Many Happy Returns

Figure 1. “Maybe if there was a global pandemic forcing people to stay at home and order everything online, I could finally be happy,” he thought before making a substantial donation to the Wuhan Institute of Virology. 

Vicki Robin identified this hedonic treadmill in Your Money or Your Life: whatever you make quickly becomes “normal” and you are instilled less with gratitude than renewed inadequacy. Jonathan Clements, the writer of How To Think About Money, notes that, as Americans, “We have twice as much to spend as we had 42 years ago—but our reported level of happiness is no higher and our satisfaction with our financial situation has declined.”

Figure 2. Of course, if you have a treadmill desk, then you at least can get a runner’s high en route to endless under-satisfaction

The good news is that most Americans are happy – apparently around 85% on a daily basis. But there’s only so much correlation with that feeling and money. As your household income approaches about $75,000, you can rough out the edges of life. But after that, there’s no gain in happiness. The typical billionaire is about as happy as someone earning in the upper quarter of the five-figures. In fact, Jason Zweig, the author of Your Money and Your Brain, reveals that 19% of those with a net worth of over $500,000 agree with the statement “Having enough money is a constant worry in my life” — and, incredibly, “among those who were worth at least $10 million, 33% felt that way.”

Figure 3. Apparently, you go from worrying about the price of milk to the price of jet fuel. 

To understand how money is misleading, the blogger Mr. Money Mustache asks quite vividly: “would you lock yourself in a dark, silent box forever in exchange for becoming a billionaire?”

Perhaps that offer doesn’t tempt. But Zweig suggests that “While it’s doubtful that money can buy happiness, happiness can buy money.” At its most basic, to chase more dollars, you can work for more hours for more years at jobs you dislike. Robin encourages you instead to radically choose to consider what you have enough.

Choosing enough concedes a personal truth that conservatives are fond of observing about government: we have a spending problem, not an income problem. We tend to stressfully spend too much generally but especially on things that don’t make us happy. There’s a better way: embrace the old-fashioned virtue of thrift. And, ironically, by focusing less on earning more and more on spending less, you increase your chance at creating (and retaining) real wealth.

Robin proposes you undertake two jarring tasks. First, determine just how much money you have earned throughout your life – and then compare it to your present net worth. Note that the typical American with only a high school education brings in over $1.3 million in lifetime earnings, and the number jumps with additional degrees. Robin asks: What have you got to show for all you’ve made?

Figure 4. When asked how he managed to lose $10 million in lifetime earnings, old Hollywood leading man George Raft replied, “Part of the loot went for gambling, part for horses, and part for women. The rest I spent foolishly.”

Second, “keep track of every cent that comes into or goes out of your life.” For every category of spending, what kind of return in personal satisfaction are you getting over time? Personal finance at its most basic is to spend less than you earn and invest the rest (hopefully in index funds). Take a hard look at your spending to determine whether it delivers: Price is what you pay, value is what you get. If you can save over 20 cents of every dollar you make, you are well on the road to wealth – but any percent is better than none. As Thomas Stanley notes in his book, The Millionaire Next Door, “If you make a good income each year and spend it all, you are not getting wealthier.” In his surveys, over 2/3 of millionaires know exactly how much their family spends on food, clothing, and shelter every year – but only about 1/3 of those with high income but no millions have any idea. 

As you try to buy happiness, studies suggest that there are spending categories that tend to have the highest return on investment. Generally, free time and the autonomy to say no is a broad and powerful happiness benefit of having enough money – in other words, just shifting your mindset will already yield rewards. The best specific return is generosity: as Clements reveals, “We get greater happiness if we spend our money on others rather than on ourselves.” Giving to your favorite charity, buying your friend lunch, getting flowers for your wife all have wonderful personal happiness yields. Relatedly, spending money to spend more time with family and friends – whether moving closer, jumping on a flight, or just getting movie tickets – has a great return. When you do spend money on yourself, nutrition and health are practically priceless: large, fresh fruit everyday will make you happier over the long run than the finest cigars. And money spent on delegating or avoiding things you dislike also has a good return – the evidence here is strongest on avoiding long commutes in traffic by moving closer to work.

