OPINION: Emergency funds make you happy – but not for the reasons you think.
Most financial advisers say it’s smart to put aside several months worth of earnings into an “emergency fund’, to pay for unexpected disasters like car repairs, or losing your job.
But now a study has shown that having a financial buffer will actually make you feel more satisfied with your life. Why does this happen?
The study’s authors suggest that it’s because you check your savings and current accounts all the time.
When you see a stash of cash there, you’re reminded of your financial health. It makes you feel good.
The conclusion came from a field study run for a large national bank in Britain, which was reported by the American Psychological Association. The bank asked its customers about their account balances and their levels of life satisfaction.
They found that those with a buffer account of readily available cash were more satisfied than those without one, regardless of their earnings, or other investments.
When there are bills to pay, it’s tough putting money aside for a rainy day, but the results of the survey show it’s well worth it.
A 10-fold increase in people’s monthly current account balance saw an average increase of 0.69 points in life satisfaction, on the five-item Satisfaction With Life Scale, a widely used measure of global life evaluation.
The secret is cash on hand.
The study’s authors say: “Individuals who have ample cash available to them as a buffer may feel more secure in their financial situation, and thus more satisfied with their lives, than those with less cash ‘on hand’, regardless of how much money they earn, or whether or not they have debt.”
It added: “Having investments and not being in debt are both associated with greater financial well-being, but having cash ‘on hand’ is meaningful above and beyond those measures of wealth.”
The study’s authors went one step further, suggesting that governments should factor this in when they’re planning their policies.
“To improve the wellbeing of citizens, policymakers should focus not just on boosting incomes, but also on increasing people’s immediate access to money,” said the study’s authors, Peter M. Ruberton and Sonja Lyubomirsky of the University of California, Riverside, and Joe Gladstone of the University of Cambridge.
Most financial advisers suggest you put aside money for your emergency account first – before you start saving for other goals.
Lynda Moore of The Money Mentalist says it helps to call that account a name that resonates for you, perhaps Rainy Day Fund.
“Start with a sum that’s small and manageable, that you can achieve in 90 days. If you haven’t been able to do any savings at all, just start with trying to save $1000.”
Try to only use it for unexpected bills, such as losing your mobile phone, car repairs or dental emergencies, she says.
“Ask yourself if it’s an emergency. Buying a dress for your friend’s wedding? That’s not.”
She has an emergency fund herself. “Every time I see that little bit of money sitting there, it’s a sense of relief.”
* Brenda Ward is the editor of JUNO Investing magazine.