Buying Happiness Roundup: Does Money Buy Happiness?

- (No) Budgets , Spending , Uncategorized

You’ve probably heard it said that money doesn’t buy happiness. Is this true? Actually, there is a connection between money and happiness—but it’s not what you might think. Today’s blog is a roundup summary of my previous blogs on money and happiness. Take a look. Maybe you’ll find ways your income can boost your happiness level.

Connecting Money and Happiness

Although conventional wisdom says money can’t buy happiness, there actually is a connection between the two. If you’re unhappy because you don’t have money to buy food, pay bills or pay for healthcare, money sure helps! Nobel laureate Daniel Kahneman and his research team discovered that increases in income can bring increased happiness—but only to a certain point.

According to Kahneman, a psychologist and pioneer of behavioral economics, that point is $75,000 in yearly income for Americans. Apparently, as household income approaches the $75,000 threshold, making additional money seems to make us happier. Beyond that amount it doesn’t. If this concept of diminishing returns intrigues you, see my blog Does Money Buy Happiness? Sometimes.

Anyone with even a little money would want to get the most out of it. Perhaps the secret for buying happiness lies in whether or not you’re spending your money right.

Using Money to Increase Your Happiness

We can spend money in certain ways to increase our satisfaction and our happiness. Here are some proven spending tactics that just might put a smile on your face:

  • Small pleasures: Don’t miss out by spending lots of money on what you think will make you happy but won’t. Because our brains quickly adapt to them, big-ticket items can be taken for granted. Often a series of smaller purchase is better for boosting your mood. My blog Buying Happiness: It’s the Little Things helps you distribute your happiness over time. Unusual, small, frequent and even surprising purchases can reset your “happy meter” for enjoyment.
  • Meaningful experiences: Experiences trump objects and possessions when you’re on the market for happiness. You’ll reminisce about a vacation or a trip to an amusement park with a child more than the widescreen TV that quickly goes unnoticed. Experiences Are a Better Way to Buy Happiness encourages you to focus on building memories instead of adding to your material possessions.
  • Assistance for others in need: Here’s a great happiness booster: Use your money to benefit someone else. This can increase positive feelings even more than buying something for yourself. Any skeptics out there should try the easy experiment in my blog Spending on Others is Buying Happiness for Yourself. Science supports the fact that humans are wired for social connections. We gain pleasure from helping each other—and there are plenty of needs to be met today.
  • Delayed purchases: Studies have shown that looking forward to a happy event can even bring more pleasure than the event itself. Your imagination could be a deal sweetener. In my blog Buying Happiness: Anticipation Enhances Reality, I explain that “buy now, pay later” offers detract from your overall happiness. Saving for a purchase with the delight of anticipation gives you more for your money. It also helps you avoid added debt.
  • Gratitude: Do you have a tendency to see others’ possessions or financial situations and feel like a “have-not”? It’s time to count your blessings by looking at the big picture. Many people cannot read, don’t know what the Internet is and can’t even access clean water. One of my daughters inspired this blog: What Are You Thankful For? Gratitude involves a conscious choice. Without increasing your wealth one bit you can feel ten times better!

Getting a Better Perspective

More money might make you happier, but only to a certain point. Obviously, what matters is how you spend it.

None of the happiness-building ideas in this roundup are off-the-charts expensive. You don’t have to be financially independent to use money in rewarding ways. In fact, the difference between a rich person and one who enjoys his or her wealth is the motive for making money and how it’s spent.

Ask Moneymentals: Retirement Options

- Retirement , Uncategorized

Are SEPs, IRAs, 401ks, and other acronyms making you feel stupid?
Michael Goldman, CFP® and creator of Moneymentals helps us figure out why there are so many options and what questions to ask as we get set up.

Managing Your Money and Your Life: Spend Wisely

- (No) Budgets , Saving , Spending , Uncategorized

Imagine buying that new laptop you saw advertised. At the register, the associate doesn’t ask for money. Instead, she sends you to the back of the building to work 35 hours to cover the cost of your purchase. Immediately you wonder, “Is it worth it?”

For every buy, we’re actually trading the hours of work it took to earn the money, plus a lot more besides. Money is simply a way to store the life energy we put into working so we can use those dollars later for what we want.

In their book Your Money or Your Life, Joe Dominguez and Vickie Robbins expand on the concept of “money = life energy.” This idea has had a number of voices over the years. When you’re looking for financial freedom, it helps to think about money and personal finance this way.

