Little statistical correlation between money and happiness

There’s really no scientific basis that equates money to happiness. In fact, the Money magazine article points out that there’s little difference in the overall happiness of millionaires vs. the middle class. Money can affect happiness if it brings someone out of poverty, but past that it has little to do with overall happiness.

One survey found “virtually the same level of happiness between the very rich individuals on the Forbes 400 and the Maasai herdsman of East Africa.”

Another study actually did find a positive correlation between money and happiness but concluded that the increased happiness was not a result of earning a pre-determined amount of money but rather how much money people made compared to others in their age group. It was a “keep up with the Joneses” mentality.

Yet another survey showed little correlation between money and happiness and points out that those with incomes over $100,000 a year spend 19.9% of their time engaging in leisure activities while those making less than $20,000 spent 34% of their time on leisure activities. This implies that those with more leisure time have more happiness (a conclusion I don’t quite agree with).

Some polls show that Americans are no more happy now than they were 50 years ago despite large increases in the overall standard of living. A Minnesota University researcher postulates that happiness is 50% genetics and 50% determination. As Abraham Lincoln once said “Most people are as happy as they make up their minds to be.”

Spend money on experiences

If you’re determined to spend money in the attempt to find happiness, Jean recommends spending money on experiences rather than objects. Objects may give us a temporary boost in happiness, but most people quickly adjust back to normal levels of happiness where the object becomes part of the norm. On the other hand, if the object gives you particular experiences, the memory of the experience or even friendships created during the experience can produce much longer-lasting, robust happiness.

What would you be doing if you were financially independent?

I was recently contemplating what my life would be like if I were financially independent and had enough money to do or have anything I wanted. What would I do every day? What would I have been doing that evening? As I thought, I realized that I would have spent the evening exactly the way I had just spent it — spending time with my wife and family and engaging in things that I’m passionate about (writing this blog being one of them). I powerfully realized at that moment that money had absolutely no impact on my happiness that day. Having more money I may have spent time with my family in a nicer house or wrote articles for this site on a nicer computer but those things wouldn’t have made me any more happy (with the possible exception having dual monitors which does make me consistently happy).

When I started this website I set three goals for myself:

1. Enjoy myself – I would only continue creating and managing this site if I enjoyed doing it. If I found I wasn’t enjoying a majority of the time I spent writing, I would stop.
2. Help others – I hope to be able to give others the tools they need to get control of their finances. If I can even help just a few people gain clarity about their finances I’ve succeeded.
3. Earn supplemental income – Notice that this is the last and least important goal. If I never make a dime from this site but accomplish the first two goals, this project is a success. As it is, this site actually has generated a decent supplemental income most of which I plan to reinvest in financial management tools or products.

It was clear to me when I created Getting Finances Done that making money couldn’t be my first or only goal. What an empty, meaningless project it would be for me if that were the case. So far it’s been an incredibly rewarding experience as I’ve seen the discussions, comments and questions that have been raised. Doing what I’m passionate about has created way more happiness than any money I’ve made.

Some material things that make me happy

On the other hand, there are some material things that have contributed to my happiness. These are typically things that either a) I consciously enjoy on a daily basis or b) things that promote interaction with others.

Let me give you a couple of examples. I jokingly referred to my dual LCD monitors above. While it may seem bizarre, they truly bring me a degree of happiness. I use them every day and consistently find them improving my work flow and increasing my quality of life. I find conscious enjoyment from them. I haven’t “gotten used to them” so to speak. Maybe my perceived increase in happiness from the dual-monitor goodness is not really an increase in happiness but simply an increase in my standard of living and quality of life. Is there a difference? Would I be less happy without dual monitors? In some small way I think I would be slightly less happy or have less enjoyment but I certainly wouldn’t go into depression or have a significant decrease in happiness.

An example of something that promotes interaction with others is a game (video or board game). My wife and I have been fans of Dance Dance Revolution for some time and have had many opportunities to play with others. This activity has helped us develop relationships with others that bring happiness, both in the moment and ongoing. I realize that the true happiness comes more from the interaction with others than the game, but the game can facilitate increased happiness and is definitely fun to play in the moment. There have been many board games that we’ve played with friends and family to a similar end.

