MONEY OBEDIENCE

Money and Happiness Once Again

You probably have read or even participated in a debate about the connection between money and happiness. Recent studies have shown that money starts contributing less and less to one’s happiness once you reach an income of $75,000, a number under debate but seemingly near magical by some accounts. Becoming overly focused on a target $75,000 annual income misses the whole point though!

First of all, these studies do not claim that a higher income beyond $75,000 does not have any affect on one’s happiness at all. If you can increase your income from $75,000 to $100,000 within a year, I am sure that you will agree that you will feel pretty good about this raise. It will make you a little happier than you were with $75,000 annual income.

Second, these studies tell us that once you make $75,000, things like relationships (marriage, family, friends) and health take a more important role in your happiness.

Think about one typical way in which life can evolve. You are in your 20s, you get married and you get your career going. You and your spouse are busy getting a promotion, making more sales, or doing whatever advances you financially. As you make more money, your joint efforts make the two of you pretty happy, but you also realize that the two of you hustle quite a bit.

At some point, say in your early 30s, this hustle won’t be worth it to you anymore. You will want to spend quality time with your spouse and family, something that you have sacrificed as you have climbed the income ladder.

Most people will feel happier if they deepen the relationship with their spouses rather than making $80,000 instead of $75,000. That is the point and result of these studies. When you reach that $75,000 threshold, your daily financial struggles can be managed much easier and you start focusing on other things that make you feel happy. So, it’s not that the money makes you happy. You’re just struggling a lot less, and have the luxury of focusing on getting happy by doing things other than chasing the Almighty Dollar.

Having said all that, there is one other aspect of these studies that are often overlooked. When you evaluate your life (which is different from feeling happy), your income does matter if you’re lucky enough to see it go beyond $75,000. A higher income (and education) makes you evaluate your life better. It is like winning in monopoly, in tennis, in baseball, etc. Or perhaps H.L. Hunt described it well: “Money is just a way of keeping score.”

This post is a very short summary of the ideas in the article “High income improves evaluation of life but not emotional well-being” published by the Nobel Prize laureate Daniel Kahneman, a pioneer of behavioral finance, and by his colleague at Princenton University, Angus Deaton.

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Posted in Happiness, personal finance

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Check your retirement plan regularly

The other day I reviewed my wife’s and my retirement accounts. I learned that we are still falling very slightly behind plan these days, but not to a worrisome extent. The reasons for this shortfall are quite obvious to me.

(1) We are still down a little bit of money with our investments, but both downs and ups are part of the deal when you put money for some period of time into anything other than federal government guaranteed things.

(2) Our household income is also still a bit lower than in years gone by which makes it a little more difficult for us to put money away. But that is not necessarily all bad for our retirement plan. Let me explain.

We have been cautious enough that our lifestyle has never consumed every last dollar we earned. When our household income dropped it was not so difficult for us to adjust our spending even further. Now and then we are a little challenged by our new economic circumstances – old habits don’t die (easily) – but between my wife and me policing each other we are doing pretty well keeping our household finances in line with our lower income. The bottom line is that our expenses are lower just as our incomes are lower. This has a positive affect on our retirement plan.

We have always looked at our retirement needs based on our expenses (and not based on our incomes as many an adviser at retirement calculators have suggested). But why should we try to save up based on the money we earn when we don’t spend that much? Now that our expenses are lower, we can also take down our projected expenses during retirement with an equal percentage. This has the positive effect since we do not need to save quite as much as we needed to save a while ago. And that leaves our retirement plan in a fairly good state even if we have to accept the decline of our assets.

Once again, I realize that it is good to check up on your finances regularly. It is not like I check my retirement plan every day or every week, but about twice a year I take a look at it and see where we stand. I think this is a good practice that works for me. But since personal finance is a personal thing, others may want to check more or less often. It is all good, as long as you make conscientious decisions about what you are doing and why you are doing it.

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Posted in Retirement_Calculator

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Thumbs Up to Home Ownership and Asset Allocation

Sometimes I come across some statements and ideas that really irk me. And sometimes I find such ideas even in publications of great standing like on MSNBC. For example, about a year ago MSNBC published an article entitled “Seven lessons from the financial meltdown”. Among these seven lessons, there were two that are really not lessons, and if I have to concede that they really are lessons then I say they are teaching us the wrong thing. Why? These two lessons go against time honored financial principals.

1. MSNBC said that this is wrong: “A house is a great way to save money for the long term.” Nope, they’re wrong. This idea has held true for generations before this one and it will hold true for generations to come, no matter that this article wants to convince us otherwise. The underlying problem is that we have grown to view a house as a financial asset rather than a home. Those previous-generation parents who were lucky enough to buy property bought a house and made it into a home. They paid off the mortgage over time and owned it outright in retirement. The house had indeed grown into a major asset by the usual means – they accumulated their wealth one mortgage payment at a time. There were no refinancings, there were no second mortgages, there were no cash-out mortgages; there were only plain vanilla mortgages that were paid off dutifully month after month. That is how previous generations accumulated wealth with their houses. We just stopped doing that. But that does not mean that a house is not a great investment for most families anymore. We just have to go back to basics.

2. MSNBC also tried also to convince me that this one is false: “Asset allocation is a good defense against losses.” – This, too, has held true for generations and will also hold true in the future. Sure, the best asset allocation cannot ensure that you never have to look at any losses when you invest in risky assets, but that is not the point of asset allocation. The point is that asset allocation allows you to accumulate wealth over time in a way that fits your personal risk attitudes and that balances all financial risks against each other. There will always be up and downs with risky assets. But that does not mean that asset allocation is a silly and useless exercise.

As a matter of fact, as soon as you own any assets, you have made a decision to allocate them, even if you decide to put all your assets into a savings account. If your assets are somewhere, you’ve allocated them! If they’re in a savings account, you may not face big losses like many of us faced during the decline of the stock market, but instead, you will face a steady and relentless erosion of your spending power that will make you relatively poor over time because savings interest surely never keeps up with inflation. Therefore, no matter what you decide, you are contending with economic risk. So, you should think hard about asset allocation if you want to hold onto your hard earned money.

As far as I am concerned, there is only one lesson that we can take away from the financial crisis and it’s this lesson I’m standing by: “Time honored financial principles work no matter what the circumstances.” There is no get-rich-quick scheme. There is only sound financial planning and financial management that keeps you financially safe in the long run. Oh yes, that also implies another lesson, so sorry, I have to add one more. It’s: “Don’t believe the hype,” like the hype fuelled by media companies like MSNBC, CNBC, and others during the housing bubble, or the tech bubble, or…..

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Posted in Net Worth Calculator

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