The Effects of Trauma on Personal Finance

A plethora of things affect our personal finances and the development of our financial habits.

From family to culture to media to unprecedented global pandemics, our money lives are constantly being molded and shaped by things both within and beyond our control.

While the majority of things that help shape our financial lives are relatively easy to see (but not necessarily to change or resist), there is a silent epidemic running throughout the world. One that affects as many as 70% of people in the U.S.

This silent epidemic is childhood trauma and money. 

Trauma is a pervasive aspect of our society that affects every aspect of the lives of those who have experienced it. Although the link between trauma and personal finance may not be clear, rest assured that it is there.

This article will discuss some of the main effects of trauma on personal finance.

First, we’ll define trauma and its prevalence. Next, we’ll discuss how trauma affects brain development and one of the most eye-opening studies ever done regarding trauma and its effects.

Finally, we’ll conclude by making the connection between trauma and personal finance crystal clear and offer ways to combat its effects.

What Is Trauma?

According to the American Psychological Association, trauma is “an emotional response to a terrible event.” It occurs when the extreme stress of the event(s) overwhelms the person’s ability to cope.

People impacted by trauma often have feelings of fear and helplessness, and their inability to cope or escape the trauma often leads to the development of maladaptive means of coping. 

Experiencing trauma can be the result of a one-time event such as an accident, assault, or natural disaster, but it can also be the result of persistent negative experiences such as abuse or neglect.

While not all who experience traumatic events are severely affected by trauma long-term, it is safe to say that the majority are.

As previously mentioned, 70% of U.S. adults (or 223.4 million people) have experienced a traumatic event at least once. Furthermore, 90% of clients in public behavioral health have experienced trauma.

Post-traumatic stress disorder (PTSD) is a common manifestation of trauma and is characterized by flashbacks, nightmares, and acute anxiety.

While most commonly associated with soldiers returning from war, PTSD is far more prevalent in our everyday society.

And one of the most startling populations of victims is children.

Almost all children who witness parental homicide or sexual assault develop PTSD. Furthermore, 90% of those who’ve experienced sexual abuse, 77% of those who’ve experienced a school shooting, and 35% of those exposed to community violence will also develop PTSD.

Aside from the high likelihood of developing PTSD, experiencing trauma is linked to a host of other negative outcomes, especially when experienced in childhood. A common link is PTSD and financial problems.

Adverse Childhood Experiences (Aces)

There have been a host of studies linking childhood trauma to negative outcomes later in life, but the largest of these was conducted by Kaiser Permanente in the mid-90s.

Called the Adverse Childhood Experiences (ACE) Study, researchers surveyed over 17,000 individuals about their childhood experiences and correlated them with later life outcomes.

The main study and extensive follow-ups found that adverse childhood experiences, or ACEs, were significantly correlated to numerous negative outcomes later in life.

ACEs are traumatic events that occur during childhood (between the ages of 0-17 years). Examples of ACEs include:

  • Experiencing abuse and/or neglect
  • Witnessing violence
  • Death of a parent
  • Substance abuse in the home
  • Parent/guardian mental health struggles
  • Parent imprisonment
  • Poverty (shown to be a strong factor in accumulating ACEs)

Experiencing ACEs in childhood was linked to many lasting negative outcomes affecting health, opportunities, and general well-being. Some of these negative outcomes include:

  • Chronic health problems such as cancer, diabetes, and heart disease
  • Depression and suicide
  • Mental illness
  • Obesity
  • Substance abuse in adulthood
  • Difficult forming healthy and stable relationships
  • Unstable work history
  • Struggles with finances
  • Shortened lifespan

While it makes sense that traumas would be linked to a higher risk of negative outcomes, the most eye-opening aspect of the study was the direct correlation between the number of ACEs one experiences and the increase in the risk for negative outcomes.

People can be given an ACEs score from 0 to 10, with each type of trauma counting as one regardless of how many times it happens.

ACEs really begin to take a toll once a person reaches a score of 4. Those with an ACEs score of 4 are twice as likely to smoke and seven times more likely to suffer from alcoholism. Your risk of emphysema or chronic bronchitis rises by 400%, and your risk of suicide by 1200%.

Those with an ACEs score of 6 or higher may have their lifespan shortened by up to 20 years.

Furthermore, those with high ACEs scores are more likely to have more marriages, broken bones, drug prescriptions, depression, autoimmune diseases, and to be violent as adults.

The implications for experiencing trauma in childhood are clear; now, let us talk about why.

Trauma and the Brain

The reason for these outcomes can largely be blamed on the impact of trauma on the developing brain, and it all has to do with stress.

Prolonged stress, called toxic stress, changes the way the brain develops. Without getting too technical, toxic stress means that the brain, and the body, are constantly in a state of fight, flight, or freeze.

This constant stress state means that stress hormones are higher throughout the body, resulting in increased inflammation and decreased immunity, leading to chronic disease.

In the brain, the more basic systems meant to keep you alive are developed, while higher-order thinking and problem-solving are neglected. The under-development of higher-order areas of the brain leads to issues with attention, decision-making, learning, and responses to stress.

