prevention

One of the central recommendations is the role of financial education. Budgeting, building emergency savings, and structured debt management are not only economic skills but also preventive health tools. Individuals who practice these habits consistently show lower levels of anxiety and depression.

Here again, the long-term horizon matters: saving for retirement or setting aside funds for the future is a way of taking care of your future self. Risk management – through insurance or portfolio diversification – makes it easier to face uncertainty.

Perhaps the most important message is this: financial wellbeing is a public health issue. Reducing financial stress means lowering the prevalence of anxiety and depression in society, easing pressure on healthcare systems and improving productivity.

Conclusion: managing money, protecting mind

The systematic review leaves us with a clear takeaway: taking care of your finances is also taking care of your mental health. It’s not about absolute wealth, but about perceived security, planning, and reducing financial stress.

For individuals, that means concrete steps: tracking spending, building an emergency fund, managing debt – and applying the three key principles of long-term thinking, risk management, and diversification.

1. Hassan, M. F., Mohd Hassan, N., Kassim, E. S., & Utoh Said, Y. M. (2021). Financial Wellbeing and Mental Health: A Systematic Review. Studies of Applied Economics, 39(4).  ↩︎