What makes people happy? Cash.
People get happier the larger their bank balance grows. Importantly, happiness isn’t so much tied to the absolute level of cash, but rather the percentage of their portfolio that is held in cash.
For financial advisors, this finding is counterintuitive. Shouldn’t clients be happiest about their portfolio’s overall size, or its growth rate? Aren’t investments the driver for a client’s wealth, not cash?
Behavioral finance gives us the answer to this question. Academics Peter M. Ruberton, Joe Gladstone and Sonja Lyubomirsky did a study of U.K. bank customers. The researchers found that a person’s ATM receipt can predict satisfaction better than net worth or portfolio size, they reported in their paper, “How your bank balance buys happiness: The importance of ‘cash on hand’ to life satisfaction.”
“Our results suggest that having readily accessible sources of cash is of unique importance to life satisfaction, above and beyond raw earnings, investments or indebtedness,” the researchers wrote.
What makes people happy is simply knowing the money is in the bank, not necessarily spending it. Once it’s spent, it’s no longer reflected in their bank balance — and no longer contributes to happiness. But when they do spend it, clients can see their happiness levels rise more if they choose experiences, like a vacation or theater tickets, compared to buying physical items, according to research by psychology professor Elizabeth Dunn of the University of British Columbia and others.
“Experiences provide more happiness than material things,” says Dunn, the author of the book “Happy Money.” Sharing experiences with others also amps up the happiness factor, she says: “Use money to go on the amazing trip you’ve always wanted and take a bunch of people who would enjoy it with you.”
Millennials in particular have latched onto this idea. This generation tends to prefer spending money on travel, dining out and other experiences, rather than on acquiring objects. They also tend to be disciplined about saving for specific goals, like an exotic vacation. This can lead to having more cash on hand — which can generate more happiness.
While advisors typically counsel clients to invest most of their money, above a rainy-day fund and what’s needed for current expenses or scheduled large purchases such as a home, having cash on hand can be positive for clients. Cash allows for peace of mind, insurance against emergencies, and the ability to pounce on opportunities when they become available.