Moneymentals

Kirk vs. Spock: Human Nature Meets Personal Finance

Are you disinterested, bored and frustrated when it comes to paying bills, balancing your checkbook and reviewing credit card statements? Do you feel like the day-in, day-out basics of money management are chores to be avoided? If so, you’re not alone. You’re human!

According to behavioral economists, many assumptions about how we should manage money come from an unrealistic view of human nature. Instead of being rational automatons guided by pure logic and objective reasoning, we’re influenced by emotion, personal preferences and social cues. Traditional approaches to personal finance make cents from the dollar perspective but not a lot of sense from the human perspective.

For my fellow Star Trek® fans out there, traditional finance is for Mr. Spock—the personification of logic in the original series—as opposed to Captain Kirk, who was often influenced by the illogical, emotional and unscientific.

For Real People

Like Kirk, we’re emotional, thoughtful, social human beings who act in complex ways while attempting to balance feelings and reason. Obviously personal finance can’t be all about
numbers and facts. If there were a financial fitness program that worked for people instead of robots, what would it do?

Inspire us: We need inspiring goals and the motivation to achieve them. Traditional methods involve budgets, scrimping, controlling our spending and denying ourselves. For example, we get a sense of failure and guilt if we don’t meet our goal of spending less in restaurants. Humans do better with a positive focus. We’re motivated by goals that mean something to us, like, “If I spend less on eating out, I’ll be able to save more money faster for my trip to New Zealand.”

Improve us: An effective program will tell us how we’re doing with our goals. We need to see progress and mastery because of our drive to grow and learn. The best feedback is positive and corrective, bolstering our confidence and showing us what to do differently.

Negative feedback tears us down, and vague feedback doesn’t tell us what we’re doing wrong, or how to improve. For example, feedback on retirement savings is characteristically poor. Most people know they should build a nest egg. However, “How much do I need and when?” and “How am I doing so far?” are usually unknowns.

Inform us: A human approach to personal finance would provide the information we need without overloading us. Technology gives average people more knowledge at their fingertips than Captain Kirk, but we can only process limited amounts of information. Excess data and choices tend to degrade rather than improve the quality of our decisions. Some Web and mobile apps automatically compile and categorize your spending, and some even track your investments so you can watch them react to market gyrations all day. This can potentially amount to noise rather than information, evoking feelings (fear, greed, guilt, pleasure and so on) but distracting us from real goals.

Connect us: A financial fitness program shouldn’t isolate us. Personal finance is often a solitary pursuit, but because we’re social by nature we want to connect with other people. Today’s wildfire spread of social media demonstrates this. Though talking about your money with others is often viewed as taboo or rude, common sense and research tell us that others can help us commit to and stick with goals—and achieve them—whether they’re financial or not. People can also be role models for success.

Entertain us: To make a difference, personal finance ought to be fun. Psychologists who study motivation recognize how play has power to engage us. There’s even a recent trend
toward “gamification,” which is applying game mechanics to non-game tasks so they’re more enjoyable and interesting. There are already money games to teach kids how to manage finances. Why can’t adults learn personal finance the fun way instead of the hard way?

Beyond our Galaxy

People are catching on to the idea that they don’t have to think like Spock to manage money successfully. In fact, our goal at Moneymentals is to provide a personal finance program for humans! If you’d like information about how to participate, please let us know.

Mr. Spock was consistently sensible and efficient—commendable traits. However, with his very human qualities and struggles, Captain Kirk became the inspiring hero who took us “where no man has gone before.” The conventional way of handling personal finance has brought us a sensible distance, but a more human approach can help everyone “live long and prosper”!

Simple Saving Priorities: Where to Put Your Money

- (No) Budgets

After you’ve passed the piggy-bank stage, some financial difficulties are good to have. For example, it’s a happy problem to need direction as to where to put your savings. Congratulate yourself that you have an income today, you’re saving some of it and you’re reading this blog!

Some frequently asked questions at Wealth Gathering involve how to allocate savings. Which goals do you save toward first, second and so on? What types of accounts are best for
achieving your goals?