Life Energy and Time

If saving money lets us store life energy, what’s life energy? The U.S. Bureau of Labor Statistics’ American Time Use Survey tells us we spend about 13 hours per day on basic needs like sleeping, eating, personal care, household chores and getting around. This leaves just 11 hours per day—only about 4,000 hours per year—for pursuing meaningful goals and wealth building. Our precious 24 hours each day plus the vitality (or lack of vitality!) we use to live them can be called life energy.

So the process of earning money converts life energy—taken from those 4,000 hours per year—into currency. It takes more than we think to trade life energy for money. For instance, the typical professional likely spends 8 to 11 hours each weekday working, getting to and from work, preparing for work and recovering from it. That means about 70% to 80% of our useful life energy gets converted to money. The sanity of that trade is for another post…

Real Earnings

Since spending money is really spending life energy, our money management efforts should include getting maximum happiness out of every dollar. But a dollar earned isn’t really a dollar! Just for kicks, let’s look at your real hourly wage, because there are work-related costs we don’t always think about.

Take your weekly after-tax take-home pay, subtract work-related expenses (like special clothing, dry cleaning and commuting costs) and divide by the number of hours a day you’re working or doing job-related activities. Here’s an example:
$1500 weekly take home pay – $100 gas – $25 dry cleaning = $1,375
40 hours working + 3 hours preparing for work + 5 hours commuting + 3 hours recovering + 4 hours checking e-mail at home = 55 hours
$1375 / 55 hours = $25 per hour (real hourly wage)

Scary, huh? Obviously the money we earn comes only at the high cost of life energy, which has great value. That brings me to the question of whether time is money or if money is time. Saying, “Time is money,” implies that money is the more valuable of the two, so we shouldn’t waste time because we’re wasting money. The truth is the opposite: Money is time, which implies that time is most valuable. We don’t want to waste our earnings because that wastes time.

Our most valuable non-renewable resource is time. We won’t get more years, days or minutes, and none of us knows how much time we have left. Time is wasted if we don’t do what we want in life. Managing money means we store it and consume it later to achieve our goals, have meaningful experiences and perhaps pass a little along to others who are special to us.

Something New to Try

That really cool iPad® costs not $500, but 20 hours ($500 / $25) of life energy! Are we handcuffed resentfully to our jobs because of what we’re buying? Or is it worth it?

Try this: Before making your next purchase, consider how many hours of scarce life energy you’re exchanging for the item. Then ask yourself if you’ll get enough pleasure from it to justify all those working hours. No matter the answer, you’ll be making a conscious choice that contributes to your happiness—and the value of what you have will increase in your eyes!

 

Ask Moneymentals: Using Credit Cards To Save Money

- Saving , Uncategorized

We’ve all heard of people doing crazy things with credit cards to earn cash back or airline miles but do really successful people do this?
We ask Michael Goldman CFP® and creator of Moneymentals about credit cards and using them for getting richer.

Once Upon an Emergency Fund

- (No) Budgets , Saving

Emergencies are no picnic. There’s nothing like the dismay, panic and anxiety, followed by that rush of adrenaline to solve the problem. No solution can mean double the emergency. With finances, unfortunately one emergency often leads to another. A single emergency can be a huge setback for your financial freedom—unless you’re prepared.

What do you do in an emergency? Call 911. This blog helps you set up a “911 fund” that will be there when you need it

Understanding What an Emergency Fund Is For

An emergency fund is your cash cushion against loss of income or truly unexpected expenses.
Here are some examples

  • You lose your job. Finding another takes time, but the bills won’t wait.
  • You can’t work due to an illness. Even if with disability coverage, there’s usually an exclusion period of three to six months during which bills must be paid.
  • Your car breaks down and needs extensive repairs. Large, unforeseeable expenses go beyond standard maintenance.

An emergency fund is not a substitute for poor planning. “I need to buy Christmas gifts,” isn’t a reason to call 911. Christmas comes each year, so plan and save for that. An emergency fund also isn’t a reason to make a big purchase on a whim because the advertisement says, “Act now!”

Calculating the Amount

Opinions differ as to how much should be in your emergency fund. I recommend three to six months of living expenses. However, it doesn’t hurt to have more. Some retirees keep two years’ worth.

Use your living expenses, not income, to calculate the amount. Do you know the total of your basic expenses during a typical month? If you’ve read my blog No Budget Way to spend Less 7 Save More, that’s what goes into your “Spend account” every month. My blog about uneven cash flow might help with irregular income and expenses.

