Last week I talked about the financial importance of building up a savings cushion. From a practical standpoint, it just makes sense—it safeguards against unexpected expenses and keeps your financial goals on track. This week I want to continue that conversation but focus more on the positive psychological effects that a healthy cash balance can have on your life.
Joe Gladstone, research associate at the University of Cambridge, recently conducted a study that found your bank balance may actually affect happiness more than your total wealth. Gladstone comments, “It goes against the traditional advice a financial advisor might give someone. Advisors might say all money that isn’t invested in something like equities is wasted.” We say that because cash yields no return and inflation slowly erodes the principal.
So it’s true that advisors naturally want to put your money to work even if the extra cash may make you happier. Hopefully, we prioritize a healthy savings cushion like I discussed last week, but his point remains—traditional advice would encourage allocating “excess” savings to investments when you, the client, may feel more comfortable leaving it in savings.
Gladstone continues, “That makes sense for the poorest 50% in the study, but it’s surprising that it’s still the case for the richest 50%. Even for a very wealthy person who has lots of savings and investments, having more money in their checking account seems to increase their happiness.” From a practical standpoint, this feeling is unwarranted, but it’s worth acknowledgment because even the very wealthy fear being “cash poor.”
Advisors and clients alike have to maintain some perspective. The “by the numbers” best answer to a situation may not be the best answer for that client. At the end of the day, money is just a tool to make your life better. So if keeping a little more cash on hand than is typically recommended makes a client feel more comfortable, then it’s worth sacrificing a little bit of growth.
Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.