The changes in brain development, along with lack of treatment, often result in risk-taking behaviors and maladaptive means of coping with the trauma, such as drug and alcohol abuse.

The Effects of Trauma on Personal Finance

How trauma affects you with money is an important issue. By now, the effects of trauma on personal finance should be becoming clear. Not only might experiencing trauma inhibit a person’s ability to make money, but it often leads to a plethora of habits and behaviors that negatively impact spending and money management.

First, some of the outcomes named in the ACE study related to personal finance include limited access to opportunities that would help one develop skills and make money, such as college. 

Additionally, people who’ve experienced trauma may struggle to hold a job, further inhibiting their ability to obtain a stable income. Long-term health issues further impede the ability to bring in income and increase the amount spent on healthcare.

Compounding the issue, people who have experienced trauma typically exhibit a plethora of behaviors that negatively impact their finances. 

A big one is spending on maladaptive coping mechanisms like cigarettes, drugs, alcohol, food, and other wants. The same changes to the brain that impact decision-making may lead to impulse spending and trouble managing finances. Debt and disorganized finances are common for people who’ve experienced trauma.

On top of all that, many who experience childhood trauma were witness to poor money management in their families and are likely to emulate those strategies as adults.

And the effects aren’t just felt on a personal level, but a societal one. The effect of ACEs is to blame for a significant portion of healthcare costs, emergency responses, mental health, criminal justice, and workspace absenteeism.

Taken together, the economic costs of trauma to our society are in the hundreds of billions of dollars every year.

How You Can Combat the Effects of Trauma on Your Personal Finances

Luckily, the impact of trauma on your life and personal finances isn’t a foregone conclusion.

Obviously, the best way to prevent the impact of trauma is to prevent the trauma from happening in the first place, but absent major societal change, the onus is placed on the individual to enact their own change.

With that being said, the single biggest thing you can do to combat the effects of trauma on your personal finances is to get help as soon as you can.

This applies to your mental health, physical health, and financial health.

The optimal course of action would be to first seek out support for coping with the trauma from a mental health professional. A therapist or other mental health professional will be able to help you work through your trauma, develop adaptive coping strategies, and help you access any needed medication or other treatment.

Ideally, you should also seek out financial help to coincide with your mental health work. Your therapist will likely have local resources they can point you to, but you can also reach out to community programs for help.

Most communities offer some sort of financial coaching or classes where you can learn basic financial literacy and personal finance skills, such as building and maintaining a budget.

These financial education resources will also be able to point you toward resources to help you access higher education opportunities that will increase your job skills. These adult education programs can help you earn your diploma or GED or learn specialized skills.

Catholic Charities is one such organization found throughout the U.S. that offers mental health services, financial support, and coaching and can also point you toward other community resources in your area. You can visit the Catholic Charities USA Find Help page to find a location near you.

Another resource is Mental Health America, which offers peer support for those struggling with addiction and other mental health challenges. You can find an affiliate program near you by visiting this page.

No matter what has happened, know that there is hope and things can improve.

Our brains have this amazing ability to adapt and change throughout our lives and can reorganize themselves through the formation of new neural connections.

This means that with access to the right resources and hard work, you can change your habits and behaviors and improve the outcome of your life.

If you’ve experienced trauma and you’re struggling with personal finances or otherwise, seek out help as soon as you can and put yourself on the path to healing and success.

Moral of the Story

Money trauma is a silent epidemic running throughout our country and the world. It is insidious and impacts everything you do. The effects of trauma on personal finance are similarly poignant.

Research on the impact of trauma has shown that adverse childhood experiences, especially when you’ve experienced multiple ACEs, lead to a host of negative outcomes later in life for your mental, physical, and financial health.

These outcomes are due to changes in the brain caused by trauma and chronic high levels of stress.

But despite all this doom and gloom, there is hope

Just as the brain adapts to deal with a traumatic environment, it can adapt to support a safe and healthy lifestyle.

But this change must start with you. If you’ve been the victim of trauma and are struggling in any capacity, now is the time to get help. Find a mental health professional you trust that can help you work through what you’ve experienced and develop healthy ways to cope.

At the same time, look for financial education and coaching so you can combine the progress you’re making in therapy with your financial life.

As a child, you had no control over what happened to you, but as an adult, you have all the control to change it.

Remember, you are not responsible for what happened, but you are responsible for ensuring it doesn’t continue to dictate your life.




Tawnya is a 34-year-old Special Education teacher in the sixth year of her career. Along with her partner, Sebastian, she runs the blog Money Saved is Money Earned. Tawnya has worked extremely hard to reach her goals and remain debt-free.

She holds an Honors BS in Psychology from Oregon State University and an MS in Special Education from Portland State University and has had a pretty successful writing career, first as a writing tutor at the Oregon State University Writing Center, and in recent years, as a freelance writer.

Tawnya and Sebastian have a wealth of knowledge and information about personal finance, retirement, student loans, credit cards, and many other financial topics. It is this wealth of tips and tricks that they wish to pass on to others.