“Cash is king,” the popular saying goes. Of course, some also say that holding cash--rather than investing it--is money wasted. Which is it? Recent research suggests that we’re probably asking the wrong question.
When considering what cash really does for us, the research points to a greater value which may not be as obvious: Having a greater amount of cash savings actually increases one’s overall life satisfaction and financial well-being in a really big way.
CASH’S IMPACT ON LIFE SATISFACTION AND WELL-BEING
The study hit three main points. First, it showed that someone’s “liquid wealth” was strongly correlated to life satisfaction and financial well-being, or in other words, as liquid wealth became more available people’s life satisfaction and financial well-being increased. What is liquid wealth? For the purposes of this study, liquid wealth means wealth in one of its most accessible forms: checking and savings accounts.
Second, the study also found that increased amounts of liquid wealth had a stronger correlation to life satisfaction and financial well-being than even one’s total amount of investments, average monthly income, and average monthly spending.
This suggests that even though access to other relatively liquid assets (such as those in a 401(k) or Roth IRA) may be available, this access didn’t bring the same feeling of comfort as having access to cash. It also suggests that cash savings even win out in favorability over a steady paycheck.
“...increased amounts of liquid wealth had a stronger correlation to life satisfaction and financial well-being than one’s total amount of investments, average monthly income, and average monthly spending.”
Finally, and perhaps most surprisingly, the study controlled for other variations like income, age, and employment status.
That’s a pretty big deal. It means that the impact of financial well-being was felt regardless of economic status. Whether the participant was a high-income individual and fully employed, or low-income with inconsistent work--all participants got those “warm fuzzies” from having extra cash.
CHARACTERISTICS OF CASH THAT MAKE IT SO “VALUABLE”
So what is it about having cash that gives individuals and families such peace of mind? I can think of several attributes of cash that may make it feel a bit more like gold.
Liquidity
As mentioned earlier, cash is extremely liquid. You know that whether your cash is in an FDIC-insured account at the bank or tucked under your mattress, it can be accessed readily--contrary to what some might feel about the U.S. banking system.
But liquidity is about more than easy access. Liquidity is also about the asset (cash) maintaining a stable value, meaning that the dollar’s value isn’t going to experience the same volatility of value--or ups and downs--that other assets are.
Low Volatility
In this same light, cash has less risk of loss than other assets. The value of the U.S. dollar does not experience near the volatility of stocks or even bonds, for example. This can give confidence that the dollar’s value today is going to be the same value tomorrow when you make a debit card withdrawal from your checking account to buy your son a fidget spinner.
Accessibility
Cash also doesn’t need to be sold or traded like other assets. This means that cash is not only more liquid, but there aren’t added costs or fees for transacting with it. Imagine if, like a real estate property or a stock, someone needed to pay a fee to an intermediary to access their cash!
SO HOW MUCH CASH SHOULD YOU HAVE? IT’S PERSONAL
It’s widely understood that every family should aim to cover at least 3 to 6 months of fixed expenses in case of an emergency. Is 6 months of cash, then, the most you should have? What do you do once you’ve achieved your emergency fund savings goal? It really depends on your situation, and more importantly, what you’re comfortable with.
Are you more comfortable leaving the cash in a checking or savings account and growing that cash beyond your needed emergency fund? Or would you be more comfortable investing your excess cash into stocks, bonds, or real estate with a greater potential for risk and less liquidity? As the study suggests and as I’ve experienced, there are families who feel more comfortable stockpiling an excess of cash. Financial peace of mind is a valuable thing!
Kellie and I have found ourselves in a similar situation. We have our emergency fund saved up plus an extra chunk of cash on top of that. In our minds (and on a spreadsheet) the extra cash is earmarked for a home down payment, but we know that it can be used for anything. Without question, having this cash cushion--above and beyond our emergency fund--has added incrementally to our financial peace of mind.
The viewpoint of socking away more cash is often clouded by the opinions of others who feel that if your cash isn’t working for you then you’re just losing money. I hope this study sheds light on some of the advantages of having an excess of cash, even above the traditional amounts families aim to have in emergency savings.
If you feel some extra cash on hand would bring you an added measure of financial peace, then building your cash reserves may be the next step of your financial plan!