Freedom

My blog Seeking Financial Freedom, not Just Retirement covers long-term savings. Today’s blog talks about this Freedom money, which is different from Purpose money (short-term savings for enjoyment).

Today’s blog also addresses only moderate-income households. The priorities shown here apply to those with an Adjusted Gross Income (AGI) of less than $122,000 for individuals or $179,000 for married couples because these limits are the phase-outs for Roth IRA eligibility. With higher incomes, saving priorities are a bit different and will be the subject of a later blog.

Priorities: What to do and Why

Here’s the best way to prioritize your savings:

1. Prep Your 911 Fund: Calling 911 won’t help if there’s no answer, so set up an emergency fund for the unexpected. Without money in the bank, you’re one surprise away from bankruptcy, whether it’s a layoff, lost pay due to illness, car trouble or worse. Your cash cushion provides the ability to sleep at night!

To set up an emergency fund, calculate 3 to 6 months of expenses (not income). This is 3-6 times your monthly Survive spending. If you spend $5000 to Survive every month, then $15,000 to $30,000 goes in your emergency fund. If you dip below the 3-month mark, divert all savings to your 911 Fund until you reach the minimum requirement. Your 911 Fund must be totally liquid and safe, so it goes in the bank. True, interest rates are low—but if you’re calling 911, you can’t wait several days for help to arrive. Some online banks provide good returns (search www.bankrate.com).

2. Get the Match: Do this step only if your employer offers a retirement plan with a match. Often a company matches every dollar you put in a 401(k) or 403(b) plan up to a percentage
of your salary (typically 3% to 5%). Declining this option is like turning down a bonus. Your employer says, “Do you want this extra money?” You reply, “No, I’ll take less income and more taxes.”

At first, only contribute the amount required to get the full match. If no match is offered, go to the next priority.

3. Kill the Debt: Nothing destroys a sense of freedom like being shackled to a load of debt. If you’re worried about bills and chained to your job (or two) by debt payments, it’s a sure
sign that the debt owns you and you’re not free.

While debt-elimination is critical, this is not step 1 because someone who is debt-ridden and lacks a 911 Fund is one bill away from bankruptcy! Debt-elimination isn’t step 2 because matching represents additional income. Credit card interest might be 20%, but you get approximately a 125% return on matched contributions because of the match plus tax savings.

4. Get a Roth IRA: You ask, “Should I put money in a Roth or my employer’s plan?” Roth IRAs are the best deal because they grow tax-free, and after age 59 1/2 you can withdraw the money tax-free. You can also limit your fees and have more investment choices instead of being restricted to employer offerings. A Roth is the only type of tax-sheltered account where you can withdraw invested moneys (but not earned interest) penalty-free. A Roth can also be a second-layer emergency fund or savings vehicle. However, since they’re investment accounts, Roth IRAs can lose value. If you plan on withdrawing early, invest conservatively. To complete this step, invest up to the yearly limit, which is $5,000 per person and $6,000 if you’re over 50.

5. Revisit 911: Make sure there’s enough in your emergency fund. Consider building it to the 6-month mark, especially if you’re self-employed, the primary bread winner or a person with irregular income or job insecurity.

6. Take Your Pick: Way to go! If you’ve still got Freedom dollars left, you have many options:

Max out your employer retirement plan contribution
Start a college savings account for your kids
Enjoy some guilt-free Freedom
Give extra to meaningful charitable causes

Keep these steps handy. They make a good savings roadmap for practicing wealthy habits on the road of financial freedom!

A Creative Way to Save Money- On Purpose

- (No) Budgets

You’re trudging through a barren, hot desert of working, working, working and saving, saving, saving for retirement, and the goal is far away. Occasionally there’s a mirage. You hope the oasis ahead is real this time—then you realize you’ve got about 20 or 30 years to go!

My blog post Seeking Financial Freedom, Not Just Retirement talks about reframing how you think about your retirement account so it becomes your Freedom account instead. Even with this new perspective, freedom is a long way off for most people. Because the goal’s at such a distance, it’s important to have meaningful sources of short-term inspiration that don’t undermine wealthy habits. This is particularly true if you don’t like certain aspects of your job.

