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We document that the most frequent reason for a deterioration in households’ financial situation is higher expenditures, in contrast to improvements in their finances which are usually due to increases in earnings. The expenditure increases are persistent and linked to:(i) fluctuations in the prices of goods that make a large proportion of each households’ budget, including mortgage expenses;(ii) life events, including the birth of the first child, divorce, and changes in health status; and (iii) psychological variables such as households’ ability to face problems. Moreover, we provide evidence that financially worse off individuals are more likely to feel depressed and to lose sleep over worry, which in turn increases the likelihood of a further deterioration in their finances. Good financial management reduces the probability that individuals are worse off due to higher expenditures. Our results highlight the roles of expenditures as a source of background risk and of expenditure management in financial education.