With inflation rising and the looming fear of being unable to meet household financial responsibilities, many Americans may be experiencing symptoms of financial stress characteristic of post-traumatic stress disorder (PTSD). Most consumers surveyed (86%) said they worry about the long-term impact inflation will have on their financial health.

Research on the relationship between the economic situation of households and mental and physical health has a long history, with financial stressors significantly impacting the individual, couple or family experiencing them. A recent wide-scale example is the pandemic, when most families experienced some form of economic stress or change in financial status, alongside social isolation, illness, grief and uncertainty. These stressors have been implicated in causing mood disorders such as depression, anxiety and PTSD.

A Yale analysis of 36 studies assessing Americans’ pandemic-related PTSD symptoms showed that on average it affected 26% of the population, with the subsequent effects still being determined as trauma may present months, and sometimes even years after an event.

What Is Financial Trauma?
Trauma is classified into two categories. First, there is big “T” trauma, an event or experience most people would view as painful or overwhelming (e.g., car accident or natural disaster). The second, small “t” trauma, is more contextual and includes small events or setbacks that leave a large cumulative impact (e.g., financial insecurity). However, both types can spur an intense emotional response, with symptoms including anxiety and negative thoughts.

Living through a significant or devastating financial event can result in financial trauma. While symptoms may appear similar to those of financial stress, financial trauma is more pronounced, with intrusive thoughts and significant distress distorting a client’s relationship with money.

In response to financial trauma, clients may develop poor money management behaviors as a way to cope (such as money avoidance, overspending and underspending). This trauma may go undetected or be mischaracterized by financial professionals. That could be due in part to our own biases about what trauma looks like, and who experiences it.

For example, even high-net-worth clients may have experienced financial trauma along the way, promising themselves they will never go back to how it was before, and developing an unhealthy aversion to risk that hinders the overall success of their financial plan.

Recognizing the Signs
Financial advisors are not expected or trained to treat a client's financial trauma. However, by understanding the signs and establishing relationships with trained professionals, you can play a critical role in ensuring a client receives proper support.

First, it's important to be able to identify the signs of financial trauma. Here are a few.

• Money avoidance. This may look like a client who refuses to look at financial statements, frequently skips review meetings or struggles to act on recommendations.

• Overspending. This behavior can be present even for those of substantial means. This could be a client who squanders every bonus, has a gambling problem or frequently makes large purchases on impulse. Irrational money decisions can also be a tipoff.

• Underspending. This may seem like the least disordered behavior of those we’ve mentioned, but don’t be deceived. Behaviors that come from a scarcity mindset can ruin relationships, such as when a client won’t spend the money to pay visits to family or friends. It can also take a toll on health if a client refuses to get regular checkups and necessary healthcare.

Relying On Expert Support
Gaining an understanding of trauma is a crucial step in guiding your clients toward financial well-being. There are many resources available online at Psychology Today and the Financial Therapy Association. The CFP Board’s The Psychology of Financial Planning book has case studies that can help you put this knowledge into context.

From there, you can work on incorporating professionals who are trained in financial therapy into your practice. There are differing ways to do this, from the classic referral partnership to consulting, training sessions and hiring an in-house financial therapist. Read my article "Aligning Your Financial Planning Practice with Financial Therapy" if you’d like to explore this idea.

When selecting a trusted mental health professional, consider the CFP Board’s best practices on recommending a service provider: “A CFP professional must, in relevant part, have a reasonable basis for the recommendation based on the person’s reputation, experience and qualifications.” The organization considers personal experience with a therapist as well as research on reputation, experience and qualifications to be a “reasonable basis.”

The Road To Resilience
Helping clients break free from traumatic patterns is a sensitive task that demands a skilled professional. Financial advisors can assist clients along this journey by looking for the signs of trauma and introducing clients to trusted mental health professionals who can help them improve their quality of life and reduce their symptoms. With a combination of preparation and education, advisors can help clients get the guidance they need and begin to heal.

Dr. Emily Koochel is the manager of financial wellness at eMoney Advisor.