Mental health is inextricably linked to both poverty and future life chances such as education, skills, labour market attachment and social function. Poverty can lead to poorer mental health, which reduces opportunities and increases the risk of lifetime poverty. Cash transfer programmes are one of the most common strategies to reduce poverty and now reach substantial proportions of populations living in low- and middle-income countries. Because of their rapid expansion in response to the COVID-19 pandemic, they have recently gained even more importance. Recently, there have been suggestions that these cash transfers might improve youth mental health, disrupting the cycle of disadvantage at a critical period of life. Here, we present a conceptual framework describing potential mechanisms by which cash transfer programmes could improve the mental health and life chances of young people. Furthermore, we explore how theories from behavioural economics and cognitive psychology could be used to more specifically target these mechanisms and optimise the impact of cash transfers on youth mental health and life chances. Based on this, we identify several lines of enquiry and action for future research and policy.