Save for Today

You might remember reading about Surviving and Thriving in an earlier blog. Surviving is when you spend money on the basics, while Thriving is using your money to make your life more meaningful. Thriving can pertain to the distant destination of Freedom (formerly known as retirement) or to shorter-term goals I call Purpose goals.

Purpose is about saving for something we can look forward to within the next year or less instead of the next few decades. Using the concept of simple living, we trim our spending to
make more choices in favor of what we value as opposed to spending mindlessly.

Choose Your Inspiration

Here’s an acrostic to help you make finance fun with a Purpose goal that ADDS inspiration and meaning:

Achievable: Purpose goals should be achievable within a 12-month period, not “Someday, when I retire . . .” A goal that costs more than you can save in 12 months is too big. Shoot for a small pleasure or break your goal down into smaller ones.

Desirable: You need to be inspired, so pick something you really want instead of something you should do or will buy anyway. Purpose goals should be so appealing that you’ll give up other purchases for them.

Defined: Vague goals don’t give you something concrete to shoot for. Think about a very specific goal, define it clearly, and write it down so it can inspire you.

Smart: Some purchases bring more happiness than others. Remember that simple pleasures and experiences (rather than “stuff”) are great buys for happiness.

Reach Your Goal

You can start earning your Purpose with these easy steps:

1. Write the name of your Purpose goal on a blank envelope. For extra inspiration, glue, tape or draw a picture of your goal on the front. The picture might represent your vacation destination, the iPad® you want or the out-of- town sporting event you hope to attend. The idea is to make your Purpose goal tangible.

2. The first month, put a predetermined amount in the envelope from your Survive account as soon as money is available. The amount should be a monthly total that enables you to reach your goal within your timeframe, but it shouldn’t be more “fat” than you can trim. For example, if your goal is a $1200 weekend escape with friends in 12 months, then put $100 in the envelope.

3. Seal the envelope and carry it with you. If you want to avoid carrying cash, put a picture of your goal in your wallet. You can even tape it to your credit or debit card.

4. Whenever you’re about to make a purchase of any size, ask yourself if you’d forgo the purchase to achieve your Purpose goal sooner or to be more certain of reaching it.

5. If you make it through the month without opening the envelope and dipping into Purpose money, deposit it into a savings account for your Purpose.

6. You can also sweep into your Purpose account whatever’s left at the end of the month in your Survive account.

7. The next month, restart with step 2.

This is a great money-saving technique because spending Purpose money feels like a loss. The pain of losing some Purpose money outweighs the psychological pleasure of gaining the immediate purchase at hand, so saving starts feeling like the right thing to do!

Want to learn more about setting up different Survive and Thrive accounts? Check out our Moneymentals Course!

Experiences Are a Better Way to Buy Happiness

- Spending

Imagine yourself in Costa Rica, floating in a pristine, blue-green pool of water and looking up at a lush rain forest canopy. You watch in amazement as, little by little, a three-toed sloth makes his way through the thick forest with the precision and grace of a Tai Chi master.

You’ve been working hard on your financial fitness. It’s time to make finance fun and treat yourself. What do you gravitate toward? Is it something you do, or is it something you own? If you’re out shopping for a reward of some kind for yourself, you can maximize your happiness dollars with an experience. Whether high-priced or economy-sized, it’s a better buy on happiness to purchase an experience than to purchase an object.

Experiences vs. Objects

How do you buy an experience? Think of taking a class on a topic that interests you, sharing a beverage or a movie with a friend or taking a trip someplace new just for fun. Material buys, on the other hand, are objects we keep in our possession, such as a gadget, a new outfit or dining room furniture. An Italian sports car would be a material purchase that can also double as an experience, but it’s still defined as something we keep in our possession.

When it comes to money and happiness, you happiness-shoppers out there might remember my blog about what small pleasures can buy. As I mentioned in the blog, research by Elizabeth W. Dunn, Daniel T. Gilbert and Timothy D. Wilson revealed eight principles for getting the most happiness from our spending. These are outlined in the Journal of Consumer Psychology article “If Money Doesn’t Make You Happy Then You Probably Aren’t Spending It Right”. Making experiential rather than material purchases is one of the happiness-maximizing principles.

