Studies of money and happiness show that there is a correlation between how you spend money and happiness. Money can, in fact, buy happiness when money is spent in ways like having experiences or investing in others, as reported in the book Happy Money.
But it’s also been determined that how money is kept can affect happiness.
We came across an article this week by the guru of the financial planning world, Michael Kitces, on this very topic. In a recent study, it was determined that financial well-being and life satisfaction was in fact correlated to the amount of cash someone had. This was regardless of age, employment status, relationship, investments, or income. By having cash, the perception of financial well-being led to an improvement in life satisfaction. But more importantly, it was having an amount of cash that was a subjective amount, and an amount that provided peace of mind to that particular person.
Over the years’ we’ve noticed that clients have very personal feelings about how much cash they keep in their Emergency Fund. We attribute this to a client’s personal relationship with money. For sense of peace, some folks want large savings, even though there is opportunity cost with not investing the excess. The amount a client wants to keep in cash is truly random, and its truly subjective. For others, we find that having the planning industry rule of thumb of enough savings for three to six months of living expenses suffices.
An Emergency Fund is just that: cash on hand in case of an emergency. However, it turns out it means much more: It also serves to provide people with a sense of financial security. The above mentioned study found that it didn’t matter if the household actually needed the cash or not; the financial well-being was a result of having the excess cash.
This has several implications. From a financial planning perspective, while more cash means less invested for future goals, pushing clients to invest more cash could actually increase financial stress. There is tremendous value in providing a client peace of mind, and this comes in many forms. Portfolio performance is indeed important, but behavioral finance also tells us that the amount of cash savings needed for a sense of satisfaction is subjective, and important. If a client favors a larger cash position, the portfolio can be constructed around this position.
And from a happiness perspective, this tells us that having an Emergency Fund can provide much more than just financial security in case of need. It can provide a peace of mind and life satisfaction that far outweighs other choices.
So what does this mean to you? Ask yourself what amount of savings would make you feel content. What amount gives you peace of mind, makes you happier? This is the amount you should have in your emergency fund. And if you don’t have it now, create a plan to incrementally save so you can get to that point.
Because apparently, money can buy happiness ?
If you’d like to learn how we help our clients live happier lives, please contact us.
