Does Financial Stress Lower Your IQ?

Most of us are all too familiar with stress. No matter how much we try, it’s one of those things we can never eliminate completely. The challenge for each of us is to find manageable ways to deal with it. That may include exercising more, eating better and surrounding ourselves with people who love and support us.

We all know that stress can negatively affect our health, but did you know that one type of stress can actually lower your IQ?

Research from behavioral economist Sendhil Mullainathan and psychologist Eldar Shafir, suggests that people who experience chronic financial stress—meaning that they struggle to meet their regular monthly financial obligations—react differently to significant unexpected expenses than those who make more money. Apparently, it all comes down to bandwidth.

Most people are familiar with this term as it relates to work and time management. You only have so much time to work on the things that need to be completed in a particular day or week—this is your bandwidth. Mullainathan and Shafir, however, use this term to explain that you only have so much brain space, and that, if you are worried about one thing all the time—in this case, your financial situation—you have less space to think about other things. This causes us to default to scarcity.

The research

In their primary experiment, subjects were separated into two groups using self-reported household income. They were divided into high- and low-income groups and given IQ tests to establish a baseline. Then they were asked to imagine how they would feel if faced with a $300 car repair. Both groups were tested again, and no significant difference in their IQ was detected.

The same experiment was conducted again, swapping out the price of the car repair to $3,000. When retested, the participants in the low-income group showed an IQ that was 10 to 12 points lower than their baseline, with the high-income group, again, showing no significant difference.

Mullainathan and Shafir believe that this was due to a loss of brain bandwidth or cognitive capacity. Those in the low-income group were so preoccupied with how they were going to meet their financial obligations, which payments they could skip and how they were going to afford necessities that their brain’s performance actually decreased.

How to make more free space in your brain

How can you make better financial decisions? The answer isn’t just to make more money. The key is to set yourself up for financial success by recognizing how cognitive capacity may change with circumstances. By decreasing the strain of unexpected expenses, like a $3,000 car repair, you will have the mental bandwidth to meet these challenges head-on—no pun intended!

Here are some tips to give your brain the room it needs to find a path forward:

1. Automate wherever you can. Automating your savings and bill payments means you don’t have to remember to make these money transfers each month. This means more room in your brain for other things. Grow your savings by setting up automatic transfers each pay period to your retirement and traditional savings accounts, even a small amount can help you feel empowered in your financial situation. Setting up bill pay will also eliminate the stress of late fees.
    

2. Use reminders for everything else. For everything you can’t automate, set up reminders. Using the calendar or assistant on your phone makes this a simple process. If you go this route, make sure you act on these reminders and don’t just ignore them!
    

3. Be mindful. Part of the issue of bandwidth is that it’s very easy to ignore your plan and focus on the immediate problems staring you in the face. It’s important that you learn to recognize the warning signs of being overly stressed as well as how best to deal with your stress. When you feel the stress coming on, start by taking a deep breath. Allow your mind to focus on why you are feeling this way and the steps you can take to address it.
    

4. Educate yourself. If you’re having trouble coming up with a plan of action, make it a goal to understand more about the source of your financial stress. Is it basic budgeting? Saving for retirement? Using credit cards responsibly? Do some research of your own or talk with a financial professional who can help guide you.

Getting a handle on your finances and reducing your stress triggers takes a bit of focus. But, once you understand the fundamentals of budgeting and implement a plan, you’ll be surprised how simple it can be to attain your goals.