Where the Happiness Comes From

Why do we derive more happiness from what we experience than from objects we possess? First, our minds adapt very rapidly to our environment. The new furniture eventually looks the same and the shoes are the ones we bought a few months ago, so we stop noticing. In contrast, experiences are different each time. Novelty gets our attention, and our “happy meter” is reset by whatever is new. Every trip to the park with my three-year- old daughter is certainly unique, even if we went every day.

A second reason experiences are more happiness-producing is that they’re ephemeral, passing quickly out of our possession. Memories remain, so we can revisit them as often as we want. We’re not very likely to reminisce about tangible purchases, but we often mentally re-experience events over and over.

Finally, experiences bring more happiness than objects because we define ourselves more by our experiences than our possessions. This is perhaps the most important reason. Places we go and things we do are more inherent parts of our identity than what we stockpile. I think of this as our life wealth. It’s the abundance of experiences we accumulate that is truly wealth gathering.

Memory Bank or Storage Room

There’s nothing wrong with buying material objects. We all need them. If they’re in the form of a reward, we can certainly derive happiness from them. However, next time you’re ready to treat yourself by using your money for something special, think about acquiring an experience instead of an object. Likely you'll enjoy it longer and have something to revisit in your memory bank rather than your storage room!

Simple Living: Putting Your Money Where Your Values Are

- Spending

One of my mantras is “You can have anything you want. You just can’t have everything.” Some people want everything now—and that’s where financial problems come in! In reality, a determined focus on what’s really important to you can get you almost anything, as long as you’re able to let go of extraneous items and activities in the process.

Financial fitness often starts with a shift in mindset. We begin thinking of money not as an end in itself, but as a tool that helps us get or do what we want. Some of us are bogged down in Surviving rather than Thriving. This is because we haven’t determined what we value, cut away the fat and made some focused, values-based decisions.

Voluntary Simplicity

In his book Voluntary Simplicity, Duane Elgin talks about stripping away as many of life’s complications and distractions as possible to focus on what’s truly important, meaningful and
satisfying. The book’s subtitle, “Toward a Way of Life That is Outwardly Simple, Inwardly Rich,” emphasizes choices based on what’s valuable to you.

True wealth is an inner sense of abundance, not outward displays of bling-bling. However, Elgin’s concept is not about excessive frugality or poverty. He’s talking about choices. We need to choose what’s most important to us and focus on it, regardless of what it is. The term “voluntary simplicity” says it well.

Simple Strategy: Survive on Less to Thrive More

When talking about things like money management, budgets and saving, people often mention self-denial, discipline and eliminating this or that. The voluntary simplicity concept is more about embracing what you want out of life and letting other things fall away. Instead of engaging in a grueling battle to deny yourself, simply focus on what has long-term value for
you. Saving money flows naturally from that.

In a previous blog, Does Money Buy Happiness, I described the Survive versus Thrive concept. In brief, Survive money is what you spend on needs (or what you think you need!) and Thrive money is for what you value. Simplicity is a tool you use to shift the balance so less money goes to Surviving and more to Thriving. Money is a limited resource for most of us, and time is limited for all of us. The less we need to Survive, the more time and money (our valuable life energy) we can commit to Thriving.

Ways to Free Yourself to Thrive

To Thrive more, you can earn more money for the things you value, or spend less on the things you don’t. Both options potentially free up time and money for Thriving, and a combination of the two is powerful.

Earn More: We’d all like this! If you aim to earn more, it’s important that the bigger paycheck doesn’t require too many additional hours. Some high-paying jobs demand 60, 70 or 80 hours per week, leaving little life energy for Thriving at the end of each workday.

Focus on improving your life-energy exchange rate rather than just getting a bigger salary. The more you earn for each hour of your life energy, the fewer hours you need to work to meet your Survive needs.

Simplify: Redirecting spending is usually more in our control. Notice I said redirecting, not reducing. Simplifying is not about spending less. It’s about spending better. When we’re trading some thingamabob for an item or activity we really treasure, the choice is easy.

