The Emotional Impact of Having Cash-On-Hand Reserves

Michael Kitces | November 06, 2017

"The Emotional Impact of Having Cash-On-Hand Reserves."

This article discusses a study that was done on the correlation between different aspects of people's financial situation and how much each of those aspects contributed to their life satisfaction from an emotional standpoint. Some of these aspects included: total liquid wealth (which they define as just checking and savings accounts), total investments, average monthly spending, average monthly income, and debt.

The most interesting part of the study found a significant correlation between having a larger liquid buffer of cash (checking and savings balance) and feelings of financial well-being, regardless of total wealth or income. Meaning "wealthy people with very little incash may still feel more financially distressed than poor people with (relatively) more cash!"

HOWEVER, this correlation between feelings of financial well-being and cash-on-hand has a 'diminishing effect'. Essentially meaning that the larger the cash-on-hand balance, the smaller the emotional benefit (once you gt past a certain amount of cash). So for example, one would feel a significant benefit to their financial well-being if their cash-on-hand went from $1,000 to $10,000. However, the benefit would be less if they went from $10,000 to $100,000; and significantly less going from $100k to $1 million. Also, each person has a different threshold for the emotional benefits of having a larger amount of cash-on-hand (meaning on person may be very comfortable with $30,000 and another may only be comfortable with $100,000.)

As you can imagine, having significant cash-on-hand comes with a financial opportunity cost as that money is not invested; the larger this opportunity cost becomes, the more it can impact someones actual long-term financial well-being (as opposed to emotional financial well-being.)

Therefore, finding the balance and the right amount of cash-on-hand for each person is a part of our role as advisors. We help to guide our clients through this decision while taking into consideration the emotional benefits of more cash-on-hand versus the potentially detrimental long-term opportunity cost.

As always, don't hesitate to reach out with any questions or concerns, and feel free to share this with friends, family, or on social media! Next week expect an article, blog, or piece of information written by a third-party that we hand-selected as we think you will either find it either valuable or interesting.

Thanks!