In his book The Happiness Hypothesis, Jonathan Haidt writes, “Those who think money can’t buy happiness just don’t know where to shop.”
But happiness research can be interesting, mostly because we can’t research it empirically. Every happiness study I’ve seen uses self-reported measures of happiness, which means there’s no objective way to gauge it across cultures.
You’ve probably seen the 2010 study that claims happiness begins to plateau after you earn an annual income of $75,000, an idea that has now been more or less disproven. Another study goes so far as to claim (hilariously) that people with $10m are measurably happier than those with a paltry $1m–$2m. But is it even possible to objectively assess something as complex and personal as happiness, let alone money’s impact on your subjective experience of it?
Taking the steepest path vs. the most enjoyable one
If you take home $5,000 per month and your goal is to save $2,500 (a 50% save rate) because a 50% save rate makes intuitive sense on your journey to financial independence, you’ll likely find yourself in situations where you’re forgoing small luxuries or experiences to stay under your self-imposed budget.
This is the point where I, as the self-proclaimed millennial money guru, tell you that a 50% save rate is unquestionably a good thing. Discipline! Sacrifice! Focus!
But it begs the question: What’s the point of reaching financial independence? Is it to never work again and tap-dance out of the boardroom, middle fingers extended? Maybe—but you’re likely trying to achieve something else: happiness.
The biggest challenge is striking the balance of “sacrifice in the short term” and “happiness in the long term.” And when taken to its logical extreme with the best of intentions, it’s easy to assume this relationship is linear: The more I sacrifice now, the happier I’ll be in the future. But that’s not how the sacrifice/happiness lever works.
Research suggests humans overestimate how much incremental happiness we’ll feel from large changes, because we often return to our baselines after big, circumstance-altering shifts.
Maybe I estimate that my life will get roughly 20% better when I hit financial independence. It won’t change everything, but it’ll change enough of the things that actively annoy me on a daily basis, and give me a lot of time back.
Spending more money now will absolutely result in my having less money (or, at the very least, the same amount of money, but later). But that’s okay, because the point isn’t to accumulate as much money as possible (or even to be financially independent as quickly as possible), but to achieve the most total cumulative happiness.
So how much do all of those small sacrifices materially change our timeline to reach a financial goal?
Let’s pretend that we could also assign a value to your happiness level on any given day. For example, let’s pretend the mornings when you buy a fancy coffee and a scone from the shop down the street and start work a little later give you a 10% boost in happiness.
If we’re measuring happiness on the same set scale of 1–10, maybe this ritual takes you roughly from a 7 to an 8.
Normally, I’d be the voice of reason in this scenario and remind you that purchasing pleasure is a slippery slope and it requires constant swiping to be satisfied and blah, blah, blah—but instead, we’re acknowledging that these little dopamine bumps are capable of making you just a little bit happier in your day-to-day life.
So how much does a little #light hedonism slow us down?
If you make $60,000/year and save $2,500/mo., you’ll reach financial independence after about 15 years (assuming an average 8% real rate of return). That’s 15 years of sacrifice, assuming living on $2,500 (or less) is challenging.
But let’s pretend you also want to rack up some happiness units that will make your life better:
- $100 biweekly for cleaning services (~$200/mo.)
- $5 per day for a fun coffee, tea, or other #littletreat (~$150/mo.)
- $30 for one nice lunch out during the work week, every week (~$120/mo.)
Maybe this increases your enjoyment of your daily life by roughly 10%. You’re now spending roughly 19% more each month to enjoy these little luxuries, and your new save rate is 40%.
Now that you’re spending an extra $470 per month, your goal number goes up—and you’d be financially independent after 18 years, not 15. Would you rather be a “7” for 15 years and then become financially independent, or an “8” for 18 years? There’s no right answer. You may determine you’d prefer to be a “7 for 15!” But asking yourself the question (and answering honestly) is crucial.
Read the full piece for a few other questions you can ask yourself to run this experiment.
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Talking with Ramit Sethi about Business, Life, and Money. I love all my guests, but…this interview is up there for me. I ask Ramit questions toward the end that I’ve always wanted to pick his brain about, and to my elation, he answers them quite openly.
Short on time? Check out clips from the interview we’ll be releasing on YouTube throughout this week.
Car shopping tip. I’m (tentatively) in the market for a new-to-me vehicle before moving to the sprawling suburban metropolis of Sacramento, California, and I have my eye on one in particular. I’m a little wary of unknown maintenance costs and very much in the “don’t know what I don’t know” phase, but I’ve been lurking in online forums for owners and enthusiasts and I’ve already learned so much from reading their posts about ongoing costs, options, and negotiation levers to pull. If you’re on the fence about a vehicle purchase, I recommend Googling “[car name] forum” or “subreddit” and poking around. It’s been illuminating!
