Guest Post: Here's the Exact Amount of Money That Buys Happiness

Warning: This is a seriously depressing statistic

Photo by Street Og' on Unsplash

This Friday, it’s time for something different - a guest post from my friend Ben Le Fort who runs the Substack Making of A Millionaire.

Ben is a personal finance writer with a difference. He isn’t afraid to tell it like it is and question what we have all been told is “normal” when it comes to money. He was also the very first editor to take a chance on my work over at Medium.com and I’m forever grateful for him for that.

If you’ve not already subscribed to Making of a Millionaire, I very much suggest you do. Ben’s words might well transform your finances.

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By Ben Le Fort

“Money Can’t Buy Happiness”

A phrase that happy people with more than enough money seem to love repeating.

Of course, it’s not at all true. Anyone who has lived without enough money and then began making more money knows that money can absolutely buy happiness.

Money buys freedom. Freedom buys happiness

Of course, money buys happiness. Not because it allows us to buy fancy toys and live in a big house. Money buys what all of us desire; freedom and a sense of control over our lives.

Nothing else can make someone as fulfilled and content as a feeling of complete control over how they live their lives. Freedom Baby!

Economic freedom isn’t an all-or-nothing proposition. It’s a sliding scale. The more money you have, the more options you buy yourself.

• If you live paycheck to paycheck, it’s difficult to quit a job that is making you miserable because as bad as the job is, life would be worse if you can’t pay the rent.

• Having a few months’ cash in an emergency fund gives you some breathing room. If taking your car in for repairs gets downgraded from financial emergency to mild inconvenience, your life becomes less stressful.

• Being able to save for retirement and go on vacation begins to open up a world of possible options and, with it, more happiness and confidence.

• Being able to save money for your kid’s education opens up a world of options for your child, which as a parent, is one of the greatest feelings in life.

• The next notch up the freedom scale is having enough income from investments and other sources so that you can work less without worrying how you’ll pay the bills.

• The final level of financial freedom is when you have enough money that working becomes optional.

Buying more freedom requires a plan

All of this assumes you have a plan with your money. Here are the six essential components of a financial game plan.

1. Budgeting

Creating a budget allows you to clarify your priorities. Don’t tell me that traveling is a priority if you don’t have a budget that includes a line item for travel.

2. Tracking your spending

If you don’t know where your money is going every month, you will have difficulty freeing up cash to help you achieve your financial goals.

3. Paying off debt

There are two proven strategies to pay off debt.

The first is the “snowball method,” in which you pay off your debts in ascending order starting with the loan with the smallest balance and ending with the largest.

The second is the “avalanche method,” where you pay off your descending order starting with the loan with the highest interest rate and ending with the lowest interest rate.

Either method works fine. All that matters is that you pick a strategy and stick with it.

4. Building an emergency fund

Most financial experts recommend having 3-6 months’ worth of living expenses set aside in cash in case of a financial emergency such as losing your job. If that feels unattainable, start with one month and build from there.

5. Investing

Do you want to hear the simplest investing strategy that nobody in history has ever lost money following? Buy an S&P 500 index fund and sit on it for 20+ years.

6. Avoiding the temptation of lifestyle inflation.

Lifestyle inflation is the phenomenon where your spending rises just as quickly as your income.

Think of building wealth like filling up a bucket of water. Lifestyle inflation is like a tiny hole in the bottom of the bucket. The more you give into lifestyle inflation, the bigger the hole gets, preventing you from filling up the bucket.

This brings me to the headline of this article.

Here’s how much money most people need to be happy

Here’s exactly how much money the average person needs to feel happy with their financial situation:

$1 more than their neighbor.

That was the finding of a research paper published in the Journal of Psychological Science.

People in the study were slightly more satisfied with their life as they made more money. However, Happiness peaked when participants were told they made more money than their neighbors. Similarly, if someone found out that their neighbor made more money than they did, they were less likely to be satisfied with their own life.

People are more concerned about their economic rank in society than funding a happy, fulfilled life.

That is human nature.

But here’s the good news, simply acknowledging that we are all vulnerable to FOMO, envy, and lifestyle inflation is half the battle.

How to avoid lifestyle inflation and buy freedom

Rather than listing off psychological exercises you could do to avoid lifestyle inflation, I’ll leave you with some practical advice.

Treat new money like it doesn’t exist.

You can fight lifestyle inflation by redirecting future pay raises, bonuses, and windfalls to buying more financial flexibility.

Every September, I get a pay raise. My wife and I then sit down and decide what we want to do with the extra money, say it’s $300 per month.

• $200 is earmarked for investing.

• $100 is earmarked for spending on things we value (make us happy), like travel.

Then we lock our plan in by automating the saving and directing it to our investment account and our sinking fund for travel.

Since it’s automated, we don’t have to make active decisions on how to spend the money because it’s already gone the second it hits our checking account on payday. This ensures we don’t fall victim to lifestyle inflation.

In summation…

Money buys happiness if you use it to buy freedom.

To buy freedom, you must avoid lifestyle inflation.

Having a plan for your money and automating that plan is the easiest way to ensure success.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions