Investing for Money vs. Investing for Happiness
If your instinctual response to that title was, “Wait, but aren’t those the same thing?”, your training is complete. I’ve successfully brainwashed you into the relentless pursuit of wealth.
After all, like Jonathan Haidt says in his book The Happiness Hypothesis, “Those who think money can’t buy happiness just don’t know where to shop.”
But happiness research can be interesting, mostly because we can’t research it empirically: Every happiness study I’ve seen uses self-reported measures of happiness, which means there’s no really objective way to gauge it across cultures.
For example, you’ve probably seen the 2010 study that claims happiness begins to plateau after you receive an annual income of $75,000, an idea that has now been more or less disproven. Another study goes so far as to claim (hilariously) that people with $10m are measurably happier than those with a paltry $1m–2m. Those poor little millionaires!
Is it even possible to objectively assess something as complex and personal as happiness, let alone money’s impact on your subjective experience of it?
Financial goals, sacrifice, and taking the steepest path up the mountain
If you take home $5,000 per month and your goal is to save $2,500 (a 50% save rate, for those keeping score) because a 50% save rate makes intuitive sense on your journey to financial independence, you’ll likely find yourself in situations where you’re forgoing small luxuries or experiences to stay under your self-imposed budget.
“It begs the question: What’s the point of reaching financial independence?”
This is the point where I, as the self-proclaimed millennial money guru, tell you that a 50% is unquestionably a good thing. Discipline! Sacrifice! Focus!
But it begs the question: What’s the point of reaching financial independence? Is it to never work again and tap-dance out of the boardroom, middle fingers extended? Maybe—but you’re likely trying to achieve something else. Happiness.
Our biggest challenge is striking the balance of “sacrifice in the short term” and “happiness in the long term.” And when taken to its logical extreme with the best of intentions, it’s easy to assume this relationship is linear: The more I sacrifice now, the happier I’ll be in the future.
But that’s not how the sacrifice/happiness lever works.
“It’s not the destination, it’s the journey!”
Research suggests humans overestimate how much incremental happiness they’ll feel from large changes, because we often return to our baselines after big, circumstance-altering shifts. That’s fancy scientific talk for the idea that your baseline level of happiness may not change as much as you think once you summit your personal financial mountaintop.
So let’s run a thought experiment: Say I estimate that my life will get roughly 20% better when I hit financial independence. It won’t change everything, but it’ll change enough of the things that actively annoy me on a daily basis and give me a lot of time back. On a scale of 1–10, if I’m a baseline 7 every day now, I don’t think it’s outrageous to assume I’d be closer to a baseline 9 if all pressure to generate my income evaporated.
“These little dopamine bumps are capable of making you just a little bit happier in your day-to-day life.”
So today, I want to measure just how much small sacrifices materially change the time it takes to reach a financial goal (in this case, financial independence).
You’re going to have to suspend disbelief with me for a moment and pretend that we could also assign a value to your Happiness Quotient™ (HQ™) on any given day. For example, let’s pretend the mornings when you buy a fancy coffee and a scone from the shop down the street and start work a little later give you a 10% boost in HQ.
If we’re measuring happiness on the same set scale of 1–10, maybe this ritual takes you roughly from a 7 to an 8.
Normally, I’d be the voice of reason in this scenario and remind you that purchasing pleasure is a slippery slope and it requires constant swiping to be satisfied and blah, blah, blah—but not today. Instead, we’re acknowledging that these little dopamine bumps are capable of making you just a little bit happier in your day-to-day life.
So how much does a little #light hedonism slow us down?
I should clarify two things right now: Spending more will absolutely result in you having less money, or, at the very least, the same amount of money, but later. And that’s okay, because the point isn’t to accumulate as much money as possible (or even to be financially independent as quickly as possible), but to achieve the most total cumulative happiness.
Rather than taking the steepest, hardest path up the mountain, we’d want to find the most enjoyable one: the path where we get the most marginal utility for our sacrifice, but stop short of diminishing returns.
The framework and numbers
All right, #RichGirl. Let’s get hypothetical, shall we?
Using our earlier $5,000/mo. income and 50% savings rate, that means we’re allowing ourselves to spend $2,500 so we can invest $2,500 per month.
At that rate, our hypothetical rich girl would need $750,000 to be financially independent (ignoring inflation, raises, etc. to keep this point illustrative).
If she saves $2,500/mo., she’ll reach financial independence after about 15 years (assuming an average 8% real rate of return). That’s 15 years of sacrifice, assuming staying under her $2,500/mo. budget requires sacrifice to maintain.
How much extra money would she have to spend each month for some happiness units?
I’m going to use my own life as an example here and rack up some happiness charges that will make her life better.
$100 every two weeks for cleaning services (~$200/mo.)
$5 per day for a fun coffee, tea, or other #littletreat (~$150/mo.)
$30 for one nice lunch out during the work week, every week (~$120/mo.)
Maybe her weekly lunches, daily special coffees, and cleaning services buy her an additional 10% of happiness. Nothing crazy, right? We’re not trying to change our entire lives, just give a 10% bump to our HQ.
In total, that’s $470 more per month for convenience and a little joy. Our hypothetical Rich Girl is spending roughly 19% more each month to enjoy these little luxuries, and therefore saving 19% less ($470 out of $2,500), because her save rate was 50% before. Now, her new save rate is 40%, because she’s only saving $2,030 per month instead of $2,500.
She needs 19% more, and she’s saving 19% less. So how much is her timeline thrown off?
Her goal number is directly impacted by how much she’s spending, of course. Now that she’s spending an extra $470 per month, her goal number goes up: Instead of $750,000, she now needs $891,000.
Now, she’d be financially independent after 18 years, instead of 15.
Would you rather have a “7” level of happiness for 15 years and then jump up to a “9”, or an “8” for 18 years before hitting “9”?
Here are a few questions to ask yourself:
How much do I make each month now?
How much do I spend? Do I honestly feel like I’m making sacrifices right now to spend less?
When am I on track to hit FI right now? (You need to know your current invested assets, the amount you’re adding to them each month, and how much you spend per month * 300)
What types of things would I want to intentionally add back into my day to bring more joy, and how much would they cost? Conversely, are there things that you’re spending money on regularly that aren’t raising your HQ? Can you redirect existing funds?
How much more per month would I have to spend to achieve a 10% boost in happiness?
How would that spending increase impact my timeline?
Try this out for yourself and see what it would cost to increase your happiness on the journey. You might find you’re taking a steeper path to reach a destination faster that isn’t all it’s cracked up to be…or you may realize your weekly pedicure doesn’t actually move your HQ, and you’d rather invest that money in reaching financial independence (or another, more meaningful goal; I’m looking at you, after-market Eras Tour tickets) just a little more quickly.
