Why you shouldn't fall into a panic over your finances: Sarah Coles

The notion came from the US, and starts with comparing yourself to other people. However, it’s not the old school version of feeling rotten because someone else is genuinely better off. It’s the new-fangled version, where even though you’re doing fine, you look at your bank account and berate yourself for not having enough saved, invested or put away in your pension. ‘Everyone else’, you think, ‘is doing better than I am’.

It's most common among Millennials and Gen Z, which is why one theory about the rise of the phenomenon is that it’s born of trauma. For these generations, there was no shortage of difficult events during their early adulthood. Whether the financial crisis and subsequent recession hit while they were starting out, or they were caught in the pandemic and cost-of-living crisis while they were trying to get on their feet, both will have taken a toll, ensuring the key emotion they feel about money is worry.

There’s nothing new in turbulent financial times, but one key difference with these particular events is that they happened during a time of social media. It’s one thing going through a tough time financially, it’s quite another doing it while being bombarded with images of everyone else going out, spending money, and living their best life.

The reason this trend resonates with me isn’t because I was part of a broader macro-economic crisis, but because I went through some real difficulties during my years as a single parent of small children. All that time living far closer to the edge than was comfortable means I’m acutely aware of the need to save. I can’t bring myself to spend hard-won savings on anything other than dire necessities. It’s why my 12-year-old car is still being forced to struggle up the hill each day, despite the fact it makes all the warning lights flash on and off in an alarming fashion. It’s also why I’m filled with dread when opening a pensions calculator, despite the fact I have been pouring every spare penny into it for almost a decade and am now roughly back on track.

There will be plenty of people who aren’t at all impressed with giving this phenomenon a label. For them, it’s just a fancy new name for the fact that some people have always found money issues fairly worrying. Regardless of what you call it, having a needlessly negative view of your finances can have a number of damaging effects.

If you feel like there’s a huge gap between where you are financially, and where you ought to be, it’s easy to feel overwhelmed and give up. In some cases, people will drop goals like saving for their first property or putting money into a pension, in favour of a holiday or going out with friends. It’s always going to be important to find space to do the things that bring you joy in among all your financial responsibilities, but it’s vital not to create a gaping hole in your finances you have to fix later.

Others will decide the only solution is to find a shortcut, which can lead them into all kinds of trouble. This was something that emerged in the May edition of the HL Savings & Resilience Barometer. It found that of the 1.8 million households who are in arrears with debt repayments or household bills, 16% are investing at the same time. Among Millennial and Gen Z households, this rises to 70%. These are also the groups the FCA has identified as being most at risk of putting money they can’t afford to lose into crypto currencies, like bitcoin.

It’s easy to see why they may be in this position. If money is incredibly tight, it’s perfectly understandable that people will look for a magic bullet to try to find a way to lift them out of financial difficulty. It’s one reason why in this position, people will consider games of chance. However, this is not how investment works. A get-rich-quick gamble of investing in something like crypto currency runs a huge risk of backfiring, so you end up losing money – and in a worse position than you started.

Even if you don’t fall into either of these traps, it can make you myopic. You may look at your savings and think there’s no way you have enough put aside to be secure – even when you do. It means that long after you have built up the recommended amount of cash – to cover 3-6 months’ worth of essential expenses – you might keep going.

The Barometer found that of the 12.2 million households that don’t have enough pension savings to retire with a moderate living standard, almost 7 million are not in arrears and have more than enough savings that could be put to better use in their pensions or SIPPs. They have just been so focused on saving that they haven’t considered other aspects of their finances. If they moved the excess money into a pension, 1.8 million extra people would be on track for a moderate retirement income.

Given the havoc that financial dysmorphia can wreak, it’s worth doing what you can to channel your anxiety into improving your finances instead of destroying them. The easiest way to get a realistic view of your finances is measure them against objective standards, and find the gaps.

So, for example, don’t worry over whether you have as much in savings as you expect of yourself – or as someone else. Instead, consider whether you have enough to cover 3-6 months’ worth of essential expenses. Likewise, look at your insurance cover, and consider whether it protects you against key risks for you and your family. Don’t waste any time asking other people what they have – it’s what you need that matters. With pensions, you can use a pensions calculator to see if you’re on track. Finding the real gaps, instead of thinking you’re failing on all fronts, will help you prioritise.

To be brutally honest, it won’t make you less anxious about money. For that, you may need to dig deeper to find the root cause, and address where the worry is coming from, which is a whole other challenge. Personally, I have to go through the objective measurement process on a regular basis in order to keep pointless panic at bay. It’s why I have a pension calculator in my web shortcuts and a budget app on my phone. As a solution, it’s not to be sniffed at, because a handy side-effect is that at the same time I’m accidentally keeping on top of my finances.

Lost pensions

Our research shows that two in five people don’t know where all their pensions are held. The most recent data from the Pensions Policy Institute estimates there is around £26 billion of lost pension money washing around the system, with the average lost pension being worth over £9,000 – so it’s worth seeing if any of this money has your name on it.

The process starts with a list of everywhere you’ve worked and a hunt through your paperwork to see if you have any details of where your pensions from those jobs are held. If not, contact the Government’s Pension Tracing Service and they’ll give you the relevant contact details. Then you need to call the company, find out how much of your money they hold, and make a decision over what to do with it.

It might be worth consolidating your pensions – bringing them all together in one place – which can give you a clearer idea of what you have, help you keep track, and support better decisions at retirement. However, make sure you aren’t missing out on any valuable benefits, such as guaranteed annuity rates, or incurring expensive exit penalties by transferring, which could end up doing more harm than good.

SARAH COLESHead of Personal Finance and Podcast Host for Switch Your Money OnHeadline Money Expert of the YearHargreaves Lansdown