An economist and two psychologists walk into a bank.  They ask customers “How much money do you have?” and “Are you happy?”  The results showed that the customers with more money were happier.  According to a recent study, this is clearly no joke!

Behavioral Economists study the effects of psychological, social, cognitive, and emotional factors on economic decisions.  Recently, a behavioral economist and two psychologists looked at two fundamental questions[1]:

  • To what extent can money lead to happiness?
  • Do illiquid (invested) funds provide the same happiness as money that is available to spend?

When Walden Wealth works with clients, we start by understanding life goals and values, and what drives happiness and fulfillment.  Next, we examine cash flow, taxes, and the balance sheet, including earnings, investments and indebtedness. The results of “How Your Bank Balance Buys Happiness:  The Importance of ‘Cash on Hand’ to Life Satisfaction”[2] were eye opening for us.  While we have seen the correlation of cash and happiness in real life situations, now there’s evidence on a large scale.

For most of us, checking and savings accounts that are immediately accessible are viewed far more frequently than other investment accounts, offering a persistent reminder of financial health, or lack thereof. By studying actual bank accounts in the UK and surveying the account holders about their life satisfaction, these researchers found that quick access to cash is especially important to life satisfaction– more than total income, investments or debt.

Having high cash balances often goes against the common wisdom that you should invest all money so it grows and is not eroded by inflation.  However, this advice is only looking at maximizing monetary benefit, and ignoring the impact on overall well-being.

piggy-bankWhile it is important to have a cash reserve as a minimal financial buffer, the research shows that having wealth above sufficiency levels is relatively unimportant to happiness.  In the study, life satisfaction increased by 10% when bank balances grew from $1 to $1,300.  This scenario is not “rags to riches, but rags to sufficiency”[3]. In contrast, when bank balances increased from $1,300 to $13,000, the gain in life satisfaction was only 3.5%.

Lastly, the study found that while holding investments and not being in debt are both associated with greater financial well-being, having cash “on hand” is meaningful above and beyond those measures of wealth.  Even high earners with no debt and large investments are happier if they keep some of their wealth easily accessible in cash.

The study did not pinpoint exactly why cash can buy happiness, only that it does.   Based on our client experiences at Walden, the reasons are clear.  Having cash on hand reduces stress. It reassures us that we are safe and prepared, and provides comfort in a moment of need.  Cash promotes peace in relationships and everyday life. The study proves what we have long observed.  Cash is not lazy money.  Cash on hand makes for a happier life.

[1] Blackman, Andrew “Money and Happiness:  A Surprising Twist” The Wall Street Journal. September 12, 1016

[2] Ruberton, Gladstone and Lyubomirsky, How Your Bank Balance Buys Happiness:  The Importance of “Cash on Hand” to Life Satisfaction.

[3] ibid