The Bane of Happiness

Positive psychology keeps telling me the money doesn’t mean much by way of happiness.  Yet all of us seem to think money is a panacea, which if we just had enough of it, all our problems would go away.  What’s going on here?

Money may not be able to make you happy, but it can sure make you miserable.  Someone said the way to become rich is to limit your wants.  The way to become poor is to spend more than you make.

When we buy something new and shiny, whether a house, a car, or a new suit of clothes, it gives us a shot of dopamine.  But that high quickly wears off and turns into anxiety when our outgoes consistently outrun our income.  Having a negative net worth is a sure way to neurosis.  It’s hard to feel good about yourself or about life when most of your paycheck belongs to somebody else.

Probably most of you have at least heard about Dave Ramsey.  He has some really good ideas for getting out of, and stay out of debt.  But again, it takes practice.  If you just read his books without turning the exercises into regular practice, you’re going right back into wage slave status.

It takes diligence to stay out of debt, especially when so many businesses are trying to find new ways to spend your money, or give you credit to spend money you don’t have.  They all promise happiness, but ironically the happiness will only come if you keep your money in your pocket.

Budgeting with ADHD

My wife and I and both our kids have all been diagnosed with ADHD. Imagine four people living together who struggle with goal setting, planning, organizing, and getting things done.

We’ve tried to set a budget a couple of times, but it just seemed like an overwhelming task; too many categories, too little planning, too many moving parts. We didn’t get through a week.

The most important aspect of creating wealth for a family is to be economically productive; i.e., live within their means and have an adequate level of savings. This generally means creating and living within a budget. But some families manage to save without setting a budget. These families build wealth by saving a certain percentage of every paycheck. Those who are “wealthy” save at least 15 percent.

My wife is a psychiatrist in private practice. Doctors as a group have a higher propensity to spend than nearly every other occupation. Suffice it to say that the propensity to spend combined with deferred expenses (like taxes, malpractice insurance, etc.) make saving a certain percentage of each “paycheck” more complicated, and for us, an inadequate means to accumulating wealth.

Like most people, what gets us into trouble are retail purchases made via a credit card. We have three cards: one for medical expenses (like a medical flex account), one for Costco (they only take American Express), and one for retail purchases in general.

The idea behind saving a percentage of each paycheck is to create an artificial sense of scarcity for the family. They put that percentage into something like a 401k right off the top, and have to live on what’s left. To create that sense of scarcity for us, I calculate the expected costs in certain broad relatively fixed categories like taxes, utilities, housing, saving, etc. I give what’s left to retail, and then calculate a per diem expense for retail by dividing by 365 days. I pay those cards off every week, calculate the per diem rate of retail spending for that week, and then my wife and I get together to discuss how we did, and whether we need to make adjustments in the following week. And thus our family is becoming more economically productive. What works for you?

Measuring Wealth, a Target for Financial Practice

If we are to have a financial practice, we need to know what we are aiming at. We need to know, “How much is enough?” The best exposition on this topic that I’ve read is in the book, The Millionaire Next Door, by Thomas Stanley and William Danko.
When someone says that another person is rich or wealthy, they typically mean that person has a relatively high gross income relative to other people. We’ve seen that in the fiscal cliff debates, where congress and the president have argued over where to draw the line between the “rich” and everyone else in terms of gross income.
But gross income is just the sum of all sources of income, earned and unearned, that a person has received in the course of a year. It says nothing about what she has spent, what she has saved, or what she has accumulated over the course of her life.
A better measure for determining wealth is net worth. Net worth is just the difference between the sum of all your assets (everything you own), and the sum of all your liabilities (everything you owe). Net worth measures what’s left after all the dust has settled; it measures what you have to show for all your work.
But net worth by itself is not enough to measure wealth. Say Joe (age 40) makes a million dollars a year, but only has a net worth of a hundred thousand dollars. If Joe lost that income tomorrow, he could only sustain his current lifestyle for less than six weeks. But if John (age 50), who makes a hundred thousand a year and has a net worth of one million, lost his job tomorrow, he could sustain his lifestyle for ten years.
For Stanley and Danko, a person has “enough” when her net worth is at least equal to her age times her gross income less inherited wealth, divided by 10. Using this model for wealth, John has twice more than “enough”, but Joe has only about 3% of what would be enough for him by age 50. So even though Joe makes ten times more than John, John is in fact in much better financial shape than Joe. John is “wealthier.”
Hence the target I use to determine whether we have “enough” is the sum of our age times gross incomes divided by 10, and compare our net worth to that number.

Financial Health, Part 2

So if financial health doesn’t consist of a person’s income, what does it consist of?

A household is like a little economy.  We all need food, clothing, and shelter to survive.  So a household needs an income in order to continually replenish these things by way of exchange.  Moreover, if our income exceeds the costs of those basic needs then we have a surplus that we can choose to spend on luxury items or services, save, or give away as charity.

Beyond that, our households are tied to certain cultural norms and status symbols which we consciously or unconsciously strive to meet or obtain.

I think financial health begins with mindfulness; being aware of what we are spending our money on and why.  Without this mindfulness we can be very much like the addicted gambler at the slot machine.  We buy another pair of shoes when we already have ten pair at home, the same way the gambler pulls the handle of the slot machine, both expecting happiness from the next purchase but finding none.

There is a Chinese proverb from the Tao Te Ching that speaks to this issue: He who knows enough is enough will always have enough.  In America, no matter how much we have we always seem to want more.

And more is not enough.

How can we practice mindfulness with respect to our money?  Why am I going to the store?  Do I have a list of things I need, or am I going to look for something I crave?  Are there certain things I compulsively buy whether I need them or not?  I heard of a girl in college who had 125 sweaters.

Is what I’m buying bringing lasting satisfaction, or am I only scratching an itch?

Financial Health, Part 1

What is financial well-beingIf we’re going to have a practice to achieve financial health, then we need to know just what that is.

I think all too often we equate our financial health with our level of income.  For most of us, we go to school to go to college to earn a degree to get a good job.  As we climb the ladder at work our income becomes a measure of how successful we have been in our efforts.

But income is not a very good indicator of financial well-being.  Consider two people, Jack and Jill, who both earn incomes at the $250,000 level so talked about in the news.  What do their levels of income tell us about them?  Are they equally financially healthy?

According to Wikipedia, in 2006 1.93% of American households had incomes exceeding $250,000, compared with a median household income of about $50,000.  So they earn a high income when compared with most Americans, and are probably either professionals or business owners with a high level of status.  But beyond that what can we infer?

Suppose both are 50 years old, and that Jack has a net worth of $125,000 while Jill has a net worth of $1.25 million.  What happens to either of these persons if they were to lose their jobs tomorrow?  Jack has less than half of his former annual income available to meet expenses, while Jill has five times that same amount available.  That is, assuming they consume at their current level of income Jack would burn through all of his assets in less than half a year, while Jill could meet five years of such expenditures.

Would you expect Jack and Jill to have the same level of anxiety if both lost their jobs tomorrow?  But that is exactly what the positive psychologists are suggesting when they use a person’s income to measure the impact of money on a person’s emotional happiness.

There is little correlation between income and happiness because income, by itself, has very little meaning regarding a person’s financial health. 

I will pursue this topic further in my next post.