Assessing lifelong learning & the pursuit of happiness

In the end I tend to think that happiness is mostly a choice that can be slightly enhanced or degraded by some material things. But if we’re looking to outward things as the basis for our happiness we’re on unstable ground. Focusing on serving, health, lifelong learning, relationships, and doing things you’re passionate about are much better foundations for persistent happiness. The Get Rich Slowly blog has a nice summary of Ten Steps to Greater Happiness that are more effective than most material attempts at happiness.

Happiness, health, wealth, money

What makes you happy? Does money bring you happiness? Do material things bring you happiness? A little? A lot? What would you do if you were financially independent and could spend your days however you wanted?

Related articles:

• Shopping for happiness? Here’s what to buy [money.cnn.com]
• Ten Steps to Greater Happiness [Get Rich Slowly]
• The Keys to Happiness, and Why We Don’t Use Them [livescience.com]
• Study: Money Does Not Buy Much Happiness [livescience.com]
• Can money buy happiness? [rediff.com]
• Money Won’t Buy You Happiness [forbes.com]

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Becoming a black belt and having a “mind like water” in your personal finances is very similar. It means you can take whatever is thrown at you without knocking your finances out of control. You can respond to any situation with perfect balance. Unexpected events or changes in your finances, good or bad, can be handled with optimum efficiency, and little or no stress. It means you can direct the flow of money where you need it almost effortlessly.

In an effort to help people gauge where they are in their personal finance development, I’ve defined what people at the various “belts” might look like. Where are you?

White Belt

You’ve recognized there is a problem with your finances and have committed to taking control. Recognition that there’s problem may come as a nagging doubt that you’re not meeting all your financial goals or a harsh reality check as you face mounting debt. You have a lot of stress concerning finances (even if you’re living within your means). You tend to fight with your spouse every time you discuss financial matters. You recognize your spending isn’t in line with your true values. You have no idea where all the money goes from month to month. You may be living paycheck to paycheck. If you saved $5 on your phone bill, it would just disappear somewhere but you don’t know where. Your idea of an emergency fund is a credit card or Home Equity Line of Credit. You frequently pay late fees on your bills and unnecessary bank fees. Net worth? What’s that?

Despite your lack of financial control, you have a strong resolve to take action even though the thought of facing the “deep mess” of your finances seems overwhelming. You and your spouse have agreed to work together. In an effort to get your spending under control, you’ve started using cash for your “out-of-control” budget categories. You’ve stopped using credit cards somewhat reluctantly and possibly out of the sheer pain of your dire financial straights. Despite some complaining, your family has agreed to use cash as well. You’ve taken initial steps to figure out what your basic monthly income and expenses are and have tried budgeting for at least one month even though it doesn’t match reality yet.

Most importantly, you’re no longer willing to BE IN DEBT!

You’re no longer willing to constantly WORRY ABOUT MONEY!

You’re no longer willing to FIGHT ABOUT MONEY!

You’re no longer willing to PAY LATE FEES!

You’re committed to TAKING RESPONSIBILITY FOR YOUR FINANCES!

You’re committed to WORKING THROUGH FINANCIAL ISSUES TOGETHER WITH YOUR SPOUSE!

White belts come in many shapes and sizes. Of course, those steeped in debt and on the verge of bankruptcy can be white belts, but so can those who are living within their means (see below). Being a white belt means you don’t have total control over where your money goes. Your spending doesn’t reflect your true values and is not conscious. The white belt is about recognition and commitment. You’ve recognized a need to change and are committed to doing what it takes to change.

Green Belt

You’re well under way implementing your financial-management plan. You’ve budgeted for at least 3 months in a row and have worked many of the kinks out. Your budget actually reflects reality.

You meet with your spouse about every two weeks to keep things on track. You often have to implement the 30-minute rule and meet several days in a row to prevent total melt-downs.

You’ve taken all credit cards out of your wallet and are using cash for all of your “in-person” spending. As a result, for the first time you feel like you have control over your spending. You’ve even started developing your own unique ways of managing your cash and have a tendency to give spontaneous testimonials about the virtues of cash whenever someone acknowledges your use of a cash envelope.

You’re well under way saving for a short-term emergency fund. You may not have it fully funded yet but you already notice feeling much less stressed having at least something in place. For the first time in your life, you may have even experienced an emergency and had the money to pay for it. You have created an initial net worth statement and have a general idea about your overall financial status.