Focus on redirecting your spending to the things you value, not on tightening your belt. This sometimes means adding to savings to achieve a deferred goal.

Whether you’re increasing your income, redirecting spending or both, you shift the balance more towards what you want rather than what you have to do or acquire. You Survive on a lot less so you can Thrive a lot more.

Your Free Choice

The first step is to ask yourself, “What do I really value? Am I putting my money and my energy toward that, or are they going toward things I don’t believe in or aren’t important to me?” The next step is to shift the balance toward Thriving. Since you usually have more control over spending, identify ways you can live more simply and put less toward Surviving. That frees up more of your resources for what’s most meaningful to you and helps you get the most for your money.

Buying Happiness: It’s the Little Things

- Spending

The little things in life really count! When we were tiny, it didn’t take a huge financial outlay to amaze us and fill us with joy. Today, a favorite restaurant, a picnic in the park, a night bowling with the kids or even a goofy yo-yo can brighten the day. When we consider what used to make us happy when there was little—or no—spending money in the bank, it’s a good reminder of how small price tags can have big benefits.

Economic uncertainty is still a factor today, so what a better topic than small pleasures? It’s not just that small pleasures cost less. In many cases, they’re actually better when buying happiness!

A Right Way to Spend

In an excellent summary of positive psychology research, Elizabeth W. Dunn, Daniel T. Gilbert and Timothy D. Wilson addressed the elusive relationship between money and happiness. The resulting Journal of Consumer Psychology article “If Money Doesn’t Make You Happy Then You Probably Aren’t Spending It Right” came to my attention recently. It’s a good springboard for
talking about money and happiness.

As discussed in my earlier blog Does Money Buy Happiness, the relationship between money and happiness is complex. Decades of studies suggest that money can buy happiness, but only a little bit and only up to a point. So the correlation between money and happiness is modest. Many of us think we should get more happiness for our money. After all, wealth can buy lots of the ingredients of a happy life: better nutrition and health, more meaningful work, more freedom, and more time with family and friends. Since money leads to those things, why don’t wealth increases connect more strongly to happiness?

According to Dunn, Gilbert and Wilson, we miss our chance for buying happiness by making purchases we think will make us happy but don’t. The article covers eight principles for spending to maximize happiness. One is purchasing small pleasures.

Small-Ticket Items and Happiness

Our brains are exceptionally good at adapting to our environment. That’s why the research suggests that more happiness results from buying many small pleasures rather than a few big
ones. We think a yacht, nice Brazilian hardwood floors, a sports car or a dream vacation will make us happy, but we adapt to them after the initial burst of happiness fades. They become same old, same old.

However, we adapt less quickly to things with the following characteristics, so the benefits are extended:

Novel or unusual
Surprising
Difficult to understand or explain
Uncertain
Frequent but varied

Interestingly, these are most easily attained as small pleasures.

Little by Little: Your Happy Meter

The psychological principle called “diminishing marginal utility” also favors small pleasures. The idea is that the first scoop of your favorite ice cream (for me, chocolate coconut!) brings more pleasure than the second or third scoops. Similarly, if you already have a lot of “stuff,” getting more doesn’t bring the same new-purchase satisfaction.

Because time between each pleasure seems to reset your happy meter, you’ll get more out of a single scoop of ice cream each week for a month than four scoops in a sitting. Small pleasures are also easier to divide up and spread across time. After all, it’s pretty tough to buy a car in pieces. Yet for the mechanically inclined like my uncle, building your own hot rod piece by piece can be enjoyable. You can’t spread a Hawaiian vacation out over several months—unless you live in the “Pineapple State”—but taking frequent mini-vacations or nearby getaways can be a happiness inducing way to spend your vacation budget.

Stop and Savor!

Gratitude also increases happiness. If you’ve made a big purchase, remind yourself to pause and enjoy it periodically. Don’t let that new floor become just like any other surface to walk on. Don’t take your new car for granted.

Remember, for excellent buys on happiness, savor that first bite of your favorite meal, the beverage with a friend and an evening out with a loved one. There is nothing wrong with the big pleasures, but for happiness sake don’t sacrifice the small pleasures to get them!

