Positive Psychology and Finances: The Importance of Having Emergency Reserves.
Article: How your bank balance buys happiness: The importance of “cash on hand” to life satisfaction.
Researchers: Peter M. Ruberton, Sonja Lyubomirsky and Joe Gladstone.
What do you think can give you more financial peace?
- Having a higher income
- Being debt free
- Having liquid assets.
I remember clearly being taught that paying off debt was by far the most important financial habit, which led me to choose paying debt over having reserves. Sometimes I would wonder if the money I had left over would even be enough to hold me until my next paycheck. I would pray that no emergencies would come up because it was unlikely that I would be able to bare even the slightest extra expense.
Research by prominent psychology researchers has shown that if you want financial peace, the lesson I was taught is questionable.
Higher income: although many people think having more money would solve their financial issues, that is often not the case. Poor financial habits that create stress, such as overspending, incurring debt and having no savings are usually kept in place even when there is a higher income.
Being debt-free: debt can take away your peace of mind. It can lead to excessive worry, a constant state of stress and lack of motivation. However, being debt-free at the expense of being left with very little money doesn´t seem to be a choice that will make the biggest difference in terms of financial stress.
Having liquid assets: at some level, we all keep in mind that unpredictable situations can happen at any time. Your car can break down, you can lose your job, or you can get sick. Having reserves in case those emergencies do happen seems to fill a psychological need for financial security.
Our assumptions about money are very often are wrong. Although a higher income seems to be the solution to financial stress, overcoming poor financial habits is more important. Having liquid assets is keystone habit that can significantly increase financial well-being, regardless of income level.
Emergency money increases happiness!
At a psychological level, having liquid reserves can increase both subjective well-being and life satisfaction, which are two important aspect of happiness. Subjective well-being is associated with how life feels in a moment-to-moment basis and life satisfaction relates to how satisfied people think they are with life in general. This emphasizes the importance of having liquid assets, not just to decrease stress, but to be happier.
How much money do you need to experience the psychological benefits of having liquid assets?
Although having liquid assets can significantly increase financial well-being, it doesn´t mean that having lots of money in reserves will give a proportional boost to your levels of happiness. The positive effects of liquid assets are greater when there is a minimum financial buffer to cover the basics, after that, there is only a modest change in the positive effects of savings.
Finding balance is the secret: No! You don´t need tons of money to feel safe.
Research on the relationship between money and happiness continues to show that when it comes to “the good life”, being balanced is fundamental. Just like with other aspects of finances, such as income, the secret is not to be excessive. Instead, it is crucial to find a modest point where you can feel financially secure without having to sacrifice other important areas of life, such as health and interpersonal relationships.
Ruberton, P.M., Lyubomirsky, S., Gladstone, J. (2016), How your bank balance buys happiness: the importance of “cash on hand” to life satisfaction. American Psychological Association. 16, No. 5, 575-580