Can Money Buy Happiness? A New Way to Measure

Though it’s true that money doesn’t buy happiness, a lack of it can certainly buy unhappiness. Let’s examine what money is from a different perspective and consider that our definition of financial wealth is flawed. I’ll offer a new way to measure it and show you how you can dramatically increase your wealth and use it to have a happier, more meaningful life.

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When I ask people what money means to them, I get words like freedom, choices and enjoyment. To me, this suggests that while money doesn’t buy happiness, it gives us the ability to pursue happiness. Sounds simple, yet often what we think will make us happy leads to disappointment.

The question then is how rich do you have to be to achieve this freedom? Is it $250,000 or $2.5 million? The answer is tricky, since both amounts could be enough and both could fall short. I believe the person with $2.5 million may end up being poor while the person with $250,000 may be wealthy. That’s because I define financial wealth in time, not money, as follows:

Wealth in years = net worth in dollars / annual expenditures

The scarcest asset we have is time, since each of us is apportioned a finite amount of it to live our lives. We can get more money, but not more time. So if the person with a $2.5 million portfolio needs $1 million a year to live on and be happy, that person is relatively poor since he’s only banked 2.5 years of wealth.  The person with $250,000, however, who only needs an extra $10,000 a year above Social Security, is rich with 25 years of wealth — assuming the portfolio keeps up with inflation, so it doesn’t require cutting back in later years.

This simple formula has significant implications.

You can either increase your net worth in dollars, which takes a very long time, or you can cut annual expenditures, which has an immediate impact on your wealth in years. Further, spending more money may only make you marginally happy in the short run.

Jonathan Clements, the longtime personal finance columnist for The Wall Street Journal and editor of the Humble Dollar blog, has been researching and writing about money and happiness for many years. His new book, From Here to Financial Happiness — which Next Avenue recently featured in a Q and A with Clements — provides a simple roadmap to reach this lofty goal in just 77 days, spending only about five to 10 minutes a day.

To be clear, the goal is to be happier in this time frame, not necessarily financially independent.

Here are the seven things Clements says you must do, along with some of my thoughts:

1. Save diligently. This creates wealth by both increasing the numerator (dollars) of the equation above and decreasing the denominator (annual expenditures).

2. Keep debt to a minimum. The more interest you pay others, the less financial freedom you will have. It’s much better to have money working for you than against you as debt.

3. Insure against major financial threats. Bad things do happen, so insure against what you can’t afford to lose — nothing more, however.

4. Prepare for unemployment. Have an adequate reserve for all potential emergencies.

5. Hold down investment costs. Higher fees lead to lower returns. And your financial happiness is more important than how much those of us in the financial services industry make.

6. Minimize taxes. Taxes are costs, too, but a better goal is to make more money after taxes. You may not pay taxes on interest from that municipal bond, but you may make more after the tax bill with a taxable corporate or government bond.

7. Avoid unnecessarily risky investments.  Though you may luck out once or twice, the odds in the long run are that the hot investment will quickly cool off.

I recently spoke to Clements about his book and he told me something I figured out the hard way: We aren’t very good at figuring out what will make us happy. It’s actually experiences that provide more happiness, not buying stuff.

So, reframe the way you think of spending money as what you will have to give up if you buy something.

For example, consider how many months or years you’ll have to keep working in that job you may hate. Keeping a modest car for many years is truly a millionaire’s car. Clements writes “whenever you see a pricey car roll down the street, hold a moment of silence to mourn the wealth departed.”

Get off the hedonic treadmill and, rather than keep up with the Joneses, feel bad for how all that spending will delay their retirement.

Clements suggests, when you do splurge, plan it months ahead — the anticipation itself provides happiness. Thinking abut the nice tropical vacation you’ve got coming up with your family will warm up those cold miserable winter days.

In his book, Clements discusses many ways to decrease expenditures and increase savings in relatively painless ways. Inertia can be a powerful force to harness by automating savings and investing.  If you don’t see the money, you don’t miss it. Clements notes it’s almost impossible to get rich overnight, but surprisingly easy to get rich over time.

While we aren’t good at knowing what will make us happier once we’ve achieved financial freedom, Clements notes there are things we can do to improve. He says: Imagine your perfect retirement day and write down what you would do on it. This helps you remember the things that made you happy rather than the things you thought would make you happy but didn’t. Those activities probably didn’t involve spending a lot of money.

Hopefully this exercise helps motivate you to reach that financial independence sooner.

Saving money is good for more than your account balances.  It turns out that people who are savers are both happier and live longer. Clements sums things  by saying: “If you spend your days doing what you love and your evenings with those you love, you’ll have a rich life — even if you aren’t rich.”

Here’s wishing you financial freedom and a very rich life.