If you saved $5 on your phone bill, you could probably redirect it rather than letting it disappear. You no longer pay late fees or bank fees. If necessary, you’ve made major changes in your lifestyle to ensure you can live well within your means.

Brown Belt

You’ve been on a zero-based budget for over 6 months and things are really humming. You may have occasional refinements, but things are mostly on cruise control. You’re able to manage your finances on one meeting a month and are able to get through most meetings without any arguments.

You’ve gone through at least one set of envelopes. You find that you’re keeping the cash envelopes the bank gives you when you cash a check or make a withdrawal because they are a better size than regular envelopes.

You’re friends have started noticing that you pay cash all the time and have asked you about it. You find yourself preaching the cash gospel and sharing your success whenever you can.

You have a fully-funded short-term emergency fund and have started reducing consumer debt or increasing retirement savings. You have a strong sense of control over your finances and can see significant improvement every time you refresh your net worth report (which you do at least once a quarter). You and your spouse have reconciled your financial differences and have a new-found sense of unity when it comes to finances. You’ve created a list of rules concerning what you both consider to be an emergency as well as what you want to do with any unexpected windfall money. By making these decisions ahead of time while you’re calm, you avoid big arguments when these events occur.

Black Belt

You laugh in the face of emergencies (mua-ha-ha) and can easily and confidently deal with anything thrown at you. Seriously, for all practical purposes financial emergencies don’t really exist for you any more. If you save $5 on a phone bill, you’re financial system allows you to know about it and easily redirect it exactly where you want. You have complete financial control over every dollar.

You no longer worry about finances. Instead of worrying about how to pay the bills on time, you think about what investments to make or which debt to pay off next. You’re amazed and shocked that people even pay late fees (you obviously are having a bout of selective amnesia). You are aggressively on track to pay off all consumer debt and/or save for retirement. In fact, sometimes you find it hard to spend extra funds because you’re so excited to become debt-free that you want to reduce your debt instead.

You finally feel like where you spend your money is a reflection of your true values. You and your spouse see eye-to-eye concerning finances. You only have major financial discussions when your financial situation changes dramatically.

You not only calculate your net worth quarterly, but also have calculated when you’ll become financially independent.

You kind of wish you’d get fired so you could find a job you really like (you have a full emergency fund and could get by for 3 to 6 months without any income). You only have to spend about 30 minutes a month on average managing your finances. You’ve cut up all your credit cards because you just don’t need or want them anymore.

Your belt level isn’t about debt, savings, or your net worth.

Some of you may have noticed that my description of the belts didn’t include savings percentages or require you to be debt-free. Your belt level isn’t about debt, savings, or your net worth. It’s about your ability to control your money, ensuring that each dollar is directed where you want. I’m sure I’ll get a lot of flack for saying this. Of course, savings and debt elimination are cornerstones of a solid financial foundation. But to enable you to save and pay off debt, you first have to get a handle on your inflows and outflows. As you gain greater levels of financial control, you can easily reach your savings and debt-reduction goals at an ever-accelerated rate.

The good news is, you can become a financial black belt even if you still have debt or haven’t reached your long-term goals. Of course, if you are a black belt, it won’t be for long before you do. As you progress in your career and get raises, or as you receive windfalls, you will be able to direct those extra funds with great focus and power to eliminate debt and reach your long-term goals. That’s the power of a black belt.

Take your finances to an “11″

I can’t avoid referencing this segment from This Is Spinal Tap. If you haven’t seen it, you should take a look.

I know many people who live within their means, pay off their credit card bill every month, and think they have arrived in terms of financial management. But the fact is, you can do these things and still be a financial white belt. I know this for a fact because I’ve been there.

There was a time when our income greatly exceeded our expenses. We saved ten percent and gave to our church. We also lived large and bought just about anything we wanted and were still living within our means. For the most part, we just accumulated a bunch of “stuff” and made a lot of emotional, at-the-register purchases. As we look back we kick ourselves for not using that money in a more conscious way. Had we been financial black belts, we could have greatly accelerated our journey to financial independence. Today, even though we have downgraded to a single income and increased our expenses (mortgage, child), we are doing more with what we have now than we did with two incomes, no children, and low living expenses. As a result we have been able to reach financial goals with tremendous speed and ease.

