A while back, I wrote the 3 Ways to Avoid Downgrading Your Lifestyle After Retirement. We did this by saving a large portion of our income when I was working full-time. We put an artificial cap on our monthly expenditures. That made it easy to maintain the same lifestyle when I stopped making a 6 figure income. Our lifestyle didn’t change much after I retired from my engineering career, but our quality of life improved immensely. I gained a lot of happiness by removing the part of life that I disliked. Today, I want to look at the other side of the coin. Life is pretty good now, but can money buy more happiness? Would our quality of life improve with say, spending $500/month more?
Money and Happiness
Can money buy happiness? Of course, it can. We all know that having extra money is better than struggling to pay the bills. A study from Princeton University showed that the more money you make, the happier you are – up to a point. Once your household income exceeds $75,000, the effect levels off and more money doesn’t really increase your level of happiness. As you accumulate more wealth, it becomes more difficult to buy more happiness.
So how do you buy happiness with money? We can buy material things and that will make us happier, but that warm glow doesn’t last long. A new car would make me very happy for a few weeks, but I would adapt to it and revert back to normal pretty quickly. Actually, a new car would be a major source of stress for me. Now, we park on the street and our car gets dinged pretty often. With a new car, I’d be angry every time I see a new ding. With a beaten up 10 years old car, new dings don’t make any difference. This is the conundrum with buying more stuff. You feel good for only a short while so you have to keep buying more stuff to feel better. Spending this way can become an addictive cycle.
Experience trumps material goods
You probably have heard that spending money on experiences is better than buying material goods. Doesn’t that sound counter-intuitive? Material goods can last many years and it ought to be a better value than spending money on fleeting experiences, right? That’s wrong according to Prof. Howell’s study from San Francisco State University. The study found that when people look back at their purchases, they realize that experiences actually provide longer-lasting value.
What should I spend money on?
I’m generally happy these days and on a scale of 1 to 10, I’m at about 8 on most days. There are ups and downs, but 8 seems to be my natural happiness point over the last few years.
Our household income is more than $75,000 so we’re above the threshold set by the Princeton study. We have some extra money for discretionary spending and we can save extra for the rainy days. At this point, we accumulated enough net worth to feel financially secure. Life is pretty good. We have reached the point of diminishing returns. Spending more money might not make us feel any happier.
From the internet, I gathered that there are in fact a few ways that spending money can bring happiness.
- Buy experiences – Okay, I believe that buying experience is better than a new laptop, but what can we buy? Summer is usually a good season for us. Normally, we’d go hiking, biking, swimming, camping, and attended many fun outdoor events. However, we cut back a ton this year due to COVID. We took 2 road trips in Oregon so we had some fun. I can’t think of any experience we can buy for the rest of 2020. Well, I’ll try to visit my parent in Thailand, but I’m not sure if that’s going to work. I guess we’ll see how it goes.
- Give it away – Another way to “buy” happiness is to give money away. Hmm… Does this really work? Prof. Dunn at UBC handed students some cash and told them to spend on themselves or spend on others. Surprisingly, students who spent money on others were happier than those who treated themselves. Actually, I am sending my parent $500/month. (I have 2 brothers so my parent gets $1,500/month.) They don’t have much savings so this gift is very helpful for them. I’m happy to help. This gift brings joy to all of us.
- Buy time – This is what I did when I quit my old job. I gave up some money in exchange for the ability to dictate my own time. It’s worth every penny. You couldn’t pay me enough to go back to that way of life. Buying time is the ultimate way to spend money. Then you can do what you want instead of following orders. Of course, if you enjoy working, you can choose to keep working as well. This is what FIRE is all about – choices.
- Get rid of debt – Lastly, saving more doesn’t make you much happier, but taking on more debt will make you less happy. If you have a lot of debt, life will improve if you pay it off. We have no consumer debt so we’re okay on that front. We have a mortgage on our primary residence, though. We are working on them, but I don’t feel the need to pay them off right away.
In conclusion, if you’re already happy, spending more money probably won’t increase your happiness much. If I have an extra $500/month to spend, I’d probably just invest it. I don’t see how spending would improve our happiness. I could give more money to my parent, but that’s not good either. My dad tends to use the money if he has too much. It’s better to send just the right amount.
On a scale of 1 to 10, how happy are you? If you have $500/month extra, how would you spend it to make life happier?
Princeton study – High income improves quality of life
WSJ article – Can money buy you happiness? Image credit – WSJ.
SFSU study – Experiences better than material goods
Elizabeth Dunn’s book – Happy Money: The Science of Smarter Spending.
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.
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Originally posted at https://retireby40.org/can-money-buy-happiness/