Seeking Financial Freedom, Not Just Retirement

- (No) Budgets

Once upon a time, in a way of life that is now nearing extinction, people looked forward to retiring at age 65. Some still do. They’ll stop working and settle into a time of leisure, hobbies, travel and time with the grandkids.

However, for most of us, the age-65 retirement mark will be a blurred or nonexistent line affected by many factors.

The traditional definition of retirement is changing. More and more people—currently 44% according to the Employee Benefit Research Institute (EBRI) 2011 Retirement Confidence Survey 1 —either plan to postpone retirement or not retire at all. Almost three-fourths of all workers (74%) intend to work for some pay after retirement age.

The Outlook

To some degree, attitudes toward retirement are changing out of necessity. Life expectancies are longer, meaning more years of retirement to fund. Our view of a comfortable lifestyle is likely more expensive than our grandparents’, so more dollars are needed each year. Non-work sources of income are questionable. Pensions are almost a thing of the past, and the Social Security system is in danger. No wonder merely 13% of workers believe they will have enough money to live comfortably in their retirement years.

When you hear the word retirement, do you roll your eyes and say, “Yeah. Right!”? With all the disheartening news, not everyone’s motivated to put money away in accounts labeled “retirement.”

The younger crowd might think there’s time to catch up. According to EBRI survey, over 70% of workers ages 25 to 34 say they’ve got less than $25,000 for retirement. At the other end of the scale, what about 60% of workers age 55 or older with less than $100,000 saved? Just 10 years from the typical retirement age, their savings will only last a few years at best.

Time for a New Label

As I mentioned in an earlier blog on mental accounting, labels are important. The label “retirement” has become so uninspiring that our modest savings might not motivate us.

It’s time to rethink retirement and mentally re-label our 401(k) and IRA accounts. Since the age-65 retirement model is on its way out, we’re no longer saving for retirement in the traditional sense. Rather, our real goal is money in the bank—and the resulting freedom:

Freedom from the need to trade our life energy for money
Freedom to spend time thriving without worrying about surviving
Freedom to pursue meaning and happiness

Now you have a Freedom account! It can facilitate life changes long before age 65 and generate happiness much greater than the traditional retirement concept. You can take a sabbatical to travel or change to part-time work to spend more time with your family. You might go back to school for that degree you always wanted or leave your job to start a business you’re passionate about. The possibilities are endless.

Months of Freedom

One problem with retirement savings is measuring progress. Most of us aren’t sure how much we’ll need to save. The survey indicates only 42% of people have even attempted to calculate what they’ll need to retire comfortably. For some, the timeframe is so distant that the amount is a fuzzy moving target on the horizon.

Freedom can be much more measurable. My favorite metric is Months of Freedom:

Calculate your total savings (savings accounts, investment accounts, “retirement” accounts,
etc.).
Subtract your total consumer debt (credit cards, auto loans, etc.).
Divide by your total monthly spending.

The result is how many months you could survive at your current spending level if you lived off savings alone. That’s months of freedom. The more freedom in the bank, the more choices
you have.

So be inspired! You’re not really saving for retirement. You’re saving for freedom.

5 Best Buys for Happiness

- Spending

Have you ever bought something just because you were bored? Or gone to the mall for a bit of “shopping therapy” as a pick me up after a disappointing day? I know I have. We imagine if we buy just the right thing it will lift our spirits. Our intuition is not far from the truth, spending money on the right things can make us happier.

My recent post Does Money Buy Happiness talks about the difference between spending money for surviving versus thriving. When spent on with purpose, money helps power our happiness.

Here are a few fantastic buys to help maximize happiness:

Great Deal #1 Buying Experiences

Memorable activities can be recalled for decades after the new outfit or gizmos are forgotten.

Our brains are wired to remember the end of events and forget the middle. This is called the recency effect. “Stuff” usually ends in loss: an old worn-out item that’s discarded. In contrast, life experiences can begin with excitement and anticipation and end with satisfying memories.

