Residual Income and Mental Health: A Longitudinal Study

Abstract Financial shocks are associated with mental health. Most studies analyze this relationship using changes in income. This study examines whether a novel measure that captures the joint effect of income and expenditure-residual income-predicts mental health problems more accurately than income alone. We define residual income as the amount of income remaining at the end of the month after covering expenses. Using a representative longitudinal dataset of Czech households from 2022 to 2024 and applying individual and time fixed-effects models, we find that residual income is more strongly associated with mental health than income. Moreover, individuals with low residual income are the most vulnerable to changes in financial conditions, particularly those with a history of depression or anxiety symptoms. Importantly, these individuals are distributed across most of the income distribution. Our findings suggest that residual income captures effects of financial shocks on mental health that analyses of income and expenditure separately overlook. These results may further support the effective targeting of psychological and financial interventions toward the most vulnerable individuals. Key messages • Mental health is more vulnerable to changes in residual income than income. • Individuals with low residual income are the most vulnerable group, especially those a history of depression or anxiety symptoms.