Friday, January 26, 2018

Improving your life satisfaction with more "cash on hand"



There is a brief report entitled How your bank balance buys happiness: The Importance of "Cash on Hand" to Life Satisfaction by Ruberton, Gladstone and Lyubomirsky was so important that I paid $11.95 to gain access to the PDF and possibly violated my resolution not to buy books in the month of January.

This paper revises what we previously know about emergency savings. The conventional advice from financial books and bloggers is to hold 6 months worth of spending as emergency expenses. Other than ensuring that you may be able to survive for six months without a job, no one can really articulate why we put emergency cash into a savings deposit account. It hardly does any solid work to make your wealthier.

Well, social science now has fairly concrete answers.

Apparently, putting money into a bank deposit account can increase your life satisfaction. This is independent of how much debt you have and how big your investment portfolio is. This means that having cash in your savings account can make you objectively a happier person.

To what degree does this work ?

The original paper was done in the UK, and surveys were carried out on banking customer.

I will translate this paper to the Singaporean context.

If you increase your bank account savings from $0 to $2,000 you raise your life satisfaction by around 10%. After that, putting in more cash results in diminishing returns. Raising your savings deposit account from $2,000 to $20,000 only increases your life satisfaction further by around 3.5%.

How does this change the usual advice we have to folks about emergency savings ?

If you are a newbie and still waiting to invest your first dollar, you might want to target $20,000 of cash in your bank account regardless of your spending pattern or investing ambitions. This can raise your happiness by a 13.5% and gives you more confidence and self-esteem to live out your lives.

Thereafter, you can increase it further to six months of living expenses if you find that $20,000 is inadequate.

Turns out folks like me are doing it all wrong - I hold onto very little cash because I want my investment hoard to work harder for me and farm my dividends back into the markets every quarter. I seldom see $10,000 in my spending account even though I have a credit card limit of $10,000 to tap on during emergencies.

Even if you can replenish your cash account with dividends on a regular basis, you will be much happier if you have $20,000 in a savings account that can be drawn out from an ATM at any time.


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