Great Deal #2: Tools for Living

Not all stuff is “bad” from a happiness perspective. Whenever my grandfather gave us cash for our birthdays, he would advise us to spend it on something “tangible, useful, and long-lasting.” Essentially, he was suggesting what I call “tools for living” – items that you take pleasure in using every day and for a long time. For instance, I enjoy cooking and really appreciate a quality chef’s knife. $100 seems like a lot for a knife…and it is…but I take pleasure in using it every day to prepare meals for my family and friends, and it will likely last for decades. Even my very frugal grandfather would approve of this “investment.”

Great Deal #3: Leaving Your Fingerprints

There’s something magical about making something yourself. When you put time or effort into a possession, you tend to value it more02. Ever notice how much better your homegrown vegetables taste than the ones from the market? The more you work for something, either through physical effort or saving over a period of time, the greater your pride of ownership.

Some call this the “IKEA effect” in honor of the Swedish company that made assemble-it-yourself furniture all the rage. I’m not sure that’s the right label, because I’ve enjoyed building furniture from scratch over the years. But, the truth is that people do value IKEA furniture more than similar pre-assembled furniture because they “built it themselves.”

Great Deal #4: Doing Things for Others

As I mentioned in my blog about money and happiness, intrinsic goals set you up to be happy! You can boost your happiness levels by using money for things like charities, college accounts for the kids, and helping family or friends. Research based on group experiments suggests that spending even a small amount of money on someone else noticeably increases happiness – even a few dollars!

Great Deal #5: Expanding Your Freedom

How much free time can you buy yourself? Studies by psychologists Edward Deci and Richard Ryan demonstrate that having options about how you spend your time can increase your happiness.

Financial fitness means money saved, which is freedom in the bank. You can start doing things you enjoy now without waiting for some point later in life.

Here are some sweet deals on freedom:

Plan a partial retirement and change jobs to do what you really love
Take the vacation of your dreams instead of sitting at home, strapped for cash
Take a mini-retirement or sabbatical
Change to part-time work or stay home with the kids instead of working

Real Value

People who want to get the most from their life energy look for proven value. If you’ve made some great buys on happiness already, leave a comment and tell us!

Does Money Buy Happiness?

- (No) Budgets

Do you remember that cheesy television series, Lifestyles of the Rich and Famous? The show featured the opulent lifestyles of entertainers, athletes and moguls. We watched the parade of excess for over ten years.

Sometimes we wished we could be like them. At other times, we salved our envy with the question, “Yes, but are they really happy?” We all want the most for our money. After all that hard work and disciplined saving to build wealth, there’s got to be something to show for it. We want to do more than just survive, we want to thrive!

Will Money Make You Happy

According to research from a team led by Nobel laureate Daniel Kahneman, increased income can bring increased happiness—up to a point. Kahneman, a psychologist and pioneer of behavioral economics, identified that point as $75,000 in yearly income for Americans. The study indicated that until household income gets to about $75,000, making more money seems to make us happier. However, increases beyond that amount don’t.

Think of the $75,000 as the average threshold for “enough” among Americans. Once you cross it, chasing more money for money’s sake doesn’t make you happier. In fact, some studies suggest it can actually reduce your happiness. This is not to say that you can’t be happy with a higher or lower income. The difference between being rich and enjoying wealth has a lot to do with the motive that led to your fortune.

Will Achieving Your Goals Make You Happy?

Research led by Edward Deci and Richard Ryan sheds even more light on the money-and- happiness perspective. They found that having any goal increases your likelihood of success, but the type of goals you’re chasing actually determine your happiness level (more on the self-determination theory here). If your ambitions have to do with something extrinsic—like riches or fame—those goals actually won’t make you happy (or happier) even if you achieve them. In contrast, people pursuing more intrinsic goals tend to be happier and more fulfilled. They also tend to achieve their goals. Intrinsic goals involve connecting to something beyond your own little universe, helping people, doing meaningful work and making the world a better place.

Are You Thriving—or Just Surviving?

My Moneymentals course talks about having a “Spend” account and a “Save” account. We can re-name Spend and Save to “Survive” and “Thrive.” Here’s why:

Your Spend account is a lifeline for survival. You need it for things like food, clothing, bills, transportation and basic creature comforts. Hey, I’m sure I’m not the only one who can’t do without a morning cup of coffee! With a new baby at home, it’s a need, not an option.

