As a great street poet once said, “Mo’ money, mo’ problems”.
I can’t argue with Biggie on that.
There are those who say money can buy happiness, but I question whether that is really true. Indeed there is a certain point where money does make life easier, but does it make you happier? How much money would it take to be happy? Some researchers at Princeton set out to find what that number was. Surprisingly, the number they landed on was $75,000 per year. The more a person’s annual income was below this number, the less happy they reported being. However, making more than this number didn’t result in happier people. This finding doesn’t surprise me. The key is not how much we make but rather, how we spend it.
It’s funny how our expenses quickly catch up to our income. How our wants quickly become our needs.
People are shocked when they hear about professional athletes blowing through their fortunes. But is it really that shocking? If you are a bench warmer on the Miami Heat and your teammate Lebron James drives a Bently Continental GT, Dwayne Wade rides in a Ferrari Spider, and even Chris Bosh is rolling in a Range Rover Sport, are you driving to the game in a Ford Focus? If you’re like most of us, you probably aren’t. How long will it take for wants to become needs and expenses to catch up to your higher income? Pretty soon you’ve breezed through your peak earning years with little saved and have acquired some very expensive (and unsustainable) tastes going forward. Living an extravagant lifestyle has diminishing returns, but lasting effects.
We haven’t even talked about credit cards, lines of credit, mortgages and other forms of leverage. Add on credit and now our expenses can exceed our income and in a pinch, life can become really unhappy.
Absolute income shouldn’t be a measure of happiness. There are families in the 1% that are living paycheck to paycheck, and families with middle class incomes who enjoy financial freedom. It all comes down to managing expenses.
I’m willing to bet that those people who have a higher level of disposable income (income less expense) would report being happier. Living within your means and reigning in expenses will result in more happiness than getting a raise will. Being rich is a state of mind. As Gordon Gekko said “I’m talking about liquid”. Liquidity means having cash available when it’s needed the most. That, in my opinion is financial freedom. How liquid are you?
My financial goals for 2012 are simple – increase disposable income, increase my savings rate, keep expense flat.
How I plan on achieving these goals is simple also. We are sticking a pin in the lifestyle sustainable by our current family income and living within our means. In other words, instead of expense keeping pace with raises and promotions, we will put aside future compensation increases into long-term and short-term savings accounts. Our needs met on a monthly basis through our income and saving towards our wants. This does require a paradigm shift though. Taking on additional expenses will require a lot more thought and research.
Just because we can afford it now doesn’t mean we should buy it now.
In 2012 we’ll try to show that “mo’ money”, can indeed mean less problems.