How much of your current spending is going toward those categories? There’s really not much more that produces consistent reported satisfaction for people. In particular, what folks often reach for but has the least long-term return are physical things. Bryant observes the better alternative that constitutes the final spending that has proven to yield a good return: “Experiences not only offer the chance for eager anticipation, but they can also leave us with fond memories—and those memories often grow fonder over time, as we recall the overall event and forget the incidental annoyances. Meanwhile, we quickly adapt to material improvements in our life, plus we have to care for these possessions and watch them deteriorate.” In other words, you will probably be happier occasionally renting a sports car for a driving spree than actually owning one. In fact, in Stanley’s survey of millionaires, more than half had never paid more than $30,000 for a motor vehicle.

Figure 5. The ultimate source of happiness is the act of regifting to others all the stuff you don’t want! Indeed, the secret to dying happy is quite simple: write a will. 

There’s also a controversial aspect to your money and happiness. The same house could be a source of misery or joy, depending on the neighborhood you are in. Conventional financial advice is that you should buy the worst home on the block – but that’s the recipe for agony. H.L. Mencken once joked that a happy man is one who makes more than his wife’s sister’s husband – and there’s an unfortunate amount of truth in that. Our tribal minds are too sensitive to status and comparison – so, ideally, happiness-wise, you delete Instagram, throw out the TV, live in one of the nicer homes of your neighborhood, and volunteer regularly at the local homeless shelter. Note that in Stanley’s survey, “Fully 90 percent of millionaires who live in homes valued at under $300,000 are extremely satisfied with life” and about half of millionaires have been in the same house for more than twenty years. The millionaire mindset – and quite a happy one – is that “financial independence is more important than displaying high social status.”

As you cut down the categories that don’t yield satisfactory returns, Robin reports a variety of approaches:

• • • “Personal finance Ninjas love to run the numbers, optimize systems, exploit niches, study personal finance blogs, mess with investments, hack the system to get free flights and hotel stays.” This category includes my best friend, who buys his favorite brands’ gift cards at steep discounts, practically has a doctorate for studying credit card points and benefits, and has set up a variety of quasi-permissible systems to bring his costs to nill. 
    • Robin also tells us of “the Frugalistas, who love bargains, clipping coupons, free-cycling, and deal making,” a category that thankfully includes my fiancee, a devotee of thrift stores, discount hunting, and instantly returning anything less than satisfactory. 
    • Then there are “the Supersavers, who love beating last month’s percentage of salary saved.” Even if you can’t compete in this Frugalympics, there’s a deep satisfaction in watching a chart of your income stabilizing or increasing, your costs decreasing, and the gap in between representing larger and larger savings, i.e. your freedom. 
    • There are the “DIYers,” a category that includes my future father-in-law, a retired metalworker who collects with a discerning eye everything from old tractor engines to abandoned buoys – a large garage full of which his wife threatens to sell to 1-800-GOT-JUNK. But he can fix virtually anything and, as Robin describes, he has a blast “Building, farming, tinkering, making, cooking, gardening, designing, creating, painting, or inventing.”
    • And finally, there are the minimalists, a group to which I aspire, for whom “It’s not about the money; it’s about the meaning.” Robin suggests that “minimalism” may be a little bit of a misnomer: “Waste lies not in the number of possessions but in the failure to enjoy them… To be frugal means to have a high joy-to-stuff ratio.”

