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It’s More Important to Be Happy Than to Be Rich
Money can certainly help you achieve your goals, provide for your future, and make life more enjoyable, but merely having the stuff doesn’t guarantee fulfillment.
To put it another way, if you’re living below the poverty line ($22,050 annual income for a family of four in 2009), an extra $5,000 a year can make a huge difference in your happiness. On the other hand, if your family earns $70,000 a year, $5,000 may be a welcome bonus, but it won’t radically change your life.
recent article in the Journal of Consumer Research showed that, in general, our feelings for material purchases fade more quickly than they do for experiential purchases. Material goods depreciate: The day after you buy something, it’s usually worth less than you paid for it. Experiences, on the other hand, appreciate: Your memories of the things you do — vacations you take, concerts you go to — become fonder with time because you tend to recall the positives and forget the negatives.
American culture is consumption-driven. The media teaches you to want the clothes and cars you see on TV and the watches and jewelry you see in magazine ads. Yet studies show that people who are materialistic tend to be less happy than those who aren’t. In other words, if you want to be content, you should own — and want — less Stuff.
In their personal-finance classic Your Money or Your Life (Penguin, 2008), Joe Dominguez and Vicki Robin argue that the relationship between spending and happiness is non-linear, meaning every dollar you spend brings you a little less happiness than the one before it. More spending does lead to more fulfillment — up to a point. But spending too much can actually have a negative impact on your quality of life. The authors suggest that personal fulfillment — that is, being content with your life — can be graphed on a curve that looks like this:
Psychologists call this vicious cycle the hedonic treadmill, though you probably know it as the “rat race.” People on the hedonic treadmill think they’d be happy if they just had a little more money. But when they get more money, they discover something else they want. Because they’re never content with what they have, they can never have Enough.
Money can’t make you happy if your increased wealth brings increased expectations.
Getting rid of Stuff only hurts for a little bit.
In a 2005 issue of the Review of General Psychology, Sonja Lyubomirsky, Kennon Sheldon, and David Schkade looked at years of research to figure out what contributes to “chronic happiness” (as opposed to temporary happiness). Based on their survey, they came up with a three-part model: About half of your happiness is biological. Each person seems to have a happiness “set point,” which accounts for roughly 50% of your sense of well-being. Because this set point is genetic, it’s hard to change. Another 10% of happiness is based on circumstances — external factors beyond your control. These
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According to the authors, because circumstances — including your financial situation — play such a small role in your general contentment, it makes more sense to boost your bliss through intentional activity, by controlling the things you can and ignoring those you can’t. (You can read the entire article at http://tinyurl.com/hmodel.)
You might say that happiness is equal to what you have divided by what you want.
For another attempt to quantify well-being, take a look at this happiness formula from Dilbert creator Scott Adams: http://tinyurl.com/happy-dilbert.
As Gregory Karp writes in The 1-2-3 Money Plan (FT Press, 2009), “Experiences appreciate, assets depreciate.”
And in Your Money and Your Brain (Simon & Schuster, 2008), Jason Zweig notes, “Doing and being are better than having.”
Don’t ignore your obligations, but make the stuff you have to do fit around the stuff you want to do, not the other way around.
Chapter 2. The Road to Wealth Is Paved with Goals
For a goal to motivate you, it has to be specific. It should also be based on your values and desires. Do you really want to be rich in the sense of simply having lots of cash? Or were you just dreaming about what you could do with that wealth?
Imagine that you have enough money to take care of your needs, now and in the future. How would you live your life? Would you change anything? What would you do with the money?
SMART goals are Specific, Measurable, Achievable, Relevant, and Timed. That might sound cheesy, but it’s actually quite effective and can help guide you to success.
On The Money: The How of Happiness During her nearly 20 years of research into goals and happiness, Sonja Lyubomirsky — author of The How of Happiness (Penguin, 2008) — has learned a lot about what makes an effective goal. In addition to the elements of the SMART framework, she says that goals should be: Positive. Positive goals (where you’re attempting to reach a target, like saving for a vacation) yield better results than negative goals (where you’re trying to avoid something, like cutting out your daily latte). Flexible. Your goals will evolve over time. As your priorities change, your
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Stay focused. Pursue only a few goals at a time. It’s tempting to multitask and work toward many things simultaneously, but you’re more likely to succeed if you focus on as few goals as possible.
Automate what you can. One of the most effective ways to increase your odds of success is to take the choice out of your hands.
Positive reinforcement is more effective than negative reinforcement. Studies show that you’ll do a better job of reaching your goals if you reward yourself for successes rather than beat yourself up over failures.
Lynn Brem writes Take Back Your Brain (www.takebackyourbrain.com), a blog that aims to teach you how to fight the influence of commercial marketing and use professional advertising techniques to help you pursue your goals.
Mistakes are lessons in disguise.
