Everyone’s heard the expression, money doesn’t buy happiness. I’d say there is some truth to this, but it’s not entirely true. In fact, surveys have shown that people in lower income households on average are generally less happy than wealthier people. It makes sense if you think about it. Low income families may struggle and be stressed with the necessities of life such as feeding their family, paying the mortgage and the risk of losing their job. Wealthier individuals may still experience stress in their life, but assuming they and their families are in good health, these stresses aren’t as life altering as those of lower income families.
There are also the stories of lottery winners who win huge amounts of money in a short period of time. They quickly find themselves overwhelmed with the lifestyle changes and their relationships with friends and family suffer. It’s clear that being more wealthy gives you more options in life. However which options you choose, or how you spend your money, is really what determines if you successfully convert your wealth to happiness. In this article, I will go over the ways that have been shown to better convert wealth to happiness and the best ways that I personally find work well.
Materials vs Experiences
Many studies have shown that having fantastic life experiences provide you with amazing pleasure during them, but also a lasting pleasure that stays with you. Taking an epic vacation to Thailand will provide you with memories that will last for the rest of your life. Buying material goods, such as new clothes, will temporarily make you happier, but this will quickly fade as you adapt to the new product. Unfortunately, society is full of pressure to keep up with everyone else and always buy the latest new gadget.
But you must be careful in separating experiences vs new expensive habits. Going to a have an evening dinner with your family at a restaurant is a great family experience. You spend time seeing people you care about and get treated to an excellent meal. Eating out everyday for lunch is just a bad spending habit. The difference is eating lunch everyday becomes an “expected” habit of convenience rather than a dinning experience. Avoid regular occurrences of spending and keep your experiences unique and fresh to maximize your enjoyment from them.
A similar logic can be applied to vacations. Taking the same weeklong beach vacation 4 times a year is less of an experience than taking one 4 week vacation across the world, exploring new cities that you have never been to before. What’s important is that you always mix it up and keep it changing.
Slow Spending Increases Are All It Takes
Sudden jumps in income and spending may provide temporary excitement that will wear off in time. What do you if you suddenly received a big raise at work? Well no rush to proportionally increase your spending by the same ratio, take your time with it. Slowly increases a few percentages over the previous year spending and savor every new experience or lifestyle change you make. As you are increasing your spending slower than the sudden jump in salary, you can save the difference and further grow your investments. The following year, make another small spending increase, infusing new experiences and incremental positive lifestyle changes.
This type of slow spending increase, at a rate slower than income jumps will drive positively with many of the strategies covered on this site that are geared towards reaching your long term goals.
The Diminishing Return of More Spending
After a certain point, more spending generates less and less gains in happiness. There is a diminishing return of more spending, it follows a logarithmic curve. Going from a small house to a medium size house will provide you with more of lifestyle change than going to a large house. In fact, too large of a home creates space you don’t need, leading to more effort to maintain it. The fanciest restaurants in big cities make great food, but not twice as good as a regular high quality restaurant, despite the price being double the amount.
This will also be especially true with exclusive luxury and/or sport cars. The lower production volumes of these exclusive cars leads to their manufacturing costs being higher. Luxury brands also expect a higher margin on their product, further diminishing the return on your dollar. If you can afford an exclusive product, and really want it, go for it. Just understand that it will not necessarily be the best value.
Focus on Converting Wealth to Time
There is one exception to a diminishing return on your spending, and that’s spending your money on buying more time. Well, money can’t exactly buy unlimited time, but it can provide you with much more free time.
The first way you can convert wealth to time is by saving for early retirement. Instead of increasing your spending on material goods, save and invest to retire 10 years younger. 10 more years of freedom from the 9-5 job is about 20,000 hours of more time in your life to do what you want to be doing.
The second way to convert wealth to time is by switching to reduced hour work week and using your investments to cover the rest. This is essentially a partial retirement from working full time.
Finally, a third way you can buy more time is reducing your commute to work. Maybe a home closer to work is more expensive, but a shorter travel time can save you an hour or more every weekday. That’s 260 hours a year of extra time to do as you please.
There are many other possible ways you can convert dollars to time, and doing so is really one of the most rewarding ways to spend your dollars as it allows you to have more wonderful experiences in your life that will bring you years of happy memories.