I should close by noting that the literature about reducing spending overall and redirecting it toward personal satisfaction has become especially popular due to a movement acronymed FIRE: Financial independence, retire early (sometimes as early as their 20s). A tenet of the faith is that if you can live on 4% of your investment portfolio, then you are financially independent. This is based on a study that found if you withdrew 4% a year from a portfolio of 50% stocks, 50% bonds, in 96 out of 100 starting years, you would not exhaust the principal over 30 years (and indeed, in many years, your wealth would grow dramatically). There are quite a few issues with this, including the fact that 25 year old retirees will need more than 30 years of income, but William Bernstein summarizes: “At a 2 percent withdrawal rate, your nest egg will survive all but catastrophic institutional and military collapse; at 3 percent, you are probably safe; at 4 percent, you are taking real chances.” To be safer, “limit annual withdrawals to [the] percent of a three-year moving average of your portfolio.” And Clements advises you can practically extend this by varying spending, lowering your withdrawal in a bear market by keeping your fixed costs as low as possible.

That’s about it: Embrace the magic of enough, enact daily the virtue of thrift, and see the benefit to your happiness and wealth. 

Figure 6. Click here to buy Vicki Robin’s Your Money or Your Life (7/10), a book about mindset. Has an especially arresting passage about how “Midlife comes and we discover…we’ve been filling teeth for twenty years because some seventeen-year-old (was that really me?) decided that being a dentist would be the best of all possible worlds.” My principal caveat is to use the radical notion of “enough” to work hard chasing your dreams, not completely exit the world (unless, of course, hermitage is your aspiration).

Figure 7. Click here to buy the Millionaire Next Door (6/10), a survey of millionaires whose primary insight is that most live modestly compared to their means. But there are others – such as 4 out of 5 are first-generation affluent. As a descendant of Scots (“Starrett” apparently translates into “Over a bog”), I was especially intrigued that the longer an ancestry group has been in America, “the less likely it will produce a disproportionately large percentage of millionaires. Why is this the case? Because we are a consumption-based society.” But there’s an exception.

The Scottish ancestry group makes up only 1.7 percent of all households. But it accounts for 9.3 percent of the millionaire households in America. Thus, in terms of concentration, the Scottish ancestry group is more than five times (5.47) more likely to contain millionaire households than would be expected from its overall portion (1.7 percent) of American households… more than two-thirds of the millionaires in America have annual household incomes of $100,000 or more. In fact, this correlation exists for all major ancestry groups but one: the Scottish. This group has a much higher number of high–net worth households than can be explained by the presence of high-income-producing households alone… More than 60 percent of Scottish-ancestry millionaires have annual household incomes of less than $100,000. No other ancestry group has such a high concentration of millionaires from such a small concentration of high-income-producing households… A household of Scottish ancestry with an annual income of $100,000 will often consume at a level typical for an American household with an annual income of $85,000.

Figure 8. Click here to buy Your Money and Your Brain (9/10) or How To Think About Money (6/10), each by a different Wall Street Journal columnist. In Your Money and Your Brain, Jason Zweig presents an excellent practical application of the work of Daniel Kahneman about how your mind’s shortcuts can interfere with the best investment decisions. And he cites an array of revealing data points, such as “Among American workers who say they are ‘very confident’ that they will have enough money to live comfortably in retirement, 22% are currently saving nothing for that goal, and 39% have saved less than $50,000. Another 37% have never even estimated how much money they will need to retire comfortably.” Which brings to mind a joke told by the Bogleheads from Jonathan Pond: “You really don’t need to begin saving for retirement before you reach 60. At that point, simply save 250 percent of your income each year and you’ll be able to retire comfortably at 70.” Jonathan Clements’ How To Think About Money opens up with an especially good chapter about the relationship between spending and happiness – and advances the interesting notion that we find pursuing goals more satisfying than achieving them.

Thanks for reading!  If you enjoyed this review, please sign up for my email in the box below and forward it to a friend: know anyone who wants to be happy? How about somebody who wants to better control their spending? Or do you know a billionaire who needs advice for how to give it all away? (I am available for personal consultation on the last).

I read over 100 non-fiction books a year (history, business, self-management) and share a review (and terrible cartoons) every couple weeks with my friends. Really, it’s all about how to be a better American and how America can be better. Look forward to having you on board!