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Here Are 4 Major Causes Of Financial Stress - Outside View by PersonalFN

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Here Are 4 Major Causes Of Financial Stress
Nov 10, 2016

It is commonly known that many health problems are related to stress. Research has shown that stress seems to worsen or increase the risk of conditions like obesity, heart disease, Alzheimer's, diabetes, depression, gastrointestinal problems, and asthma. There can be several underlying factors that increase your level of stress, but stress due to inadequate money management is a leading cause worldwide. Surprised? Let's take look at some statistics below-

  • 75%-90% of all illness and disease is stress-related, according to the Centers for Disease Control and Prevention, a public health institute in the United States (US)
  • 46% of the workforce in India suffer from some form of stress, according to a 2016 study by Optum, a health services and innovation company
  • 29% of individuals globally, cite that financial problems are the major cause of stress - and it is highest between the age group of 30-60 years, according to market research firm Gesellschaft fur Konsumforschung (GfK SE), Germany's largest market research institute and fourth largest market research organisation in the world

Clearly, financial stress can damage your health. A US based workplace wellness firm, Financial Finesse, conducts an annual survey to understand the leading reasons of financial stress and its impact on an employee's wellbeing. The research is restricted to US employees, but much of the findings will relate to individuals in India as well.

The 2016 survey of Financial Finesse finds that those with no financial stress "have very strong cash management scores (9.1), as well as high scores in debt management (7.7) and solid retirement planning scores (6.6)." Thus, as expected, those with overwhelming financial stress score the least in these 3 areas, with scores of 2.1 for cash and debt management, and 2.7 for retirement planning. Let's take a look at the major causes of financial stress as highlighted by the report...

  1. Poor Money Management

    Frivolous spending and high debt leads to inadequate savings, crippling you in emergency financial situations. "An employee who lacks emergency savings can be derailed by one large, unexpected financial event, such as a layoff, a dental problem, or a car accident. They borrow on high interest credit to fund the emergency expense, and never seem to dig themselves out of the hole," the report highlights. Only 6% of employees with "overwhelming financial stress" (the highest level of financial stress as per the report) have an emergency fund, and only 44% pay their bills on time. In contrast, for those with little or no financial stress-"94% live within their means, 98% are paying their bills on time each month, 80% maintain an emergency fund, and 93% are comfortable with their debt levels."

  2. Inability to Meet Financial Goals

    Saving too little or starting too late, can lead you to fall short of your financial goals. This is especially the case when you don't have a financial plan in place. You need to set S-M-A-R-T (Specific, Measurable, Adjustable, Realistic, and Time-based) financial goals. Uncertainty over reaching future financial goals is cited as a main cause of financial stress by about 60% employees. Unfortunately, vast majority of those with high or overwhelming financial stress lack a general knowledge of investing. Hence, those with inadequate financial knowledge feel anxiety during a stock market downtrend. Lack of financial knowledge can lead you to make ill-timed investment changes guided by emotional decisions. Such adjustments, too, can throw your financial plan off track.

  3. Being Uninsured or Underinsured

    Of those with the highest financial stress, just a little over 50% review their insurance cover annually. However, the study finds that employees do not set aside enough funds to cover expenses not covered by their insurance plan.

    Insurance is an important element of financial planning. You need to be adequately insured to cover unforeseen financial losses. Just a single uninsured or underinsured event can lead you to dip in to your savings set aside for other goals. Apart from the basic life insurance, other forms of insurance offer indemnification against future financial losses in the form of theft, damage to property, or medical emergencies. Such insurance covers help you tide over unexpected financial loss that may arise.

  4. Finding a Trustworthy Adviser

    Nearly 30% with "overwhelming" levels of financial stress state that they "don't know whom to trust" with investing their money. There is always a doubt whether the advisor is acting in your interest or his own.

    Indeed managing money is a stressful affair. And with complex financial products - a variety of them - the job of managing personal finance vide prudent investing, is even tougher. Therefore, there's a need to hire the services of a financial guardian who adopts high fiduciary standards and handholds you in the path to wealth creation. In India, the capital market regulator, the Securities and Exchange Board of India (SEBI), is actively upholding the best interest of investors with deserving regulations and the fee-based investment advisor model is encouraged. A commission-free model avoids conflict of interest. Therefore, choose a SEBI registered fee-based investment advisor who can guide you by comprehensively drawing a prudent financial plan for you. Shun investment advisors who promote insurance products in the name of financial planning.

Here are 5 effective ways to reduce your financial stress

On identifying the causes of financial stress, the solutions become clear. The solution to resolve financial stress is to have an effective financial plan in place. The virtue of planning cannot be overlooked and its benefits have been proved. Don't get bogged down with complex financial planning processes. You need to keep it simple. Here are a few action points to help you reduce your financial stress.

And to top it all, while you manage your personal finances, being disciplined is highly imperative.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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