I’m not saying you have to choose between having fun with your money and saving it for later. As a black belt, you can set aside funds for frivolous spending and still aggressively meet your financial goals. The key is to spend consciously, making decisions as they relate to your values and your finances as a whole. If you plan wisely, you can have the best of both worlds.

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“While I try my best to “get rich slowly” I have one huge issue: a husband. My husband likes to spend money. I’m referred to as the “Thrifty One Who Won’t Allow Me To Buy Stuff” and he’s referred to as “That Jerk Who Buys Stuff”. Do you have any advice for couples that need to have the other half put on a strict budget without making them feel like a child?”

I posted a comment at Get Rich Slowly in response, but I thought this excellent question deserved a more thorough answer, so here goes.

In my experience, there are 3 keys to making your personal finances work as a couple:

1. If you don’t already have an established method of managing finances, decide together to try an established, published system. Agree to stick to it exactly, unless you both decide to deviate.
2. Make the “personal” budget category a high-priority and fund it as generously as you can.
3. Don’t discuss finances for more than 30 minutes at a time or past 10:00 at night. If you don’t get through all the issues, meet again tomorrow.

1. If you don’t already have an established method of managing finances, decide together to try an established, published system. Agree to stick to it exactly, unless you both decide to deviate.

My wife and I have always lived within our means and have never had debt problems. However, we never saw eye-to-eye on the specifics of how to manage finances. I always felt like we were doing great; we were living within our means and saving 10% of our income for retirement. I figured we could spend the rest however we wanted. My wife always felt like the rest of our money was just wasting away on things that were useless. Even though we were doing better than a large portion of the population, she continued to experience significant anxiety and discontentment.

We both had read several personal finance books and tried to persuade the other to adopt the principles, but to no avail. I realize now that in many cases we weren’t rejecting the ideas, we were rejecting the messenger (the spouse).

Finally, after 10 years of marriage we faced a series of emergencies that forced us to either move from our home and dramatically reduce our standard of living or get a tight grip on our financial management. We figured we could barely make it through if we carefully managed every dollar.

In our desperation, we decided to attend Dave Ramsey’s Financial Peace University, a 3-month, weekly course in managing personal finances. Knowing that one of us had always rejected financial ideas proposed by the other, we agreed that we would follow the program to the letter, even though we didn’t know what it would consist of. If we BOTH disagreed (which we did at points) with the program, then we could alter it. But if only one of us disagreed, we would have to follow the program as the default.

This was one of the BEST decisions we’ve ever made in our personal finances. It allowed us to stop fighting each other. By having a completely objective third party telling us what to do, it was easier to accept the concepts. If we both felt there was a better way of doing things, we weren’t tied to Dave Ramsey’s system and could discuss how to alter it to better fit our needs. In short, it factored out personal grudges and judgments. We were left to judge the actual content and not the content-delivery system.

If you’ve always had a hard time agreeing upon a system, TRY THIS OUT! Don’t get stuck on a particular method. If you’re convinced a certain system will work and your spouse is not, find a different system you can both agree to try. Otherwise, your spouse will be resisting you rather than the content. It’s way more important to just get on the same page. Most main-stream systems for managing finances are theoretically sound. If you first get a system established, then you’ll at least have a base system from which you can discuss deviations.

2. Make the “personal” budget category a high-priority and fund it as generously as you can.

The “personal” budget category is a key to helping a budget work. Having personal money that you, and only you control makes budgeting as a couple tolerable. It’s easy to imagine why couples are financially miserable when they have to negotiate every single purchase with their spouse.

My “personal” funds are what I really care about the most. I don’t really care that much about groceries or household items or hair cuts. Sure, I care on a large scale – I don’t want to spend so much that we can’t meet our other goals. But I’m not that emotionally tied to them, so I can discuss them with my wife non-emotionally. On the other hand, if I had to negotiate every personal purchase – every book, CD, and soda – I’m sure we’d end up in endless arguments every month!

The fact is, many couples end up spending personal money anyway. They just hide it or manipulate the system. Why not explicitly budget “personal” funds and reap the benefits of knowing that money is yours.

