Emergency Funds Make You Happy

Worried about money lately? You’re not alone. New research shows it’s time to set up an emergency fund to stop you hitting the wall in a crisis. Brenda Ward finds out why.

Financial advisers have always said 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. And new research from the New Zealand Financial Services Council shows that we need emergency funds now more than ever. It says Covid-19 has hit Kiwis’ financial resilience and wellbeing hard, especially those in Generation Y (aged 37 or below).

We’re worried about money

Over 40 per cent of us are now worrying about money at least weekly, says Richard Klipin, chief executive of the council. Covid-19 – and money worries caused by it – are also taking a major toll on our mental health, the FSC’s Financial Resilience Index shows.

“Fifty-one per cent of us have had our mental health affected at least once or twice by money matters, a 6 per cent increase since New Zealand went into lockdown,” he says. The index showed that Generation X was most worried about job security, with one in four sometimes or always worrying about their job security. “Our hope is that this first stage of research will help drive a national conversation and build awareness of how we can collectively work to build our financial resilience and wellbeing.”

How often do you worry about money?

Generation Y (37 years & below) Generation X (38 – 52 years old) Baby Boomers (53 – 72 years old)

One proven way to prepare your finances to weather a storm like a pandemic is to set up an emergency fund of easily accessible cash.

A buffer makes you happy

In fact, emergency funds can make you happy, one international study shows. Its authors, Peter M. Ruberton and Sonja Lyubomirsky of the University of California, Riverside, and Joe Gladstone of the University of Cambridge, 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. Their 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

“Every time I see that little bit of money sitting there, it’s a sense of relief.”

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.

Life satisfaction went up

A 10-fold increase in people’s monthly current account balance saw an average boost 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, says the study’s authors. “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.” They added: “Having investments and not being in debt are both associated with greater financial wellbeing 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,” they said.

How to set up your fund

Most financial advisers suggest you put aside money for your emergency account first – before you start saving for other goals. Lynda Moore, 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, her ‘Stuff Happens’ account. “Every time I see that little bit of money sitting there, it’s a sense of relief.”

Challenges ahead

The FSC’s Financial Resilience Index paints a challenging picture of our financial resilience as a nation, and one that we know is likely to worsen in coming months, says Klipin.

The council will be doing further research to map how Kiwis are faring. “There’s no getting away from the scale of this challenge, especially with the worsening economic outlook, but as an industry we are committed to doing what we can to help New Zealanders improve their financial resilience.”

The survey showed that generations were affected differently. Gen Y, aged 37 and younger, worry about money the most, followed by Gen X (aged 38-52), then Baby Boomers (aged 53-72). Pre-Boomers (aged 73 and older) worried the least.