How Cash on Hand Raises the Quality of Your Life
Several friends who have nice incomes and nice lives (at least from the outside) tell me they always feel broke and stressed. They don’t have cash on hand or have much of an emergency fund. They buy everything with credit cards. And even though they may have investments—for example a 401k through work, they still feel poor.
Whether you have investments or not, or a lot of money or not, the majority of us don’t keep much cash. And in fact, investment advisors even try to discourage people from keeping cash even if they can afford to.
But research by University of California Riverside psychologist, Sonja Lyubomirsky and colleagues shows we’re doing it all wrong. If we care about our well-being, that is. Having a buffer of money in savings and checking accounts, i.e. having some money liquid, leads to a sense of financial security associated with greater life satisfaction.
What’s more, the buffer creates more of a positive impact than your level of income. Of course having money in general makes us feel better about life, so that part isn’t groundbreaking.
But what’s so important here is the finding that we may feel better in general not from a higher income or higher net worth (which is what we focus the most on), but when we have some safety cushion of cash.
And what’s also key about that: Feeling better is not just a money issue but a health issue and a relationship issue, since money affects our health and relationships.
Which is a massive argument in favor of having some money in your pocket and in an emergency fund or savings account. It just makes us feel richer and healthier inside and out. So it’s worth the time and effort to prioritize it. To create an account, find some money in our budget, and start funding it.
Most of us, with exceptions of course, can find some money we can set aside. But we have so many ‘reasons’ for not making it a priority (I know because I didn’t either and had to shift my thinking).
For example, we have a cognitive bias where we see saving as a loss instead of a gain (when in reality, it’s a huge win). Or we find that life’s too hectic to think about it. Or there’s this other thing we must have, so the money must go to that thing. The fact is most Americans–even high income folks–couldn’t find $500-$1000 if they needed it.
This is a key mindset shift that sounds hokey but it works here and research backs it up:
If you want a richer life, you must feel rich from within first. (And by rich, I mean your personal version of what a rich life means). The reason, according to behavioral economists Sendhil Mullainathan and Eldar Shafir, is that feeling broke and stressed will typically lead to a cycle of broke and stressed. When we’re stressed about money, we make poor decisions that continue the negative spiral.
So having that buffer, or ‘slack’ as Mullainathan and Shafir call it, is critical. But what do you do if you’re stuck in that broke/stressed loop? Two things: One is a mindset shift and one is an action step.
For the mindset shift, again, instead of putting that liquid savings (financial safety cushion) last on your list like many of us do, change it to Priority One. Just shifting your intention and focus will start your brain coming up with ideas. So set that intention and really work at shifting your thinking here and make it a priority.
For the action step: This sounds cliché but just do it. You can start by putting $5 in the bank. And gradually add money and build that safety cushion. Start with a goal of $500, work toward $1000 and try to build up to having three months of expenses in there. Then six months, and then finally work on 12 months.
You’ll get the best results if you automate it (so you’re not subject to the faulty money biases we have). Automating means you have a certain amount sent each week/month from your paycheck or your checking account to your safety cushion account.
Consider that it’s not just for financial security, but for your overall sense of well-being. It’s a gift from you to you.
What steps will you take to raise your financial well-being and life satisfaction? Let us know in the comments below.
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