As you travel the path to wealth, you’ll inevitably run into financial trolls, which Steve Pavlina describes on his website (http://tinyurl.com/wealthlessons) this way: Financial trolls strive to sabotage your financial pursuits. These trolls can be internal or external. They’re the people who make comments like, “Wealthy people are so greedy. They only care about themselves and will take advantage of anyone to make money.” Financial trolls are also the internal voices that say, “If you make too much money, people will judge you harshly for it. They’ll assume that’s all you care about.”
Chapter 3. “Budget” Is Not a Four-Letter Word "A budget is telling your money where to go instead of wondering where it went.” — John C. Maxwell
Your budget can show you where you’ve already spent your money (expense tracking), what you have available to spend now, and where you want to spend your money in the future (expense planning).
Many budgets fail because they’re too complex. When something is difficult, it can become a chore, and if it’s a chore, you’re not going to stick with it. Your first budget should guide your spending in broad ways rather than determining how you spend every single penny.
In All Your Worth (Free Press, 2005), Elizabeth Warren and Amelia Tyagi propose a budgeting method similar to Tobias’s, though they’re less tongue-in-cheek than he is. The authors argue that, in order to succeed financially, you need to balance three broad areas of your finances. They say to divide your monthly net income (that’s after-tax income — what you actually take home each paycheck) as follows:
Allocate no more than 50% to needs, including housing, transportation, groceries, insurance, and a basic wardrobe. Spend up to 30% on wants like cable TV, clothing beyond the basics, dining out, concert tickets, comic books, knitting supplies, and so on. Set aside at least 20% for savings, including paying off debt.
How can you decide what categories to use? One way is to get ideas from budget templates, which you can find online at places like http://tinyurl.com/ramseybudget and http://tinyurl.com/googlebudgets
(Always budget with only your actual income; don’t include bonuses or raises you’ve been promised.)
Table 3-1. Sample Balanced Money Formula Budget Needs: 50%, or $2,000 Wants: 30%, or $1,200 Savings: 20%, or $800 Rent: $800 Entertainment: $400 Credit card payments: $300 Utilities: $150 Dining out: $300 Your retirement savings: $200 Transportation: $300 Clothes and grooming: $200 Your spouse’s retirement savings: $200 Insurance: $150 Miscellaneous: $150 Your kid’s college fund: $100 Groceries: $500 Charitable giving: $150 Health care: $100 These numbers are targets.
How you think you spend money is likely very different from how you want to spend it — and how you actually spend it. A budget can help you bring these three into alignment.
It’s not always easy to find ways to earn more money, but almost everyone can find ways to curb their spending.
Finally, go to your public library and borrow a book on debt reduction. After you finish it, borrow another book about money. The more you learn about smart money management, the easier it’ll be to make the right choices.
In The Paradox of Choice (Harper, 2005), Barry Schwartz describes his research on two groups of people that he calls Maximizers and Satisficers: Maximizers only accept the best. Every time they make a purchase (or do anything else), they need to be sure they’ve made the best possible decision. Satisficers are willing to settle for “good enough.” These people still have expectations and standards, but they’re willing to settle for something other than the absolute best in order to save time, money, or effort.
The perfect is the enemy of the good. When you spend so much time looking for the “best” choice that you never actually do anything, you’re sabotaging yourself. No matter what you’re trying to accomplish, simply starting the process plays a larger role in your success than any other factor.
Chapter 5. The Magic of Thinking Small "Be industrious and frugal, and you will be rich.” — Benjamin Franklin
clothes, dine out on occasion, and buy new things. Frugality means making the most of your money by focusing on everyday expenses (as opposed to big-ticket items, which you’ll learn more about in Chapter 9
Many people equate being frugal with being cheap. But there’s a difference: When you eat stale crackers with your soup for lunch, you’re being frugal. When you serve stale crackers to your guests to eat with their soup, you’re being cheap. You cross the line when your habits affect others, not just you.
Quick wins. As you learned in Chapter 4, the two ways to improve your cash flow are to reduce expenses and boost income. Both are important, but reducing expenses offers the quickest results. It takes time to find a new job or to ask for a raise, but you can start being frugal right now.
Note For the most part, smart grocery shopping hasn’t changed in decades — your grandmother could have written most of these tips. For a fun look at the shopping advice of yesteryear, watch this 1950 film about buying food: http://tinyurl.com/1950shopping
Note The biggest package isn’t always the most cost-effective. Stores know that people want to buy in bulk, so sometimes they actually make the larger package’s unit price higher than the smaller package’s.
Tip If you eat a lot of meat and have the storage space, buying beef in bulk can be an excellent value. The price is generally about the same as in the supermarket, but the quality is much better. Pool your resources with other families and buy from a local rancher or butcher. For more info, read this article about buying and freezing beef: http://tinyurl.com/buyingbeef.
Waste not. One of the best ways to save money on food is to not let it go to waste. According to various estimates, Americans throw away 12–25% of their food. So if you spend $400 on groceries every month, you may be able to save $50 to $100 simply by never throwing food away. (Here’s a New York Times article on the subject: http://tinyurl.com/fwaste.)