Choosing Where to Put the Money

When calling 911, time is of the essence. Liquidity and safety are most important, so your emergency fund goes in the bank instead of a higher-interest investment vehicle. Sometimes online banks offer good returns (see www.bankrate.com).

Handling the Tradeoff with Debt

Your emergency fund comes before other priorities even if you have debt and want to pay it down. Before beginning any debt-reduction efforts, have at least a month or two of expenses in your emergency fund. Why risk plunging further into debt when an emergency fund can handle the unexpected?

Using Credit

If you’re suddenly strapped, a credit card might fill the emergency fund role temporarily. It’s not a good practice long term.

Some argue that good credit, a large home-equity line of credit and high credit-card maximums can cover for them instead of having a lot of cash in the bank. Be careful. Instead of relying on credit, get a three-month emergency fund first. Your good credit can be a second-layer backup to give you a total of six months. You must have cash in reserve, because it’s tough paying a mortgage with a credit card, and every credit card comes with a minimum monthly payment. Do yourself a favor: Get a cash cushion to avoid bad situations. It’s about balance.

Another second-layer backup can be a Roth Individual Retirement Account (IRA) if you qualify for one. Unlike other kinds of IRAs, you can withdraw the principal without taxes or penalties, subject to certain restrictions. However, don’t make a habit of pulling money out of your Roth IRA! Before considering credit or a Roth IRA as part of your plan for emergencies, you should have three months’ expenses in cash in the bank.

Avoiding Discouragement

If it costs you $5,000 each month to live, you need $15,000 to $30,000 in the bank. Don’t be intimidated by that. An emergency fund is not all-or-nothing. If you’re able to save a month’s worth of expenses, that’s one month toward financial freedom! You can increase your fund from there and work in saving priorities too. At three months you might put some savings elsewhere, then later build your emergency fund up to a full six months.

You can do it!

Ask Moneymentals: Building Wealth On A Cash Income

- (No) Budgets , Saving , Uncategorized

Let’s say you earn a lot of cash in tips as a bartender: how do you minimize your taxes and invest this cash?

How do you manage an irregular income?

Michael Goldman, CFP® and creator of Moneymentals helps us figure our some strategies to make that cash work for you.

How to Make Money: Find it

- Saving , Uncategorized

Ever look at your bank account or wallet and wonder where the money went? If you were the U.S. Treasury, maybe you could make money—literally—and replenish it right away! Many people balk at the idea of drawing up a budget and watching every penny as they attempt to follow a plan. At Wealth Gathering, we don’t believe in budgets—but we do believe in spending less. That’s how to make money, because you end up with more of it.

Money has the uncanny ability to disappear. The title of this blog says, “Find it.” Does that mean loose change in the dryer or a five in your jeans pocket? You’re close, because part of our secret of how to make money involves what you have already.

Understand any Mindless Spending Habits

We emphasize behavioral economics, which includes the study of how we as humans sometimes act irrationally with our money. For example, we usually have habitual patterns of making mindless purchases—sometimes beyond our means. These buys add up fast. Maybe we toss things we don’t really need into the shopping cart, purchase an excess of toys or video games for the kids, buy extra calorie-laden goodies or dine out at expensive restaurants too often. Then there’s remodeling the kitchen, taking that expensive vacation or getting the big entertainment set we know we can’t pay off this year. The list goes on.

We really don’t have to tell you how to make money. Most people are already doing that. The secret is finding and keeping those dollars before they’re gone! Think about purchases you’ve made that led to apathy, disappointment or back-of-the-closet items. How much money could you have saved?

Save Mindlessly and Spend Consciously

Mindless spending might have you in its clutches, but there’s hope! Try these helpful tactics that take into account how people tick:

  • Make saving the default option: Most people won’t transfer money deposited from their paychecks to a savings account immediately, so there’s an illusion of plenty and a license to spend! You need to make better choices with your money. You can start by having your pay deposited to savings rather than checking.
  • Use our no-budget method to decrease spending: My blog The No-Budget Way to Spend Less and Save More gives you a detailed plan for finding money by lowering the amount you spend each month little by little. You’ll hardly notice!
  • Pay attention to the extras: Do you always buy lunch instead of packing it? There are lots of ways to find money by avoiding those small expenditures that add up. Interestingly, when the extras you buy are less expensive and less frequent, the small pleasures mean more.
  • Don’t rely on willpower:  Structure your life so spending decisions don’t come down to willpower when your resolve is weakest. By steering clear of temptation, you end up with more money and less stress.
  • Label your savings categories: Find ways to trick yourself into keeping the money you find by defining categories you’re saving for. Using mental accounting, decide on labels for each category, such as “next year’s vacation,” “new skis,” “retirement account” and “kids’ camp.”

