Money growing on trees (Image: Damon Moss/TS)

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.

Every client holds cash and often clients hold much more cash than an advisor would expect. While a model investment portfolio might only hold a 3% cash allocation, high-net-worth American households now hold more than 23% of their assets in cash, according to the latest Capgemini World Wealth Report.

Investors often like to hold cash because they have a conservative bent. In volatile markets like those prevalent today, cash provides peace of mind, which helps investors stick with their agreed-upon strategies. Cash can also serve as dry powder, to snap up investments when they fall in price.

If clients are committed to hold a certain percentage or amount of cash, it’s incumbent on advisors to make sure they are making the most of it. That starts with getting the highest interest rate possible. This allows investors to maximize their savings account balances and compound the extra interest over time.

In a period of rising rates, as we have today, inflation can devalue savings, so it makes sense to earn as high an interest rate as possible on cash. Recent Federal Reserve rate increases have led to rate wars among banks. While brick-and-mortar banks largely haven’t raised the interest rates they pay depositors, online banks have raised their rates rapidly over the last year. Why are online banks different? They don’t have physical branches, so their cost structure is lower, and they pass some of that savings along to their customers in the form of higher yields on deposits.

Cash held in an online bank savings account is fully liquid and can be moved back to the client’s checking or brokerage account whenever the client needs the funds to spend or invest.

Although this strategy is new to many advisors, it can garner significant interest for clients compared to regular brick-and-mortar bank savings accounts. Regular banks pay an average of only 0.09% on cash, while it’s now possible to earn more than 1.50% on FDIC-insured cash spread across multiple online banks.

When using online banks to hold client cash in high-yielding savings accounts, it’s important to monitor the interest rates, which can change frequently, and also ensure that all funds remain FDIC-insured. Vigilance is key to making sure clients are earning all they can on cash, while keeping it safe. And in the process of helping clients with cash, you may find that you’re better equipped to provide more holistic advice since you’ll have a better understanding of their total assets.

Cash has become a forgotten asset class, although it comprises an important part of clients’ sense of well-being. It’s up to financial advisors to make sure their clients’ cash is working as hard as it can for them.


Gary Zimmerman is the founder and CEO of MaxMyInterest, which helps optimize cash for advisors and their clients. Learn more about Max at MaxForAdvisors.com.