Here are a few of guidelines for your “personal” budget category:

Separate checking accounts are ok for personal funds

It’s important to have at least a small financial slice to call your own. You can manage it however you want. If you don’t want to budget it, that’s ok. Waste it all if you want. Or save it for that new electronic gadget. While my wife and I keep separate checking accounts for our personal funds, we still have access to look at each others’ accounts if we want. But I don’t think I’ve looked once and don’t really care how she spends her funds.

Be as generous as you can afford

My wife and I budget $100 each for personal funds. Whenever I mention that to someone, they are always shocked the figure is so high. Well, you can afford to do that when you don’t have a car payment . Seriously, I give our personal fund a huge amount of credit for making our budget work and go smoothly. $100 is more than enough to feed my book-buying addiction. It’s also substantial enough that I could fairly quickly save for large purchases of several hundred or even a thousand dollars. There’s almost nothing I couldn’t afford over time, even that new HDTV I really want.

Personal funds can also act like a shock absorber, similar to the “cushion” budget category. Sometimes I want to eat out with my co-workers more than I have money allocated for. No problem, I just use personal funds. Similarly, I often buy my boy a toy now and again with personal funds. It’s easier than waiting and negotiating it with my wife. With such a generous personal fund I really don’t feel a loss from $5 or $10 every now and again.

One last benefit that can be a huge plus in marriage; having personal funds can make gift giving more meaningful. Before we started budgeting personal funds, gifts seemed less meaningful because all our funds were pooled and negotiated. Budget meetings were like, “Hey hun, I want to buy you some roses this month, so let’s budget $20.” How romantic. Now, when I give my wife spontaneous gifts, they are even more meaningful because I use my own money. I’m sacrificing my own interests for her sake. Let the romance begin.

Obviously, not everyone will be able to afford $100 each for a personal fund. We started out at $20 each and grew it from there as we could. Do the best you can. I recommend allocating at least $20 each for “personal.” That’s enough to buy one medium-size purchase like a book or CD a month. You certainly need to be meeting your debt reduction and savings goals first, but your “personal” and “cushion” categories should be close behind in priority.

Keep it even

This one’s easy. You always allocate the same amount to each person. I’ve never found a good or fair way to do it otherwise. This also goes for personal funds that we allocate from bonuses or other windfalls. If we get an unexpected windfall and I want that new road bike for $600, I should expect my wife to get $600 to spend how she wants as well. You can discuss variations to this rule if you like, but it should be the baseline assumption.

3. Don’t discuss finances for more than 30 minutes at a time or past 10:00 at night. If you don’t get through all the issues, meet again tomorrow

Doing finances as a couple is hard enough. Why complicate things by dragging a tired or distracted spouse through sometimes tedious and intense discussions. I’ve found that almost exactly after 30 minutes of discussing finances, I start to tire of the conversation. Suddenly I become contradictory and hard to work with.

Similarly, after 10:00, financial discussions should be prohibited. We’ve tried discussing finances after 10, or even 11pm and it wasn’t a pretty sight. I disagree with everything and am very grouchy. Every time it’s ended with contention and bad feelings.

These guidelines should be adjusted based on the personalities involved. Maybe both partners have a nicer demeanor and higher tolerance for talking about finances than me. Or maybe both are night owls. Great, expand the limits. On the other hand, you may need to shrink the allotted 30 minutes or move up the evening cut-off time if finances are a really tough issue. Just try to meet for a minimum of 15 minutes or it will be hard to make progress.

If you’re establishing a budget for the first time and have lots of issues to discuss, you may need to meet several nights in a row for 30 minutes to get through everything. That’s ok and should be expected. At least you’ll be able to do so in a civil manner.

Limiting the time spent discussing finances has a great benefit. You become much more focused on the issue at hand. Agendas for budget meetings are entirely appropriate and helpful. A time limit will help you get clarity on exactly what needs to be addressed. Rather than allowing yourselves to digress, you will stay on topic and have more efficient meetings. This can also have the side effect of making things less emotional which is a VERY good thing when talking about finances.

Conclusion

It’s no surprise money is the #2 cause of divorce. In our marriage, even when our financial situation has been good, it’s still been one of our major issues. Following these steps has helped us get to the point where finances are no longer a major issue. For the first time in tens years, we see eye-to-eye. Sure, we still have an occasional disagreement, but these steps have alleviated a huge amount of tension and stress in our relationship. I hope they can in yours too.

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