Learning better ways of spending and saving keeps old habits from robbing you of money you already have. Most of us don’t need to learn how to make money. The good news is that it’s waiting to be found—and put in the right places so it adds meaning to our lives!

Ask Moneymentals: Splitting Money As A Couple

- (No) Budgets , Saving , Spending , Uncategorized

Know a cohabitating couple trying to make it work in love and finances?

Michael Goldman, CFP® and creator of Moneymentals helps couples figure out how to split their finances fairly.

What is Behavioral Economics

- Business , Saving , Spending

There’s nothing like a good buzzword—especially when you really know what it means. Here’s one that’s more valuable than you think: behavioral economics. It holds a surprising answer to why, despite all good intentions, careful planning and firm resolve, you can depart from reason and deviate from your financial goals until you’ve lost sight of financial freedom completely.

Much of traditional economic theory assumes we’re always perfectly rational beings who make money management decisions based on our own financial best interest. We all know that isn’t true. Behavioral economics is that blend of economics and psychology that examines how we really behave and make decisions around money versus how we’re supposed to—if we were robots, that is. An automaton would always have textbook financial behaviors based on pure logic and reason. We humans, on the other hand, are influenced by emotion, people around us, unreasonable thought processes, personal biases, changes in risk tolerance and so on. We’re somewhat irrational.

Irrational, but Predictably So

The best way to describe how people behave when it comes to money is a term coined by Dan Ariely and used for the title of a bestseller he authored: Predictably Irrational. We tend to be emotional, not rational, with money. Fortunately, our irrationality is predictable.

Behavioral economists have observed how we make certain decision errors in the same types of circumstances over and over. We’re pretty predictable and consistent. The value of discovering the patterns in our irrationality is that we can begin addressing it. Think about flipping a coin example. In a well-balanced coin, we know heads should come up about half the time. But if we know that the coin is weighted slightly so that heads comes up more frequently, we can use that info to guess heads and be right more than half the time. The same with human behavior – if we know about our tendencies, we can predict behavior and arrange the situation to take advantage of those tendencies.

Financial irrationality extends across society. However, according to the book Nudge by Richard Thaler and Cass Sunstein, it’s possible to structure our policies and financial services industry to nudge people to do what’s in their best interest. Here’s an example: By making automatic enrollment in an employee-sponsored retirement plan the default option instead of making non-enrollment the default, more people would participate in retirement plans. Why? It’s human nature to take the default choice because it requires no effort.

You can address the irrationality in your own habits by taking a look at some of the decision errors people often make.

Common Decision Errors

Many common financial decision errors involve predictable irrationality that’s tied into the difficulty our brains have with understanding probability.

One decision error we can fall into is described in my blog Mind Your Money: Optimism and Illusion of Control. By making the mistake of maintaining an all-pervasive optimism that includes the idea that we’re in control of things, we might think we’ll succeed when others can’t or win when the odds are against us. This can take the form of things like attributing lucky investment choices to skill, having early financial successes and expecting to repeat them, keeping a low emergency fund or none at all, and disregarding the need for insurance or estate planning.

We’re also prone to decision errors in our price perceptions. These errors relate to a common cognitive practice called anchoring. Anchoring is locking onto a certain price or value as a norm that influences our decisions about what we’re willing to pay.

For example, a loaf of bread is $5 where the cost of living is high, we’ll be willing to pay the same where the cost of living is much lower and we should be getting a better deal. This isn’t a big issue, right? Try it with a brand new car or a home! Anchoring can affect us when making large, infrequent purchases, negotiating prices, buying something unusual or assigning value to an investment.

There are all sorts of cognitive twists that can affect financial freedom. Some of these are loss aversion, representativeness, adjustment bias, cognitive dissonance, overconfidence, mental accounting, recency bias, availability and confirmation bias.

Money Management and Wealth Gathering

My blog Kirk vs. Spock: Human Nature Meets Personal Finance talks about what’s needed to tailor a financial program for humans with complex decision-making processes, this approach works with human nature—not just when it comes to decision errors, but through overall coaching and behavior changes around money.

 

Ask Moneymentals: Dealing With Grown Children Moving Home

- Retirement , Uncategorized

Michael answers your questions!

In today’s world more and more adult children are moving home. So how do parents handle this?