What does happiness have to do with investing?

Happiness is the ultimate goal of almost any action we take. We want to invest to make more money. We want more money to buy more things or to be free from work. And we want to buy more things or be free from work because we think this will make us happier. So at it’s most basic level we invest because we think investing has the potential to make us happier.

But can we really be certain that more money will make us happier? In a post on behavioral finance, I talked about how we are poor at predicting what will make us happy. So it seems important to question the implicit assumption that more money will make us happier.

Will more money really make you happier?

There’s some evidence to say that more money will not make us happier, or at least not substantially. Some studies have shown that about 50 percent of your happiness can be attributed to your genetics. So regardless of your wealth, half of your happiness level is already determined.

We also have a tendency to quickly adapt to changes in our environment. So even if you gained more money, you would quickly get used to this new level of wealth, and probably decide that you needed just a little more to be at the level of happiness that you wanted. Think about the last time you got a raise, or bought a dream house. The euphoric feeling wears off much faster than we think it will. We are definitely happier in the short-run, but not for very long, and it will take an even larger amount of money to make us happier next time. Given these symptoms, the pursuit of more and more money kind of has the profile of an addiction.

Even after noting this though I still think not having to work every day of the week would be a huge gain in happiness. But one of the surer ways to tell if a particular thing will make you happier is to ask someone who is already doing that thing. And surprisingly, according to this article by someone who did retire early, whether or not you are happier depends a great deal on what you plan to do with the newly found freedom. (Take a look at the comments at the end of that article for some more examples of people with the same problem.)

But what if you have a plan that you think will keep you happy?

If you already have a plan for what you would do if you didn’t have to work, consider dipping into your retirement savings, and taking a year off and implementing that plan now. If you are right, then you get to spend a year doing something you really enjoy and now have some motivation to get there faster by cutting your current and future expenses. If you are wrong, you probably won’t even take the entire year. You’ll probably know within 30 days if your plan is something you won’t enjoy doing for the long-term.

I’m sure your financial advisor will howl in pain if you tell him this plan, so let me address the objections he’ll throw at you.

One tactic he might take is to point to a graph of two people who start saving at different times and how the earlier saver made more in the end, even after stopping saving at a certain point.

The graph is true, but if money doesn’t matter as much for happiness, then why would that graph matter? Well it matters to the financial advisor because his income is a percentage of your savings, so the lower your savings, the less money he makes. So in this case, his interests might not be completely aligned with your own.

Another objection might be that you need to raise as much money as possible (and pay the higher fees that it brings), so that you’ll be able to afford surprise medical expenses.

You should have catastrophic medical insurance to guard against this kind of thing. And even further if there was a large expense, you should be able to take the sum out of your principal and only lower the income that you make off of that principal each month by a small amount.

Another objection might be that you’ll need as much money as possible to outrun inflation. I would suggest you consider Buffett’s advice about buying stocks in companies that have strong brand names, or what he calls goodwill.

The strong brand name allows the company to sell their product for more than their competitors can, so the company can make higher profits using less capital. And when inflation pushes prices up, the company now makes an even higher profit than before and the value of the company increases even more relative to other companies because they gain the benefit of selling at higher prices, but not as much of the hindrance of having to purchase supplies at inflated prices.

Gaining perspective

Finally, consider that by taking a year off now, you are exchanging a year of youth for a year of age. If after taking the year off, you make no other changes and go right back to saving as usual, you will only have to tack one more year to the end of your retirement schedule to be at the same place as before. Is there really a valid difference in retiring at 65 versus 66?

But if it turns out after trying out your plan that it does make you happier, you’ll now be in a position to compare the benefit of a current expense against pushing your plan further out. You’ll be able to make an informed decision on whether or not cable is really worth what you are paying for it in terms of how many more years out it pushes your plan. The same goes for a large house, or new car, or any of the many things that we spend money on now in an often-failed attempt to increase our happiness.

Or you might be able to figure out a way to implement part of your plan now. Perhaps you work fewer days a week, or only part of the year. Or if someone else might like to do what you want to do, you teach lessons and get paid to do what you like, in more ways than one since helping is a way to gain happiness as well.

Once you start thinking about the things that really make up what it is you want to do and what parts of it really make you happy, you might find that it’s not so expensive as you thought and that you can do it much earlier than you originally thought.

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4 thoughts on “What does happiness have to do with investing?”

  1. Interesting post. I would have no trouble with taking a year off, if at the end of that year I was guranteed that the job I left would still be available for the same or more pay or I could find another job of the same value. I agree that money doesn't buy you happiness, but it sure can remove a lot of unhappiness. There's a great deal of peace of mind that comes with financial security.

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  2. You seem to be saying that you're lifestyle is dependent on the salary level of your current job, and that you are not confident you could replace that salary with a comparable one.If that's the case, since jobs aren't guaranteed, do you really have peace of mind or financial security even now?And given that no job is guaranteed, why require a guarantee before you'll look at pursuing your happiness?

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  3. No, It's not about my lifestyle, its about earnings potential and the loss of that earning potential.If you could be a wealthy man living in a broken down home, or a poor man living in a broken down home, which would you rather be?

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  4. I think that question really gets to the heart of the matter because the answer is that it depends on what I had to do to be the wealthy man instead of the poor man.If I had to work all my life and I still ended up in the same shabby house (or level of happiness), then why did I do all that working?

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