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? 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 expenses quickly catch up to income. How wants quickly become 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 and one teammate drives a Bentley Continental GT, one rides in a Ferrari, and another is rolling in a Range Rover, are you really 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 you’ve 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 with one unexpected bump in the road 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.
So once again my financial goals for 2014 are simple – increase disposable income, increase my savings rate and keep expenses flat. Instead of expenses keeping pace with raises and promotions, put aside future compensation increases into long-term and short-term savings/investment accounts. Just because we can afford it now doesn’t mean we should buy it now.
Plan and save. It’s a simple goal.