Over the last couple weeks I’ve run through a lot of my philosophy behind saving and investing. I discussed that I invest at least as much as I spend every month because I want to buy options for my life, because I see the value of labor declining over time, and because I don’t want to need to start a new career path if mine gets automated out of existence.
The big question for most people at this point is: “Is it worth it?”
Saving that much money is unusual in our modern culture. That means I must be living differently. I must be skipping out on spending that my peers are doing. I must be making sacrifices.
So are they worth it?
I’ll tell you why.
Before I ever studied finances and investing, I studied happiness.
I wanted to understand it. I was in college and recognized that a lot of the things I thought would make me happy didn’t. Or made me quite happy for an evening and then left me with a headache the whole next day.
I thought I was a pretty smart guy. So why couldn’t I figure out how to be happier?
So I did what I always do when I see a problem that needs to be solved. I read. A lot.
I started with the pop self-help books. There were a lot of them. Most of them were useless. They provided some feel-good quotes and motivation, but no scientific backing.
So I moved on to psychology. I read books and studies from Dr. Sonja Lyubomirsky, Dr. Martin Seligman, Dr. Mihaly Csikszentmihaly, and many others.
I expanded into neurobiology studies on happiness and learned more about the brain. (I still struggle with a lot of the drier, more technical studies, but I also have a neurobiologist friend that I ask asinine questions of when I need help.)
I learned a lot, both about happiness and about my own decision making.
Money and Happiness
I learned that I was not alone. That we all suck at knowing what will make us happy.
And we waste a lot of money on things that we think will make us happy, but don’t. Happiness isn’t nearly as expensive as we think it is.
Let’s start with a ceiling.
As we’ve discussed before, a 2010 Daniel Kahneman study found that for the average person, happiness increases with household income up to $75,000. After $75,000 in household income, there is no longer a benefit to happiness.
(For the more nuanced take and a discussion of the different types of happiness, see the original article. I’m going with shorthand here.)
So $75,000 for a household of 2.5 people is our ceiling for how much happiness costs. After taking out around 5% for the average savings rate and subtracting federal income tax, state income tax, social security tax, and Medicare tax, the happy family is spending around $50,000. Spending beyond that doesn’t contribute to happiness.
(“But I live in a city, Matt! Things are more expensive here!” I thought the same thing. Turns out, though, that $75,000 number holds in high cost-of-living places like New York City.)
But that number is based on the average family’s spending. And the average person hasn’t spent enough time learning about happiness.
Humans are great at adapting to new situations.
This is great when something bad happens to us. We adapt and go on to live happy lives. One study found that end-stage kidney disease patients had the same level of happiness as healthy people. This despite having to adhere to a strict diet and undergo nine hours per week of hemodialysis.
They got used to it and their happiness bounced back.
The downside is that we adapt to positive changes, too. This is why another study found that lottery winners returned to their previous level of happiness after only a year.
They got used to it and their happiness fell back.
Hedonic adaptation affects pretty much everything we do. We love that new couch when we first buy it, but eventually it becomes just another couch. We love our new phone when we first buy it, but soon we take it for granted.
The biggest areas of expenditure for the average American are housing and transportation. And housing and cars are some of the biggest hedonic adaptation risks.
When you first move into that bigger, more modern house, you love it. Eventually you end up liking it just the same as your old house.
When you upgrade to that new car, you love it. But eventually your happiness falls back to where it was with your old car.
There is a short-term happiness boost when you upgrade. When you get that new car. When you get that bigger house.
The question is: what is it worth to you?
Since my wife and I got together seven years ago, we have shared one car and made zero car payments. We missed out on the happiness boosts that come from updating our car. But we also saved the money that others would have been spending on those upgrades.
The average car payment in the US is right around $500/month for 68 months. Over seven years, that is $42,000. Plus, we invested that money, so that $42,000 over seven years becomes over $56,000.
You could go on some pretty baller vacations for $56,000. You could put a down payment on a house. You could let it grow in investments and use it to retire early and free up more time to do things that truly make you happy. Investing that $500/month for 20 years, assuming an 8% return, nets you almost $300,000.
If you decide you don’t want to retire early, then you can buy a boat. Or a Tesla. Or whatever else you want to spend it on.
Or, you could get the short-term happiness boost from the new car every 5.5 years. Your choice.
So what does make us happy?
I’ve spent a good deal of time talking about how we are bad at finding happiness, and no time on how to correct that.
There is a lot of research and a lot of different findings. Far too much to cover here today, but I’ll give you a few ideas.
(And if you’re interested in happiness research, check out past articles on happiness)
- If you want to buy happiness, one great way is to pay for experiences.
- Another good use of money is spending it on others. Acts of kindness and donating to charity both provide really high happiness returns on investment.
- Practicing gratitude. It sounds simple and is easy to ignore, but studies have shown that it is actually a massively powerful tool in living our happiest lives.
- Overcoming challenges. When we are able to find a challenge that is just slightly beyond our current capabilities, we hit a state called “flow” and are able to reach a surprisingly high level of happiness.
The Real Challenges
While I recognize that there are many families simply scraping by, I hope this showed you that many of us can cut back our spending without sacrificing happiness.
Instead, the biggest challenge in saving this much is breaking away from the default.
We live in a consumerist culture. It is assumed that you will spend most of your paycheck. If you contribute enough to a 401(k) to get the company match, then most people will say you are saving enough. With an average savings rate of 5%, the mere suggestion of saving 50% gets you weird looks.
You need to be confident and comfortable being different.
You also need to recognize that comparison is the thief of joy. We have a tendency to self-segregate into groups of people like ourselves. This means that we end up with a lot of friends that have similar incomes to us.
It’s hard to get used to the truth that newer toys don’t make people happier. We get jealous when we see our friend’s new car. We long for the beach house that we see on Instagram. We instinctively want to keep up with the Joneses.
But we need to recognize that those things would not make us happier in the long run. That our brains our tricking us into a mindset of more more more.
And that is the real challenge of saving a lot.
We know intellectually that spending more won’t make us happier, but it is easy give into the emotional drive for more.
Is It Worth It?
That brings us back to the question that we started with: Is it worth it?
I believe it is. At least for me at this point in my life.
Ultimately what it comes down to is trading in those small boosts to present happiness that come from extra spending for much larger boosts in the future.
It is passing on smaller, shorter-term pleasures for consistent, long-lasting happiness and security.
I think this trade-off would be worth it simply for the happiness trade-offs. (But then, I am the type of person that would have dominated the marshmallow test when I was a kid.)
When you throw in the stability and security that this type of lifestyle buys for my family, it becomes a no-brainer.
What about you? Do you think it’s worth it? Do you disagree with me? Let’s talk in the comments!