It seems like money has just been flying out of my wallet lately.
$3,500 – A late-night emergency room visit to get a breathing treatment for one of my sons.
$2,000 – Bed frames, mattresses, bedding, and pillows for my twins.
$1,500 – A crown for a broken back tooth that I cracked biting into a soft bagel.
And talking with other people in my life, it seems like these unexpected expenses aren’t uncommon.
$10,000 – A new water heater and water softener my friend had to install after his old appliances suddenly broke.
$8,600 – Repair costs to fix another friend’s old Ford.
$5,000 – To fix a broken arm for one of my friend’s sons.
All of this has made me think about the crucial role that money plays as a security blanket in our lives.
Taking your money and investing it is exciting. It’s fun to take the risk and watch your money grow. It makes you feel like you’re doing something. The allure of investing and growing your money is so strong that the simple act of saving cash in a bank account often gets overlooked. As opposed to talking endlessly about hot stock picks and real estate ventures, no one is boasting to their friends about how much cash they’ve put away in the past few months.
Yet, sometimes we simply need money to pay for stuff.
And knowing that you have money set aside that is specifically meant to cover an emergency, an unforeseen expense, or be a buffer through a job transition is the ultimate form of security.
In a study published in Scientific Reports, researchers found that wealth (how much money you’ve saved) has a more positive impact on our mental health than income does:
“Whereas income represents a flow of capital, wealth represents an accumulated stock of capital. Even more than income, wealth represents more holistic access to resources that may improve or protect mental health. Wealth gaps, rather than income gaps, may better describe economic disparities, including intergenerational transfers, that drive access to resources that can then result in differential mental health…A growing literature suggests that wealth is associated with mental health above and beyond income.”
Intuitively, this makes sense to me. A 65-year-old with an income of $150,000 who has had decades to successfully build a $3 million nest egg is going to feel very different about their financial situation than a 35-year-old who also makes $150,000 (or even $250,000) but is still building a career or raising a family.
Income is a stream. Savings is a reservoir. One flows in and out. The other sits there, ready to be drawn on when you need it. It’s hard to underestimate the mental freedom you gain from having that reservoir.
Even smaller-scale savings can have a significant impact. Another study found that having less than $5,000 during the pandemic was associated with a 52% higher chance of having depressive symptoms compared to people with more than $5,000 in savings.
Before the pandemic, in 2016, a separate study showed that those with less than $20,000 in wealth had a 49% higher chance of depressive symptoms compared to those with more than $20,000.
Another study from Vanguard found that those with at least $2,000 in emergency savings had a 21% higher level of financial well-being compared to those without. Having an additional three to six months of expenses saved offered an additional 13% boost.
The average number of hours spent thinking about and worrying about personal finances drops by nearly four hours per week for people who have a modest $2,000 saved.
The act of saving money, even if it’s just in a savings account, can have huge benefits to our lives, well before we reach some sort of financial independence number.
Even a modest emergency fund lets you live with more choice. It makes losing a job less catastrophic. It turns unexpected expenses into inconveniences rather than crises. It permits you to say “no” to things you don’t want to do — not because you’re completely financially independent, but because you’re secure enough to have options.
Saving doesn’t require a goal of purchasing something specific. You can and should just save for saving’s sake.
Planning for the future involves a lot of guesswork. You have to guess about rates of return, income, inflation, taxes, goals, and on and on. It’s impossible to get all of that right. And that doesn’t even include the guesses we’re making about our own values, beliefs, desires, and preferences.
Life is expensive. And no one knows exactly what their future expenses will be. So saving is a great hedge against life’s uncanny ability to surprise at any moment.
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.