Whatever your personal non-negotiables are, they’re part of surviving happily. Your Save account helps you accumulate money for thriving. Once you’re meeting your Survive threshold, you enter “survival-plus” mode where you’re saving money to do things that make life meaningful. That’s the Thrive part. Our friend Henry David Thoreau sums it up: “Wealth is the ability to fully experience life.”

The way you use your Thrive money has a tremendous impact on how happy it will make you. Buying to accumulate things or competing with the neighbors can make it appear as if you’ve got more riches, but you’ll get a lousy deal on the happiness factor.

What’s Your Ratio?

You can use money to make you “rich” or to enrich your life. Check to see how much you Survive vs. Thrive by asking yourself what percentage of your earnings, your precious life energy, you use to really Thrive in your life. When you reward yourself for saving, choose something that truly maximizes your happiness.

Mind Your Money: Mental Accounting

- (No) Budgets

Do you like a good magic show? A talented, entertaining magician can create mind-boggling illusions. Little do we know, we do the same—all the time. How else can we go from excellent financial fitness objectives to uninhibited swipes of a credit card in just a few hours? “Now you see it… Now you don’t …”

Our brains often play tricks on us—but by understanding how we think, we can trick ourselves into putting the phenomenon of mental illusions to work! Used correctly, they can help us build wealthy habits and reach important goals.

Optical—and Mental—Illusions

Anybody notice a full moon? When close to the horizon, the moon usually looks much bigger than when it’s high overhead. This has baffled people for decades, but it’s actually an illusion. The moon never changes size, and its distance from the earth is relatively constant.

When the moon is near the horizon, our brain takes into account the earth’s proximity, so the moon looks big. High in the sky, there’s no comparison point, so the moon looks more like actual size on our retina.

Here’s another interesting trick: In the graphic to the right, the orange circle on the far right looks bigger, even though the two orange circles are actually the same size! You can even measure to be sure. Just like the moon, our brain compares the orange circles to their surroundings to determine their size. Though we know the moon’s size and the size of the orange circles are illusions, our brains still have difficulty accepting that. How can we make this quirk contribute to our financial fitness?

Mental Accounting

Mental accounting is about how we think about money. We tend to group money into different mental categories for different purposes, labeling them in our heads. My mother took this a step further by keeping cash in various pockets in her wallet and purse. She designated one for groceries, one for emergencies and one for her weekly mahjong game. Perhaps your family does something similar.

From a rational point of view, a dollar is a dollar, regardless of how we receive it or label it. Despite this, our brains accept the illusion we create for ourselves with mental accounts.

Downside

Here’s how the illusion can detract from financial fitness:

We’re more likely to blow a windfall—like an inheritance or lottery winning—than money received in a regular paycheck. Tax-return and bonus money can also spend very fast!
We’re more willing to use a credit card than part with the equivalent cash.
We’re more likely to spend investment dividends than appreciation in value.

Is this “free money”? Personal finance says all dollars are the same, but our minds don’t.

Positive Results

While it can influence us to act unwisely, mental accounting can also help us achieve important financial fitness goals. For example, we’re less likely to spend money we label “retirement” or “kids college account” on a plasma screen TV.

Similarly, people who save too well and miss opportunities to enjoy life in the present can designate an account as “fun” or “spoil yourself” as an incentive to live it up a bit more. Anyone who has a parent or grandparent who lived through the Great Depression or in poverty has probably noticed this tendency toward extreme frugality.

Mental accounting pays great dividends as a tool for self-control. We trick ourselves into wealthy habits and doing the right thing! Budgeting methods are rooted in mental accounting, because we know we’ll spend one piece of the pie on food, another on transportation and soon. By reserving each category for its purpose, bills get paid and the entire paycheck doesn’t go out the window on a whim.

A key principle behind Moneymentals is to work with, rather than try to change, our human nature with respect to financial goals. Take a little time to understand yourself and how you mentally position your finances, and the recommendations in this course can help you do some good money magic!

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