Wealth and happiness – the surprising factor that can increase well-being

2 months ago 0 227

Does money buy happiness?  Wealth and happiness are often paired together.  As you earn more income, invest more into the market, or reduce your debt, you likely feel more life satisfaction. This seems obvious, and many studies* prove this to be correct.  However, in a study conducted by researchers from UC, Riverside, a surprising factor emerged about how you can improve your overall feeling of well-being:  the amount of cash you have in the bank.

The relationship between income and well-being

Researchers have long been interested in the correlation between wealth and well-being.  Studying the effect of income on life satisfaction, a 2010 research study makes the link between higher income — with the ability to meet your needs or slightly exceed them — and higher life satisfaction.  However, using income as the sole measure of financial wealth provides an incomplete picture of the link between wealth and well-being. For example, individuals who overspend their incomes and accumulate debt may gain less benefit from their wealth than those who earn the same but prudently save or invest their money. Consistent with this theory, both total assets and lack of debt have been found to be a stronger predictor of life satisfaction than income alone.

Cash-on-hand and life satisfaction

While the combination of income, assets, and debt levels seems to affect your well-being, the researchers at UC Riverside wanted to find out if “liquid wealth” or cash on hand—the balance of one’s checking and savings accounts—would be a better predictor of life satisfaction than income.  In other words, are you happier if you have money in your checking and savings accounts?

Many avid investors who contribute regularly to retirement savings plans, 529 plans, or simply invest in the market through a brokerage account, view keeping money in low-to-no interest rate accounts as a lost opportunity for growth. Surprisingly, the results of this study suggest that people who keep some cash on hand have higher life satisfaction than investors who do not maintain liquidity.

The price you pay for accessing cash

Imagine if your income is temporarily lower (as many have experienced during COVID), or you experience an emergency need. You pay a price if you do not have enough cash on hand. This cost can show up as:

  • penalty fees and taxes associated with accessing retirement savings or withdrawing from a 529 plan prematurely,
  • interest rates from carrying credit card balances and drawing down on a HELOC, or
  • capital loss associated with unfortunate timing for selling from your investment portfolio.

Even if you can afford to absorb these costs until you liquidate a stock or bond or receive your next profit distribution or bonus, they take a toll on your happiness.

Whether or not we consciously recognize it, we organize our financial decisions by way of the accounts we draw upon for use. Building on this concept, the bucketing approach and naming accounts strategy are both used in financial planning to help clients manage cash flow and inspire savings.  Each account has a purpose, and you are “supposed” to use that account for those purposes. You may hold a vacation fund, retirement accounts or a house remodel account while you’re younger, and separate accounts to draw down the appropriate mix of income in retirement.

Your financial accounts and feelings

Each one of these accounts gives you a different feeling. For example, as you contribute to a retirement account and see its growth, you may feel secure about long-term goals; however, you won’t feel the benefit of short-term financial security. An account designated for vacation allows you to plan and take that next trip without guilt, but does not give you peace of mind that your retirement is intact.  On the other hand, because you access your regular checking and savings accounts more frequently than a 401k or an IRA, the balance of those liquid accounts gives you a frequent reminder of your financial well-being. A near zero balance can erode the happiness built up by high income, total asset values, or the lack of debt.

If you’ve been looking to boost your life satisfaction, one step in the right direction is to look at your checking or savings account balance.  Do you have a few months of expenses as a buffer in the bank?  If not, consider giving yourself the gift of cash on hand.  You may feel just a bit better.

*Brown, Taylor, & Price, 2005) (Headey, Muffels, & Wooden, 2008; Headey & Wooden, 2004; Johnson & Krueger, 2006.