The mechanisms underlying the SES-psychological distress association are not fully explored. Based on representative cross-sectional data from Israel for the year 2017 (N = 1508), we examine (1) the association between subjective poverty, material deprivation, social capital, and psychological distress among young adults (20–29 years); and (2) whether social capital mediates the subjective poverty/material deprivation-psychological distress association. Informal social capital includes connections with family and friends, perceived support, and perceived trust, whereas formal social capital includes volunteering and civic and political involvement. An additional aspect was online social network usage. We constructed a structural equation model to explore paths of relationships between subjective poverty, material deprivation, social capital, and psychological distress. Subjective poverty and material deprivation were strong predictors of psychological distress. Informal social capital buffered the negative effect of subjective poverty and material deprivations on psychological distress, whereas use of online social networks increased it. The use of online social networks, however, promoted informal social capital, which, in turn, was a protective factor against psychological distress. Further investigation is needed on which patterns and platforms of online social networks harm and which promote young adults’ psychological wellbeing. Informal social capital should be a prominent aspect of both preventive medicine practice and health promotion initiatives among young adults. Policy-makers are called on to support this important means of promoting public health. However, to substantially narrow disparities in psychological distress among young adults, direct action should be taken to reduce poverty and material deprivation.