In my former life as a World Banker traveling throughout developing countries, including war zones such as Croatia during the Balkan War, I learned to carry at least $2,000 in crisp and clean 100-bills with me at all times. I was concerned that at some point, I would need that cash to save my life or maybe just pay a hotel bill if my credit card were frozen.
Part of feeling successful and in control of your money is being able to handle financial emergencies when they arrive. Yet almost half of Americans (46 percent) say that they would be unable to cover a $400 emergency expense. According to the 2015 Report on the Economic Well-Being of U.S. Households compiled by the U.S. Federal Reserve Board, almost half of all Americans would be obliged to borrow money or sell assets in order to cover the standard expense of an emergency car repair, i.e. $400. This is a serious deficiency.
Being obliged to scramble to cover emergency expenses adds a level of stress and insecurity that would distract even the most productive worker. Without an emergency fund, it is difficult to focus on careful long-term management of one’s financial life. Best to keep at least $400 in a bank account or other easily accessible form.
Furthermore having access to emergency cash increases your happiness and satisfaction with life. In 2016, Peter Ruberton of the University of California at Riverside conducted a study of 585 customers of a bank based in the United Kingdom. He diligently asked the customers, “How satisfied am you with your life? If you could live your life over, would you change anything?”
PM Ruberton found that increasing bank balances from £1 to £1,000 increased life satisfaction by 10 percent – certainly a significant and noticeable difference. However increasing the balances further had far less impact. Going from £1,000 to £10,000 further increased satisfaction by only a small amount – just 3.5 percent. Don’t squeeze your money so tight that you don’t have the cash ready to cover an emergency expense.