It goes without saying that the less financial stress we feel, the more confident we are and the more content our lives become. However, happiness may not be the result of how much overall wealth you have, but in fact, it could be more closely correlated with how much cash you have on hand.
As financial advisers, it is deeply ingrained in our thinking to improve the efficiency of our clients’ investment portfolios by ensuring cash balances are minimised to about 3 months’ worth of expenses. This leaves the vast majority of funds available for investment in harder-working growth assets likes shares or property. While this is more often than not the best path to greater longer term growth in wealth, it may not be the best path to an individual’s happiness.
The correlation of financial security and life satisfaction
A recent study conducted by Ruberton, Gladstone and Lyubomirsky in the UK measured the correlation of the size of 585 individual’s bank balances with their stated satisfaction with life and feelings of financial well-being. The study showed that when it comes to happiness, a person’s bank balances is more important that the size of their income or overall wealth.
The study found that having money readily accessible makes people feel more financially secure, which leads to less stress and an increase in happiness. Reflecting on this, it seems intuitively correct for the poorest 50% of the study, but surprisingly, it’s still correct for the richest 50% as well. So it appears that going to the ATM and seeing a large balance available is more important that knowing that you have a steadily growing retirement plan or you debts are reducing.
So simply stated, wealthy people with very little in cash may still feel more financially stressed than poorer people with (relatively) more cash. Go figure!
Though notably, the researcher ultimately determined that having cash on hand was not directly contributing to life satisfaction, per se; instead liquid wealth directly impacted perceived financial well-being, and it was this perception of well-being that led to an improvement in life satisfaction.
So how much is enough to make you feel happy?
The study showed that there is a diminishing effect to feeling better when holding substantial cash balances. The relative benefit of increasing cash severely diminishes at high levels. However, there is no sacred threshold. The “comfort cash” balance is a personal thing but is often more than the 3-months’ of expenses amount. Also, people need to make sure that the cash doesn’t burn a hole in their pocket and resist the temptation to spend it unnecessarily.
Comfort cash vs efficient investing – the cost of happiness
Holding cash is usually viewed as an investment “mistake”, especially in this historically-low interest rate environment. Yet, while this technically remains true from a pure investment perspective, locking up your cash in longer-term assets may actually have an emotional toll, and one that isn’t necessarily offset by greater returns that may ensue.
In other words, choosing to keep more cash on hand isn’t necessarily an inefficient investment decision. Instead, it could be considered as a conscious decision to buy more happiness.
Are you holding enough cash to give you peace of mind?
Our core principle at Treysta FinLife is to ensure you are living the life you want. Speak to your adviser today about your financial well-being and see if adjusting your cash balance makes you feel better.